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We are contemplating moving into a house with an in-law suite in Mississippi and our inlaws selling their house and moving into it. We would pool the sales from both houses as downpayment on the new house.

What are the financial and tax implications we should be aware of / plan for for this kind of living arrangement?

they would not be dependents, and we are currently thinking my wife and i would be primary owners with our name on the paperwork, and they pay us rent.

for both of us saving money and them being able to help with the kids, it makes good sense, but we dont know what we dont know about any formal tax and financial implications

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    Make sure that the in-law suite has been approved by the local government. Some people make a modification to the house without getting all the permits. The new owner then runs into an issue, and has to bring it up to code, or rip out the kitchen. – mhoran_psprep Nov 22 '14 at 20:39
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GET A LAWYER. Doing business with relatives is business first, and some effort spent in setting things up and nailing down exactly what the financial relationships and obligations are beforehand can save a lot of agony and animosity later.

Assuming it's a legal rental, you may be able to deduct business costs spent on maintaining the rental unit, but of course you will have to declare the rent as income.

If it's just a bedroom suite, rather than a full legal apartment, I don't think you can claim it as rental. (Note that whether you decide to share cooking and such is a separate question; apartment in most areas requires its own kitchen and bathroom.)

As Joe pointed out, the actual purchase also sounds like it's going to involve a large gift, which has its own tax implications. Either that, or they retain ownership of their share and you get to deal with that if you or they decide to sell.

Again: GET A LAWYER. And a tax accountant or tax lawyer to advise you on those implications. This is not someplace where the average wisdom of the Internet should be relied upon except for generalities; local laws and contract details matter.

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    +1 - A lawyer is needed, agreed 100%. But once that's behind them, the devil is in the detail when it comes to the finances and tax implications. – JTP - Apologise to Monica Nov 23 '14 at 18:09
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You are "pool[ing] the sales from both houses as downpayment on the new house." But they are going to pay you rent.

Your question as it stands, just opens more questions. What, exactly is the ownership of the new house? If your's (and your wife's) was the money a gift?

Ignoring the gift, if that's what it is, and if the in-law suite is 25% of the house value, you have a rental. You claim 25% of the expenses, including property tax and mortgage interest, along with 25% of the utilities, unless their part has its own meters.

That's a start, if you add details, I may edit my answer.

(Not to be pedantic, but whose parents are they. They can't be "our in-laws," can they?)

  • Joe, does it really matter which side of the family they're from? Not in the US, certainly. (And if marriage was outlawed, only outlaws would have in-laws.) – keshlam Nov 23 '14 at 23:09
  • @keshlam - I was being pedantic. Which is why it was a parenthetical extra, added to the list of missing details. If nothing else, I'd like to be able to say "your parents" or "your wife's parents." Does it really matter? Nope. – JTP - Apologise to Monica Nov 23 '14 at 23:36
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    Pedantic quibble in return. There are lots of good solutions, such as "your folks" (or even "they"). (RWRTATP -- Real Writers Rewrite To Avoid The Problem.) – keshlam Nov 24 '14 at 0:21

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