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I am looking at buying a home for my sister to live in and I am trying to figure out if I can deduct any of the interest/payments.

This is a pretty special case from what I can tell - I can't tell if it is a rental if I don't live in it even though I will not be renting it out.

Here is a bunch more info is this helps

  • I do not own a home of my own, so this will be the only home I own
  • My wife and I make over the maximum limit for taking any passive loss deductions
  • My wife and I will be the only people on the deed.
  • It will be in a different state than we live in.
  • My sister will not be paying any rent at all. (For all intents and purposes she and her son/husband are special needs)
  • I do not have any power of attorney over her and do not claim her as a dependent
  • the home will have a value between 100-200k
  • Their combined income is about 24K/yr
  • We will be providing less than half of their support during the calendar year
  • I assume I will not run into gif tax issues as the total for the year should be under $14,000
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The IRS considers renting below fair-market value to be an instance of personal use. If your sister lives there all year without paying fair-market value rent, the IRS doesn't see it as a rental property, rather as a personal property.

You are limited to deducting mortgage interest and property taxes on your first and second personal properties (Schedule A).

Given the new tax bill, you may not even benefit from itemizing deductions, and therefore would receive no tax benefit from the situation. I don't know of a mechanism by which you could receive a tax-advantage apart from itemizing, since the IRS doesn't recognize waived rent as charitable contribution, and even if they did I doubt they would allow it between family members.

The primary drawback of it not being your primary residence is that you don't qualify for the capital gains exemption when you sell it.

IRS Publication 527 is a bear, here are some easier to digest articles:
Tax reaks for Second-Home Owners (It doesn't matter that it's your 'first' home.
Tax consequences of charging below-market rent

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This is virtually the same answer I gave to the other, essentially identical, question.

(What you're doing is very nice.)

I can't tell if it is a rental if I don't live in it even though I will not be renting it out.

(This doesn't make sense. No one lives in the place that they rent.)

It's a rental if you rent the house to them -- full blown signed lease, etc. Then gift them the FMV rent.

I am trying to figure out if I can deduct any of the interest/payments.

Not the mortgage interest, since it's not your primary dwelling.

https://turbotax.intuit.com/tax-tips/home-ownership/deducting-mortgage-interest-faqs/L4a9KF9mI

Mortgage interest is any interest you pay on a loan secured by a main home or second home. These loans include:

A mortgage to buy your home A second mortgage A line of credit A home equity loan

If the loan is not a secured debt on your home, it is considered a personal loan, and the interest you pay usually isn't deductible.

Your home mortgage must be secured by your main home or a second home. You can't deduct interest on a mortgage for a third home, a fourth home, etc.

Since you don't live there, you can't deduct the mortgage interest.

OTOH, since it's rental property... congratulations, you're a landlord!

https://www.nolo.com/legal-encyclopedia/top-ten-tax-deductions-landlords-29497.html

Here are the top ten tax deductions for owners of small residential rental property.

1. Interest
2. Depreciation
3. Repairs
4. Local Travel
5. Long Distance Travel
6. Home Office
7. Employees and Independent Contractors
8. Casualty and Theft Losses
9. Insurance
10. Legal and Professional Services

I'd strongly recommend you look at how to turn the rent gift into a charitable donation. It might not be possible, but certainly worth a look. That's probably it's own question: how do I make a deductible charitable contribution to an individual?

Of course, you can just gift the FMV rent to them.

https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes#5

For 2018, the annual exclusion is $15,000.

If the fair market value of rent (since renters don't pay property taxes, repair costs, etc... just rent) is less than $15000/12 = $1250/month then it falls under the annual exclusion. If FMV rent is over $1250/month, you'll have to -- I think -- file form 709 https://www.irs.gov/pub/irs-pdf/i709.pdf and pay taxes on anything over $15K (or deduct it from your -- as of 2017 -- $5MM lifetime estate exclusion).

  • Plenty of people rent out a portion of their house. – Hart CO Dec 23 '17 at 16:10
  • @HartCO but they don't live in the portion they've rented out. – RonJohn Dec 23 '17 at 16:13
  • Mortgage interest claim is incorrect. It also sounds like you're recommending tax fraud, by trying to classify the property as a rental and gifting FMV rent as a way to goose deductions and avoid a proper personal property classification. – Hart CO Dec 23 '17 at 16:17
  • @HartCO you can't deduct it as a personal expense, but can if you act as a landlord. – RonJohn Dec 23 '17 at 16:29
  • That's not true. Personal use doesn't mean you have to live there. You can deduct mortgage interest and property taxes on a first or second home. Renting below FMV constitutes personal use. – Hart CO Dec 23 '17 at 16:33

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