Apartment and Rental Properties - Second home or rental?
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tansey90
04-15-05, 08:38 AM
Currently own one home we live in and own two other rental homes. The two rentals are rented at "fair market" i.e. making money and are carried on our tax returns are "residential rental property".
We just purchased a 3rd "home" which we are renting to our daughter and her boyfriend at under REPAIRED MARKET VALUE to "help" them out until they can purchase the home from us at a small profit (probably in 2008). The main purpose of this purchase is to help out daughter and we only want to sell it to her at small profit if she does right. If she doesn't behave, we will evict her as necessary (all's fair in love, war and rental property!).
3rd home purchase price was $57,000 (was a foreclosure and needs a lot of TLC--new carpet, new kitchen and bathrooms, painting, etc...). Daughter is living in it now--with repairs ongoing. We are doing all the work ourselves (much experience at this). This home will require approx. $7,500 in repairs when it is all said and done. It already appraised for $76,000 BEFORE repairs and should appraise at $90-95,000 after we are done.
Now my question: We are renting home to daughter now for $600 per month which is under what we could rent to non-relative AFTER repairs are finished. She is putting up with the mess for about 4 months but we want to get her to sign a lease for 6 months or a year as we do our other tenants. If we do this is the IRS going to not like this due to our renting under market value (after repairs are finished)? It would rent for around $800-850 after repairs, maybe $900. Should we consider this home a "residential rental property" or as a second home for tax purposes on our 2005 taxes?
We just purchased a 3rd "home" which we are renting to our daughter and her boyfriend at under REPAIRED MARKET VALUE to "help" them out until they can purchase the home from us at a small profit (probably in 2008). The main purpose of this purchase is to help out daughter and we only want to sell it to her at small profit if she does right. If she doesn't behave, we will evict her as necessary (all's fair in love, war and rental property!).
3rd home purchase price was $57,000 (was a foreclosure and needs a lot of TLC--new carpet, new kitchen and bathrooms, painting, etc...). Daughter is living in it now--with repairs ongoing. We are doing all the work ourselves (much experience at this). This home will require approx. $7,500 in repairs when it is all said and done. It already appraised for $76,000 BEFORE repairs and should appraise at $90-95,000 after we are done.
Now my question: We are renting home to daughter now for $600 per month which is under what we could rent to non-relative AFTER repairs are finished. She is putting up with the mess for about 4 months but we want to get her to sign a lease for 6 months or a year as we do our other tenants. If we do this is the IRS going to not like this due to our renting under market value (after repairs are finished)? It would rent for around $800-850 after repairs, maybe $900. Should we consider this home a "residential rental property" or as a second home for tax purposes on our 2005 taxes?
slumlordfrank
04-15-05, 07:28 PM
I'm NOT a CPA, so make sure you run this past yours. You can't consider it a second home, it's a rental. Also your "below market" rent will have to be considered one of two ways. Either the IRS will impute to you the difference between fair market and what you're getting, and add that amount to your income, or it will consider that difference as a "gift" to the daughter and go against your lifetime exemption.
Again, I'm not an accountant, just been doing what you're doing for 25+ years, but no kids, so I never faced this situation personally.
frank
Again, I'm not an accountant, just been doing what you're doing for 25+ years, but no kids, so I never faced this situation personally.
frank