Let’s say that your “child” is a sophomore in college and you are tired of paying rent for his apartment. What can you do? If the ave you considered buying a place for him to stay? You could deduct mortgage interest and real estate taxes, but you can’t deduct other expenses of a property used by a relative if he is not paying market rent. What to do?

My advice: Create a little college tax shelter. Buy a rental property in which 3-4 students can stay and that is a likely good investment. Charge your son rent at market rates. Pay him a reasonable amount to manage the property or make gifts to him.

With your new tax shelter, the house will pay for itself and incur few taxes. You can deduct the typical costs of maintaining a rental property: maintenance, insurance, mortgage interest, utilities, and repairs. You can deduct depreciation on the cost of the building (not the land) roughly 3.6% per year. If the rental operation loses money you can write off losses to a limited extent. More about rental properties.

To satisfy the IRS, be business like. Set up a rental checking account. Record rental expenses. Your son should send checks to you for rent and they should be labeled as such.

Editorial: Proposed tax reform will double the “standard deduction,” so the mortgage deduction may not reduce the cost of home ownership. This could reduce real estate values. Make sure you are diversifying your investments.

Contact Wis for more information.

About Wis Laughlin

I help clients with tax preparation and IRS representation, estate planning, and complex contracts, including LLC's. As a former IRS tax attorney in their National Office. picked Wis in 2017 and several prior years as one of the Top Tax and Estate Lawyers in Tennessee. I am your advocate, not your accountant. I don't tell you what you can't do. I show you how to do it.
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