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Old 10-03-2012, 12:40 PM
 
2 posts, read 4,042 times
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We refinanced our house end of Sept 2011. We bought another house end of Mar 2012. We left the refi house and moved to the new one starting Apr 2012. These houses are less than 10 miles apart. My wife's brother and his wife moved into the refi house Apr 2012. They have been paying utilities, which are still in my name, and giving me $450 every month to help with mortgage which is $460. According to the bank I'm not eligible to rent my house out until Nov 1 2012, I feel i could argue for Oct 1, but whatever.

According to the IRS, i'm not renting my house anyway because i'm letting family live there for less than Fair Market Value which might be $650-$700. IRS considers the house personal use. So i think that means I can't claim any deductions, which i don't care about. But how do i handle income? Since we're not talking about lots of money exchanging hands do i even need to claim the money they give me as income? Could the money be treated as a gift? We have no written agreement and I was approved on the new house assuming both mortgages. Could this money be treated as them volunteering to help with expenses since i'm letting them live in my house?

Would the mortgage company have a different definition of "rent" than the IRS? Would they view this as breach of contract regardless if i handle my tax implications correctly?

Thank you for your time and help
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Old 10-04-2012, 10:28 PM
 
Location: MID ATLANTIC
7,598 posts, read 17,618,792 times
Reputation: 8078
The mortgage company is going to use the tax returns. If you aren't treating the income as rental income, then you aren't filing a Schedule E. If the income is $0, then the full payment will be counted against you. How much equity do you have in the property? 10%, 20%, 30%? Will family always live there?

Something here doesn't feel quite right. Have you run this by a tax professional?
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Old 10-05-2012, 10:34 AM
 
2 posts, read 4,042 times
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Not much equity, but my credit is really good and the house appraised for just enough to do the refi (owed $72K, app $80. Note I now owe $74 after refi). Likewise, i was able to use my 401K account to prove 6 months mortgage for both house to get approved for the loan on the new house. I was planning on trying to sell the old house, but my brother in law need a place to stay, instead of living with us in the new place, i'm letting him stay in the old house. He pays utilities and gives me $450 a month, all in mortgage (taxes + insurance) is $460, so it's definately not a FMV situation.

"If the income is $0, then the full payment will be counted against you"
What do you mean here?

"Will family always live there?"
Yes. If he decides to move then i will sell it, I have no plans to ever rent the house out to the public. Likewise, I will probably always be letting him stay there for less than FMV.
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Old 10-05-2012, 12:59 PM
 
1,258 posts, read 1,465,784 times
Reputation: 1392
Quote:
Originally Posted by erock29 View Post

According to the IRS, i'm not renting my house anyway because i'm letting family live there for less than Fair Market Value which might be $650-$700. IRS considers the house personal use. So i think that means I can't claim any deductions, which i don't care about. But how do i handle income? Since we're not talking about lots of money exchanging hands do i even need to claim the money they give me as income? Could the money be treated as a gift? We have no written agreement and I was approved on the new house assuming both mortgages. Could this money be treated as them volunteering to help with expenses since i'm letting them live in my house?
I can't address any of the refi questions, but I will try to address the taxes. Please, note that I'm not a tax professional, and you may want to consult one.
I was in a similar situation last year - renting for less than FMV. Rent was about half of my mortgage payment, but this is not relelvant. I reported it as personal property rental income, line 21 of 1040. It gets added into your AGI and yes, you pay taxes on it. You can still claim mortgage interest and property tax deduction on both of your houses. The only publication I could find on it right now is somewhat old - 2001 - but I don't think anything has changed in that regard: Publication 527: Residential Rental Property; Not Rented for Profit. I think you can only deduct mortgage interest on your first and second home, not on third, if you'd have one (again, you may want to check that in other sources).

Again, you may want to consult a tax professional, but what you describe here looks like avoiding tax liability, especially if you'd claim mortgage interest and property tax deduction. Sounds like you don't, but I think you safely can, as long as you report rent as income.
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