Rental property, but not really

[my4jewels]

Last year, our son went through an ugly divorce, and was going to lose his house when his wife left. The bank would not allow him to keep his mortgage on his income alone.

My husband and I bought his home, rather than co sign his mortgage; we figured we had better control of the situation should things go sour. It was not our wish to make any profit on his home, just to sustain it for him until he is financially able to buy it back from us. We also own our own home outright with no mortgage, which is our primary dwelling.

He has been able to faithfully pay all of the expenses on the home. He is accountable to us monthly for the mortgage, and pays all of the utilities and such. Other than that, he pays no rent to us.

It is my understanding that we need to claim this as a rental property, even though we are not actually renting and make no profit. Could someone please explain to me exactly how to go about this when filing our taxes, what forms to file, and what documentaion is needed? I have always done our own taxes, including my own small business, so I think I can handle this, too.

Any and all help will be appreciated. Debbie

[jainen]

family member

>>It is my understanding that we need to claim this as a rental property<<

It is not rental property and you should not report it as such. It is a second home used by a close family member.

[my4jewels]

Thank you, it makes sense. If we sell our primary home and buy another during the time we still own the second home, will we still be able to avoid capital gains taxes on our primary home?

[DaveO]

Yes, as long as you meet

The requirments of occupancy and ownership in 2 of 5 years leading up to the sale.

[OldJack]

If you have owned and lived in your primary home for at least 2 years, and have not claimed the exclusion during the prior 2 years, you would still qualify to exclude gain on the sale of your primary home. Since you as the owner are not living in the second home as your primary residence it has nothing to do with tax on your primary residence.

[my4jewels]

Thank you all so much!!

What extra form do I need to add and fill out regarding this 2nd home?

I have read that we can still claim mortgage interest and property taxes, is this correct?

[OldJack]

Thank you all so much!!

What extra form do I need to add and fill out regarding this 2nd home?

I have read that we can still claim mortgage interest and property taxes, is this correct?

The 2nd home is not reported, as such, on your 1040 tax return except you simply add the real estate taxes of both homes together and deduct on your 1040 Sch-A. Same thing for the mortgage interest. That is of course assuming you wrote the checks and paid the taxes and interest rather than your son.

[my4jewels]

Normally, we don't itemize because our standard deduction is a better option. Our taxes have been very simple and straightforward for a number of years.

If I fill out Schedule A, and it comes out to more than our standard deduction as a married couple, then we use that deduction instead, correct?

If, hypothetically, our standard deduction is still a better alternative, then we do not have to file anything at all on the 2nd home. Is that correct?

[jainen]

all your choices

>>Is that correct?<<

You should recognize that an internet forum can only explain the general rules. Depending on your specific facts and circumstances, you may have other requirements or you may find it advantageous to do something in an alternative way. What is "correct" might involve non-tax goals and opportunities, and it might depend on how you WANT to file.

For example, you might prefer to treat the home as rental property to the extent of income. The decision about whether to itemize deductions might involve Alternative Minimum Tax. Or you might want to resolve your questions by changing the timing of income and expenses. I recommend you meet with a tax professional to explore all your choices.

[my4jewels]

Again, thank you for all of your quick help and patience with me.

Alas, my husband would prefer for us to complete our own taxes and file them.

So, basically, it is our choice. We are under no obligation to claim expenses on the 2nd home if we choose not to. I am just trying to get a grasp on our situation.