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I can answer your first question. If Dad is renting the old house out at fair market rent, then he can deduct mortgage interest, and other expenses such as taxes and repairs, on Form 1040 Schedule E. But, he must also declare the rental income on that schedule. His mortgage interest on his new primary home is deducted on Schedule A.

As to your other questions, beware, I am not a lawyer or a CPA, and I don't even play one on TV. But I think that if Dad sells you the place below fair market value, he has in fact made you a gift. This subjects him to gift tax. If he doesn't pay this up front, it reduces the amount (currently $650,000) that is exempt from estate tax when he dies. This may represent a pretty penny of tax, since it starts at 37%.

But don't trust me on this. suttons, I just replied to another message of yours on another board. I think the truly best advice I could give you is to find a competent CPA and spend a morning, and a couple of hundred dollars or whatever it takes, to have you understand the issues. The posters on the boards do their best, I think, but they are no substitute for a face-to-face meeting.
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