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I think this is the best place to post this question, but there are several facets, so I'm not completely sure.

DS is now living in RI on a shoestring budget with a couple of roommates. I am originally from there, and essentially my entire family is down there, so he can't throw a rock and not hit a relative.

DH and I have been looking for a potential retirement home, and we are not really sure where we want to be, but RI is definitely a possibility. DH is also a general contractor, and work is feast and famine for him, so he's been looking around up here in our area in MA for a potential house to flip, or just for something that could be our retirement home when we downsize, which we hope to do within the next few years now that the kids are out of college.

Putting all that together, I've started to wonder if it makes sense for us to buy a cheap property in RI, perhaps something that needs a lot of work, fix it up, and have DS live there. He would pay us rent, but he could also get a couple of roommates that could carry the bulk of the expenses, and he could potentially end up living there for less than he is paying for rent now. We could find something closer to where he works, and that would also cut his commute a bit.

For the tax questions - I think that as long as I charge DS market rent, then this is just the same as any other rental property with the regular deductions and depreciation. But what about for DS? I'm sure he will have to claim the roommate rent as income, but how is having roommates different from being a landlord relative to taxes? He wouldn't have any depreciation, so I am thinking that it might all be pure income to him, as I also can't imagine that he'd have much in the way of expenses, since that should flow to us as owners and landlords.

Is this a reasonable way to accomplish this? I've also considered buying the house jointly with him where we'd put up the down payment and would be on the mortgage, as would he. If we did it that way, what changes in terms of him getting roommates? How would things like the depreciation work if he is living there and has roommates? And what about down the road when we would want to sell, or perhaps sell to him so that we'd get our down payment money back, but he'd end up with the property because he'd be the one paying the mortgage, taxes, expenses, etc.?

Other ideas to accomplish this? We have the money to be able to do this, but we do not plan to gift him the down payment money for the house. And he's got a twin sister, so at some point, we might do something similar for her.

We have multiple goals here - helping DS to get a good place to live that is affordable to him, getting our retirement home, and possibly picking up some investment property along the way. These are in rough priority order.

We have been landlords before for 16 years, so that part doesn't scare me at all, and it does seem like I can meet all our goals above without throwing any sort of monkey wrench into our longer-term plans.

I know this board can help with the tax questions, but I'd also like general comments on what I am thinking about, particularly around what I have missed.

DS does not know that we are thinking about this, so there are no expectations there.
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For the tax questions - I think that as long as I charge DS market rent, then this is just the same as any other rental property with the regular deductions and depreciation. But what about for DS? I'm sure he will have to claim the roommate rent as income, but how is having roommates different from being a landlord relative to taxes? He wouldn't have any depreciation, so I am thinking that it might all be pure income to him, as I also can't imagine that he'd have much in the way of expenses, since that should flow to us as owners and landlords.
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"Roommate income" IS rental income. It sounds like you're taking the position that DS is the only tenant, and what the roommates pay is something you're not involved in.

If you want to make it simpler, why not just take DS out of the middle and make the 2-3 of them the tenants, including DS for his share of the rent?

Bill
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"Roommate income" IS rental income. It sounds like you're taking the position that DS is the only tenant, and what the roommates pay is something you're not involved in.

I'd rather have him choosing his own roommates and managing that aspect. That is exactly the situation he is in now where he is one of the roommates paying rent to the guy who's name is on the lease. That seems to be fairly common down there.

If you want to make it simpler, why not just take DS out of the middle and make the 2-3 of them the tenants, including DS for his share of the rent?

I wasn't necessarily after simplicity.

Other things I should be considering here?
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I'd rather have him choosing his own roommates and managing that aspect. That is exactly the situation he is in now where he is one of the roommates paying rent to the guy who's name is on the lease. That seems to be fairly common down there.
...I wasn't necessarily after simplicity.

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That's not a problem. Let him do the choosing and then the roommates sign the lease (with you as the lessor.)
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Other things I should be considering here?

Probably not too much, from a tax angle.
As to your son living there, being a family member, make SURE you're getting a fair market rental from him. Otherwise you're deemed to be using the property personally, and that drags you into the "vacation home rental" rules.

As to your son being on site and looking after the place on your behalf, and it's in a distant city, I question whether it qualifies as an "active rental" for the PAL rules.

I can't think of anything more that would make it complicated.

Bill
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I wasn't necessarily after simplicity.

If you want to structure things with your son sub-leasing to some roommates, he would have to report the rental income from the roommates, but he'd also have one significant expense - a portion of the rent he pays to you. If he kept utilities in his name, he'd also have an expense for a portion of those utilities.

--Peter
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If you want to structure things with your son sub-leasing to some roommates, he would have to report the rental income from the roommates, but he'd also have one significant expense - a portion of the rent he pays to you. If he kept utilities in his name, he'd also have an expense for a portion of those utilities.

I was thinking that he would have the utilities in his name, so if he had 2 roommates, would he deduct 2/3 of the utilities as an expense? That seems to make sense to me.

How would that work on having any portion of the rent deductible as an expense for him?

I am thinking that all of this would be reportable on Schedule E for him. Is that correct?
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I was thinking that he would have the utilities in his name, so if he had 2 roommates, would he deduct 2/3 of the utilities as an expense? That seems to make sense to me.

Sure. Or depending on the facts of the situation, perhaps some other allocation method would work. (Maybe you buy a duplex, he lives in one unit alone and two people share the other - so he'd deduct 1/2 of the utilities instead of 2/3).

How would that work on having any portion of the rent deductible as an expense for him?

Same as the utilities. He's doing a sub-lease. So one of his expenses is the rent (or in this case, just a portion of the rent) he has to pay on the lease for the entire property.

I am thinking that all of this would be reportable on Schedule E for him. Is that correct?

Yep. Although I still prefer Bill's suggestion of you renting directly to the other roommates. But if you want to go this way, your son would report the income and expenses on Schedule E.

--Peter
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Yep. Although I still prefer Bill's suggestion of you renting directly to the other roommates. But if you want to go this way, your son would report the income and expenses on Schedule E.

I would look at landlord-tenant law for the area.

Renting a room in your home to someone *usually* gives you a lot more leeway on landlord-tenant law than renting a complete unit.
ex. I can kick a boarder out of my spare bedroom for basically no reason without worrying much about losing a lawsuit. But if I want to kick a renter out of the other half of a duplex, I need to make sure I follow all the appropriate laws for evicting a tenant.

Hopefully there wouldn't be any reason to go down that path - but I'd make sure you have a clear understanding of the landlord/tenant laws and make sure it's clear ahead of time whether a roommate is a renter or a boarder. Then if you have to get someone out because of either they're not paying, or they're making your son feel unsafe, you know what your son can/cannot do and what you can/cannot do.
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Be sure to check out the liability since renting out rooms is likely a lot different than renting out the entire house to a group of people who agreed to live together.

I recall hearing about a situation a few years ago where two rooms were rented out a man and a woman and the woman was sexually assaulted by the other renter. The landlord was part of the lawsuits, I didn't hear what happened but since the landlord had selected the renters I would not want to have been in his shoes.
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DD's been in a 3BR/2bath apartment since about 2007 with 2 roommates. Every year at least one of the roommates leaves and is replaced.

The lease and utilities are all in DD's name, but the roommates don't pay her, they write checks for 1/3 the rent, etc, directly to the landlord & utilities. So every month DD sends the landlord 3 checks, the electric company 3 checks, etc.

My point is: your DS could control who his roommates are without actually having any income from them.
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The lease and utilities are all in DD's name, but the roommates don't pay her, they write checks for 1/3 the rent, etc, directly to the landlord & utilities. So every month DD sends the landlord 3 checks, the electric company 3 checks, etc.

The issue is that DS will not be able to afford 1/3 of the rent, and will need to be paying a lesser amount. It seems to me that if he gets the rent, then he can charge the roommates more than 1/3 each, and he ends up paying less than 1/3 and something he can afford. Otherwise, he won't have enough money to pay an even split on the rent that would be due.

I suppose I could give him back money at the end of each year because it would be under the gift tax limits.

Would it make more sense for us to buy the house with him and us on the deed and mortgage, and then he collects the rent as the owner, and pays the entire mortgage? In that case, how do we structure the deal?
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Would it make more sense for us to buy the house with him and us on the deed and mortgage, and then he collects the rent as the owner, and pays the entire mortgage? In that case, how do we structure the deal?

Bottom line... stop wasting your time asking the well-intentioned people on this board and spend some time and dollars and consult with both legal and tax counsel who can review your complete situation and give you the appropriate guidance.

Ira
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My sense is that you're now in the exploratory stage, and will hire tax and legal counsel to hammer out the details if/when you proceed. Meanwhile, not a tax/legal consideration, but what jumped out at me was:
DS does not know that we are thinking about this...
Right now, he's a college graduate who's living independently, albeit quite frugally, which is typical for someone just starting out. What might it do to his sense of independence and accomplishment to be living in a house that Mom & Dad own, especially a fixer-upper where Dad's actually there sometimes working on it? What might potential partners think?

Admittedly I'm not at all objective about this. DD's ex-boyfriend has been living in, and acting as property manager for, his parents' house while they've been deployed overseas for several years. On paper, it looks great. In fact, he's in a rut, and my suspicion is that the house has become an albatross.

So, apples and oranges most likely, but I wanted to throw that out there FWIW.
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Would it make more sense for us to buy the house with him and us on the deed and mortgage,

I would not do this.

He's still young and possibly not really ready to be a property owner. If he has some financial issues, those can affect you if you jointly own property.

Story time.

I have a client who wanted to help his kid get started in the rental property business. So he provided the down payment and he and his son jointly owned the house. The problem is they bought a house in Phoenix, AZ. In 2006.

The story ends with a foreclosure, and both dad and son's credit trashed. For dad, that's not a huge issue. He's fairly well off and can easily live without credit for a few years. But now his son can't finance a car - well, not at anything approaching a civilized rate. And he can't buy a home. (Not that he want to now that he's been burned badly in the real estate market.)

In short, my completely unsolicited advice is to stop trying to get the kid tied down into some real estate. Let him rent some place to live until he is ready. And let him rent from someone other than his parents. When he is ready, then talk about some arrangements - and consider sticking to a straight cash gift to help with the down payment.

--Peter
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My sense is that you're now in the exploratory stage, and will hire tax and legal counsel to hammer out the details if/when you proceed.

Yes, that is my intent, but I had thought I could do some information gathering from this board to get an idea of things so that I wouldn't go to the professionals blind and uninformed.

I can see that the board generally thinks this is a bad idea for reasons with which I do not agree only because I have more information than I have been able to give the board, and you can only respond to what I have posted. I had thought that I'd put enough info in there, but it seems I was mistaken, and I'm not sure what is missing.

Rather than waste everyone's time here, which is what some folks have suggested I am doing (sorry about that - it was not my intention and I was hoping for a fruitful discussion), we can consider this closed and I will seek information elsewhere.
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DS could be both a tenant and the caretaker of the property. As caretaker DS would be compensated by lower rent.

To me the biggest question is how DS might react to the whole thing. He might not want the responsibility of finding roommates (and extracting rent from them!), or to be dependent on parents, or to be tied down to any one place, or be resentful of plans being made for him without even consulting him.
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Rather than waste everyone's time here, which is what some folks have suggested I am doing (sorry about that - it was not my intention and I was hoping for a fruitful discussion), we can consider this closed and I will seek information elsewhere.

I didn't mean to imply that you were wasting the time of the people here, only that you were wasting your own time by continuing to pursue specific stategies. As you stated, you disagree with some of the advice offered because of additional undisclosed information. The problem is that you can't know if your disagreement is justified or not (nor can those who have offered their advice) until all relevant information is considered.

It is very rare that the regulars on this board feel that someone is wasting their time. Yours is definitely NOT one of those rare instances. Even if none of the advice offered were relevant to your specific situation, the number of issues raised should serve to caution others who may be considering similar action that this isn't a quick DIY project.

Ira
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Thanks, Ira, but it does feel like I'm getting scolded in some of the responses for even considering this. It seems that some folks are implying that I am forcing something down DS's throat because I haven't mentioned this to him, but the reason I haven't said anything is that first I'd like to know what is or isn't possible, and if I end up with finding nothing possible that meets my liking, I wouldn't want to disappoint him by first saying we were going to help him get a house, and then turn around and say 'never mind.' I see no reason to spin him up for something that might not happen.

I also see no reason to start by consulting with tax and legal professionals in that area until I know this is really the way I want to go because we are just in the exploration stage. I would consider that a waste of my time and money if I hadn't done some legwork first to see the lay of the land. I've already checked out some of the landlord/tenant stuff in RI, and in reading the information put out by the state, it is a lot more balanced there than in MA where the tenants seem to get all the rights, so I like that part already.

Gifting him the downpayment is not something I want to do at all, and that's why I suggested that a better idea might be to just buy it with him, and we would get our money back down the road when he sells the house, whenever that might be. We just finished giving both kids a full college education, and that seems like quite enough gifts at this point.

Houses in RI are pretty cheap, at least compared to MA, and DH has been wanting to buy something he could fix up and flip, so doing that with DS eventually living in it actually seemed to be addressing a couple of needs. I'm seeing foreclosures in the sub $125k range, and so the numbers look good. It is just all the logistics around how to structure this that are confusing me. I was hoping for more help from the board in terms of how to accomplish my goals, and I seem to be getting a lot of lectures on 'just don't do it' lectures instead.

I was hoping for more discussion on how to do this, and that's not here, so maybe I just asked in the wrong place, and so I would take pointers on where else to ask.
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I think your questions are a great starting point. Personally I hate going to a professional without having the opportunity to get at least a basic understanding of what I need. Too easy to waste time and money that way. Perhaps the Real Estate Investing board would be a good place to deal with the real estate end of it.

IP
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...where else to ask.

Maybe here: http://boards.fool.com/owning-rental-property-114196.aspx

...feel like I'm getting scolded ...some folks are implying that I am forcing something down DS's throat because I haven't mentioned this to him, but ... I see no reason to spin him up for something that might not happen...

Sorry for the scold (guilty). But as far as forcing, I never suspected you'd proceed if DS objected, only that (1) if he objected after you found something to your liking, that would be more of your time spent than if he had objected earlier in the process, (2) given his proposed future involvement, earlier involvement in the brainstorming process might be useful, and (3) shared homeownership and/or renting from relatives might introduce boundary issues. However, this isn't the Parenting board, I don't have the whole story, and from what I do know you've done spectacularly well so far, so I'll just shut up now.

Luck!
YG
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Thanks, Ira, but it does feel like I'm getting scolded in some of the responses for even considering this. It seems that some folks are implying that I am forcing something down DS's throat because I haven't mentioned this to him, but the reason I haven't said anything is that first I'd like to know what is or isn't possible, and if I end up with finding nothing possible that meets my liking, I wouldn't want to disappoint him by first saying we were going to help him get a house, and then turn around and say 'never mind.' I see no reason to spin him up for something that might not happen.

Oh, no, you're not being scolded. Scolded is more like,
"Use your d@mn head for something besides a wig stand, will you!" Notice the subtle distinction?

I've been a CPA for 35 years, this fall. Telling people what they don't want to hear is not exactly a brand new experience.

And beyond taxes, your topic's OP stated what might be its biggest drawback:

"We have multiple goals here - helping DS to get a good place to live that is affordable to him, getting our retirement home, and possibly picking up some investment property along the way. These are in rough priority order.

Well, your multiple goals are in conflict, beyond it being a matter of priorities. And you need to get REALLY CLEAR about which it's going to be, for DS's sake. Is he going to end up being a homeowner, or just the interim resident caretaker of your future retirement home? That little question needs to be nailed down solidly, before you get into a convoluted ownership/rental arrangement.

Bill
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Oh, no, you're not being scolded. Scolded is more like,
"Use your d@mn head for something besides a wig stand, will you!" Notice the subtle distinction?


Thanks for the chuckle!

Well, your multiple goals are in conflict, beyond it being a matter of priorities. And you need to get REALLY CLEAR about which it's going to be, for DS's sake. Is he going to end up being a homeowner, or just the interim resident caretaker of your future retirement home? That little question needs to be nailed down solidly, before you get into a convoluted ownership/rental arrangement.

First priority is to get DS affordable, decent housing. If he ends up being there temporarily, it would be OK for us to end up with the house as a retirement home, but that's a side-bar. I can think of lots of other scenarios such as he doesn't end up liking living there, so we rent it out, sell it, or opt to move in ourselves as a retirement home. But first priority is his housing. Anything else that comes out of this would be gravy. I would like the flexibility in this instance to belong to him and not necessarily to us.

He might kill the whole idea if he just doesn't like it for any reason. I can think of lots of reasons he might not like it - not wanting the financial responsibility to collect rent, not wanting to have to do homeowner maintenance like mowing the lawn and shoveling snow, not wanting to feel the pressure at this stage of having a mortgage or owning a house, etc.

Right now, though, I'm trying to look at it from my perspective to see what might be possible, and I thank everyone for the help.

I will cross-post to the other board that was mentioned.
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Thanks, Ira, but it does feel like I'm getting scolded in some of the responses for even considering this.

I apologize for being one of those scolding-sounding posts. I should know better than to respond to posts when I'm tired and cranky.

I was hoping for more discussion on how to do this, and that's not here,

I think you've gotten a fairly good discussion of the tax angles. There's not a lot more to say there that hasn't already been said. So now the discussion is devolving into other issues - legal and interpersonal - that are probably better handled elsewhere. You've gotten one suggestion for another board. Let me offer another, the Real Estate Investing board: http://boards.fool.com/real-estate-investing-113590.aspx .

--Peter
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