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Wouldn't MIL's continued payment of the property taxes also be an annual gift?

I'd classify that problem as an ugly pimple on the ugly backside of a very ugly problem.

While it might be a gift, I could easily see the IRS attempting to classify it as rent. And that would make it taxable income to the daughters.

And seeing as it would likely be a rental without a profit motive, the only deductions allowed would be those allowed on schedule A: property tax and mortgage interest. So the income would be offset by the deduction, but inbetween you've increased AGI, creating an impact on anything affected by AGI (like medical and misc itemized deductions, taxation of Social Security benefits, IRA deductions to mention a few).

And then the daughter would need to itemize to get the deduction. So worst case, the additional property tax deduction is still not enough to allow the daughter to itemize, making the whole property-tax-as-rent payment taxable income.

Instead of avoiding taxes, all I see is tax increases in this "plan".

Hopefully someone involved here will wake up and smell the coffee.

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