Q: My mother lives alone and is nearing retirement. Her retirement income will be too small for her to continue mortgage payments on her home. She's considering selling her home and moving into a rental home or apartment on retirement. Do you feel this is good economics for her?
Since I'm considering investing in rental property, I thought I could buy her house and rent it to her at a below-market rate. Would this lead to any problems with the Internal Revenue Service about deducting operating and maintenance expenses and depreciation on this house?
A: This may not be good "economics" for your mother. But it may seem logical and reasonable, overall, to her. By this, I mean she may want to get out from under the problems of ownership, maintenance, yard up-keep, etc. Of course, she's trading one set of problems for another. But she probably feels she'll find her problems as tenant more manageable than those as an owner. The overriding fact remains that she won't be able to afford the mortgage payments. If she can find suitable rental quarters at a price she can afford, and her retirement income is tied to some sort of adequate cost-of-living index so she can continue to afford probable increasing rental costs, this may be a logical soultion to her problem.
Another solution might be for you to furnish the difference between the total mortgage payment and the amount she can afford to pay. Assuming you will inherit the property upon her death, this may not be inquitable for either you or your mother. If there are other heirs as well, perhaps you and your mother can work out an equitable arrangement to repay you (with interest, if you both agree) on her death out of the property or its proceeds.
As for your buying the house and renting it to your mother - this will withstand Internal Revenue Service scrutiny if the purchase and rental qualify as "arms-length" transactions. Normally, this means you will have to pay "market value" for the house; and your mother will have to pay a rental amount comparable to that paid by tenants of similar properties in the locality of the house. Under provisions of the Tax Reform Act of 1976, you can't take deductions (including depreciation) in excess of your income from rental of the property to your mother the IRS says.