My sister and I took advantage of the Family Opportunity Mortgage program to buy our parents a home closer to us this year. My sister put 20% down and will be a “silent partner”. The title is in my wife and I’s name.
Is your sister's name on the mortgage? If not, then most likely she has no "skin in the game" (for lack of a more accurate term.) That means she gets no claim for anything concerning the property on her tax return.
My parents will be paying us rent,
I'm not well versed on the Family Opportunity Mortgage Program myself. But I question the legality (as part of the program qualification requirements) of charging/collecting rent. I would highly suggest you seek legal advice on that front.
but well below FMV.
Assuming no legal issues as mentioned above, that just means when you report the income/expenses on SCH E, once your qualified rental expenses gets your taxable rental income to zero, that's it. You are not allowed to carry over excess losses. You just "lose" those forever.
Since this is an “owner-occupied” second home,
How do you figure it's owner occupied? If only you and your spouse are on the mortgage, yet your parent's live there and call it their primary residence, then it's not owner occupied. A homeowner can only have one primary residence at a time.
I believe we can claim mortgage interest and property tax as deductions on our taxes
You most certainly can. But the question is where on your taxes would be correct and legal? If it's legal for you to rent the property out under the Family Opportunity Mortgage Program, then it's claimed on SCH E.
but do we have to claim the “rent” as income?
If you're charging rent, then yes, most certainly.
Is there anything I’m not aware of and should take into consideration when it comes time for taxes?
Absolutely yes.... and not just for the tax front either. You need to seek advice from someone who is well versed in the Family Mortgage Program and confirm that what you are doing (or what you want to do) is in fact legal and will not disqualify you from the mortgage program, possibly causing legal issues down the road for all we know. I for one question the legality per the terms of the program, of charging rent. Though I see nothing wrong with the actual occupants of the property (the parents) making the mortgage payments, or contributing to the mortgage payments.
Since your parents claim the home as their primary residence, I would expect them to be able to prove a "vested interest" in the property, thus allowing them to claim their share of the interest on any mortgage payments and property tax payments they contribute to, even though they themselves may not have a legal obligation to pay the mortgage or property taxes.
