Not so fast. When renting to a relative, you lose out on a lot.
- Your claimed rental expenses allowed can not exceed the taxable rental income.
- Excess expense carryovers to the next year are not allowed. They're just lost, forever.
Those two alone can cost you dearly down the road when sell or otherwise dispose of the property. Also, when you put money in that 529 it was not tax deductible (on your federal return) when you contributed it. You paid tax on that money. Now when you claim that money as rental income, you will pay tax on it "again". While it's taxability may be offset by the deductibility of mortgage interest and depreciation, you will still pay tax on it when you sell the property later, since you are required to recapture depreciation in the year your sell/dispose of the property, and pay tax on it then.
The IRS has had these loopholes figured out for decades now, and they've basically been closed for just as long. But the bottom line is, you're going to do what you're going to do.
