I own a townhouse and my mother lives in it. She is paying me rent equivalent to all expenses related to the property including principal, interest, taxes and insurance and HOA. I have no net expenses and the property is being paid off at the same time. The monthly rental amount from my mother turns out to be equivalent to the fair market value in the area.
1) From IRS pub 527 I understand that this is considered a regular rental property where I report the rent as income and I make deductions and take a depreciation, all reported on schedule E. Could you please confirm?
2) Would it be possible to convert this property into a second home? My mother would still be paying me the same amount hoping that I wouldn't have to pay taxes on her payments because she is my mother. I couldn't find anything about this in the IRS publication. Does the IRS specify anywhere if there is such an exclusion related to family members?
3) If 2) doesn't apply, could I consider my mother's rental payments as a gift, thus avoiding to be taxed on her payments to me? I understand that I wouldn't be able to take a depreciation any longer, but I could still deduct mortgage interest and property taxes.
4) The yearly "rental" amount I receive from my mother is about $30,000. I understand that the annual exclusion of the gift tax is $18,000 (for 2024). Could my mother pay $18,000 to me and another $12,000 to my wife and thus still be within the limits of the gift tax exclusion?
5) Assuming that I could convert the property to a second home, would I have to recapture the depreciation from the past? If yes, do I recapture the depreciation at the time of conversion or at the time of sale in the future?
Please provide exact reference to the corresponding IRS publication in your answer. Thank you very much for all your help in advance.
