you are not renting at FMV
I'm not quite in agreement with that statement. If your mom was paying that for the entire house each month, then I would agree that there's no question you are not renting at FMV. However, you specifically stated, "This amount is close to FMV for a room rental in the area... the other rooms are reserved for when family visits. "
Based on that, I agree that $1,100 a month for a *ROOM* in the house could very well be FMV. Your comment also leads me to think she does not have access to or use of 100% of the floor space in the house either.
For starters, if the two brothers own the property then they have what is called a Partnership. Generally, a partnership files IRS Form 1065 Partnership Return. The partnership then issues each partner a K-1 which each partner needs in order to complete their personal 1040 tax return.
So basically, you are buying out the partnership interest of one of the brothers.
More than likely the two brothers are not filing a 1065 Partnership Return. Instead, they are each reporting their half of the rental income/expenses on SCH E of their individual tax returns, claiming a 50% ownership interest in the property. It's okay to do things that way with rental property. But if any of the partners are married and live in a community property state, it has the potential to create legal issues should the married partner(s) divorce, or separate and file separate returns for whataever reasons.
$1,100/month rent. This amount is close to FMV for a room rental in the area
So as I see it, your mother is not renting a house. She is renting a room. This is why I seriously doubt the two brothers are reporting this as a partnership on the 1065 Partnership Return. Basically the property is not 100% business use. So this further complicates matters. For example, if the room she is renting occupies 10% of the total floor space in the house, then only 10% of the mortgage insurance, property taxes and property insurance is deductible as a SCH E rental expense. So with two owners of the property that means each owner can only deduct 5% of those expenses on their personal tax return. The remaining 45% (for each partner) is a SCH A itemized deduction.
Additionally, assuming 10% business use that means that only 10% of the utility bills are deductible as a SCH E rental expense, and the remaining 90% isn't deductible anywhere on the tax return at all.
Do I charge my mom rent
So long as the other partner charges rent, then weather you do or not does not change the fact that there's business use here.
As you can see, this *will* get very complicated, very fast. Even more-so if your state taxes personal income. I would *highly* recommend you seek the services of a tax professional in your area before making any commitments here. Then if you decide to buy in to this, you can do so with a plan that will keep you out of trouble with the IRS, and possibly your state taxing authority too.
On a more personal note, and without sticking my nose in your personal business, this is an arrangement I would never agree to myself. Based on my own knowledge of the experience of others, I've found that the one ship that never makes it to port after it sets sail, is a partnership. Especially if there's a blood relation between the partners.
