Two potential/possible IRS flag raisers here, as well as tax liabilities being created that do not need to be.
- When renting property to family, and when paying family for childcare, both of these "may" require special attention on the tax front.
- So you're going to pay your parents $1500/mo for child care. That's taxable and reportable income for them. In addition to the regular tax that will be assessed on that income, they'll have to pay the additional 15% self-employment tax.
Then you're parents are going to turn around and give you that $1,500 back for rent. So you'll end up reporting that as rental income and definitely raising your AGI another $18K. First, you take $18K a year of money you've already paid taxes on and pay your parents with it. Then your parents pay you that $18K back as rent, and that same $18K is reportable as income to you *again* (potentially taxable too!) thus raising your AGI another $18K. This makes no sense.
You're better off converting the property to personal use (assuming it's classified as a rental already) and let your parents live there for free, in exchange for childcare that will "NOT" be a tax credit for you. But one advantage is that if each of your parent's earn less than $4,300 of *earned* income in the tax year, and you provide them more than half of their support for the entire tax year, you may qualify to claim them as your dependents.
Note that if your parents receive retirement income from an IRA, 401(k) or other type of pension plan (not including social security) then you would probably not qualify to claim them as a dependent.
