rentback/leaseback tax
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rentback/leaseback tax

Hi all! 


In a situation where I'm purchasing a house where the seller will need to remain in the house for bout 90 days after closing. 


My question is this, I will have a conventional loan yet I've seen articles suggesting leasebacks over 60 days will be considered an investment residence as opposed to a primary residence. This in turn can change mortgage terms and/or increase the rate given conventional loans backed by Fannie/Freddie require the buyer to occupy within 60 days. Is this accurate?


Also, let's assume this is correct I will likely request under 60 days. But in doing so, what impact does this have on my income tax? Do I report as rental income payments received for the leaseback period? Can I deduct expenses? Assuming the mortgage portion itself of the lease back payment won't be able to be deducted where the interest, taxes and insurance will be thus I would have some income tax hit given the entire amount cant be deducted? Or would this not be treated as rental income given its not for profit purposes? If so, how would I record for income taxes if I was to record at all? 



1 Reply
Level 15

rentback/leaseback tax

Most of the time, the rent back agreement will be for the amount of your mortgage payment, and not the true fair market value of the property (what you could rent it for to an unrelated tenant).  If the rent is below FMV, you can only deduct expenses up to the amount of the rent, which makes it a wash -- you go to all the trouble of reporting a schedule E, reporting the income and deducting the expense, can't show a tax loss, and you have to take depreciation which screws up your taxes when you sell.   If it were me, I would ignore the situation entirely and not report it.  You're not a landlord-investor, you are buying a personal home and making accommodation to the seller.

*Answers are correct to the best of my ability but do not constitute legal or tax advice.*
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