Below FMV to family

[WC53]

Confused situation and getting different opinions 

I have two houses. I refinanced house A to pay cash for House B as a vacation house which has become my permanent residence. I have a sister that rents nearby.

until recently, I had a different relative living in house A for free. He was helping to care for elderly parents who live nearby.We are looking to move back to house A for a year in order to provide care for elderly.

We would like to rent our beach house to my sister at a rate below our costs (refinance mortgage, taxes and insurance) and well below the market value. 2k vs 3.5k.  The house will be unoccupied except for weekend visits if we don’t rent to her.  We would still stay at the house a couple weekends a month.  She would be paying less than her existing house, but in a much nicer location. Utilities would stay in our name.

The tax stuff has confused me, to the point that I am not sure if we should do it.

Any guidance would be appreciated.

Thank you

[tagteam]

Can you state the precise nature of your confusion?

With respect to fair rental value, each day you rent below fair rental value is considered to be a day of personal use (per Section 280A). 

In that regard, you would have to report the income you receive from the property, but you would have to report your mortgage interest (if any and allowed) and real estate taxes on Schedule A (if you itemize your deductions). 

[Mike9241]

my advice see a tax pro that can sort through the situation with actual facts and numbers.

in my opinion the refi of A presents some problems. any amount over and above the mortgage balance at the date of the refi is not acquisition debt so interest on that portion is not deductible.  House B was not security for the debt so even if you attribute a portion of the refi and intertest to it, the interest is not deductible.

renting out property B to family members at less than fair rental value would result in the residence being treated as a second home. the rent wouldn't be taxable but the only deduction I see is real estate taxes on schedule A.   no mortgage interest would be deductible because the mortgage on A is not secured by the property B. taking out a mortgage on B wouldn't help because the mortgage would be in excess of the existing debt which is zero.    

also realize that the deduction on schedule A for all taxes is limited to $10K

[WC53]

Thanks, and yes, I can’t deduct much.  We hadn’t planned on holding on to house A, but parental health changed the equation.  

if the rent counts as income, that will bump me up to 24%, so will evaluate.