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Is this dumb? Are we missing something?

We want to live two miles south of where we are.
A house we can fit into two miles south of where we are costs twice as much as our current house. Not gonna happen.
We had my mother over for dinner on Friday, for her birthday. I don't need to detail how the conversation went, but the gist of it is this:

My brother is moving in with my mother. Her place is too small for the both of 'em, so if he stays for any significant length of time, they'll need a larger place. Our place has two bedrooms. We could rent to my mother, she and my brother could move in, and we could rent a place south of here for less than a mortgage would be on a place down there. We'd still get the tax writeoff for owning a place, but we wouldn't make our debt worse by buying something else that we couldn't afford.

So, is this dumb? Are we missing something?


( 19 comments — Leave a comment )
May. 5th, 2003 08:50 am (UTC)
Nope, you're not missing something. Unless your mother doesn't pay the rent, which is unlikely to happen. This is actually exactly what Adam and I are doing, except we are renting to strangers who don't pay their rent.
May. 5th, 2003 08:59 am (UTC)
Aah. There are legal recourses to that. Sorry to hear that. :(
May. 5th, 2003 08:58 am (UTC)
Nope, I don't think you're missing anything.
May. 5th, 2003 09:07 am (UTC)
I did this for a year while I was moving around to be near my to-be husband. The only issue I ran into is that the rent money is considered income. So, you will get the tax writeoff for owning a place, but you will probably also have additional "income." I weaseled out of this b/c he rented half of one tax year and half of another, and the total amount I received was small enough each year to be considered a gift. But we also didn't have a rental contract -- everything was informal.
May. 5th, 2003 09:14 am (UTC)
That's what we've been hearing will be the consequences. It's doable, IMO.
May. 6th, 2003 10:42 am (UTC)
Actually, I've now independently heard from two friends who have rental properties... there are definite tax ADVANTAGES to renting out the property, which I never could have imagined. I was shocked to find this out, but one of the people I heard this from is a lawyer, and the other has been renting properties out for about 30 years.
When you have rental properties, there are a ridiculous number of deductions you can use on your taxes, apparently. So it turns out that our idea to rent to Seth's mom may, in fact, be wiser than we originally believed.
May. 5th, 2003 09:11 am (UTC)
That actually makes sense...hope all works out.
May. 5th, 2003 09:14 am (UTC)
Is it okay if you take care of the cats for us when we move? *evil grin*
May. 5th, 2003 09:23 am (UTC)
Yeah...you think you're funny...
May. 5th, 2003 10:07 am (UTC)
Did you smile, even a little?
May. 5th, 2003 09:46 am (UTC)
Sounds like a deal to me.
May. 5th, 2003 11:26 am (UTC)
So your mother will go from owning a place to paying rent? Is this contingent on her being able to sell her current place, or does she have sufficient funds to cover?

Others have mentioned the rent=income problem already. You'll be out more money because you'll be paying rent (no tax benefit) and offsetting your rent income against your mortgage. Your quality of life will be better so it may be worth it, but run through the scenario in TurboTax to make sure you're not surprised.

Oh, and even though it's family, you should all put everything in writing, just to avoid misunderstandings later.
May. 5th, 2003 11:32 am (UTC)
My mother is renting. She'll go from renting to renting.

Yeah, I was thinking that everything should go in writing no matter what, although I don't know that it'll actually make anything easier.
May. 5th, 2003 11:36 am (UTC)
My mother is renting. She'll go from renting to renting.

That's handy. It means she isn't losing a big tax deduction by doing this.

What putting things in writing does, primarily, is to resolve ambiguity. You don't want to end up in a situation where each of you thought the other was responsible for something. It forces you to spell things out, which is better done early and hypothetically than later in the midst of a problem. (For example: what routine maintenance will they be responsible for?)
May. 5th, 2003 01:23 pm (UTC)
Also, when we're ready to buy something, our place may be the right thing to sell to her. But that's down the road.

I see what you're saying about putting things in writing. That makes sense.
May. 6th, 2003 10:47 am (UTC)
Actually, we're not out MORE money from it. We still get a tax advantage from owning property and paying the interest on the mortgage. The question of whether the rent=income obviously is an important one. It is, in fact, income. But there's a huge tax advantage to renting out our property. My co-worker illustrated a realistic scenario whereby we actually save $1400 on our taxes as a direct result of renting this property out.

It's really this beautiful tax loophole. I'm beginning to love the messed up tax code. :)
May. 6th, 2003 09:52 am (UTC)
Have you considered...?
Don't know how feasible this is, but have you considered buying a place down there and keeping your house to rent out to your mother? You'd have the advantage of the tax benefits of two mortgages, plus depreciation on your rental property. It might make up for the extra cost of buying as opposed to renting. I'd talk to an accountant of course.

May. 6th, 2003 10:04 am (UTC)
Re: Have you considered...?
We've considered it. The problem with buying anything down there is that it's out of our price range. We're carrying too much debt to really buy anything else at all...if Karen got a job that paid better, we would be allowed to buy something. Since that's not happening any time soon, we'll just have to wait.

Depreciation, huh? I guess I can call my accountant and run things by him. Good idea.
May. 6th, 2003 02:25 pm (UTC)
Re: Have you considered...?
Our friends Dylan and Jodi did exactly this. They rent out their old house and live in their new house (new as of two years ago; wow, time flies). Here's the interesting bit: one of the people they rented to had a huge chunk of cash around, and poor money-handling skills. She paid up-front for N years of rent. That money then became the down payment on the new house. A second renter in the house pays additional rent on a monthly basis.

I don't know if you can swing something similar, but it's another approach. The only concern that I'd voice is that you are, in effect, going into business with family. This is always a red flag.
( 19 comments — Leave a comment )