How does 2nd home get treated with respect to taxes?

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Submitted by sd92128 on November 9, 2012 - 8:20am

Needing to buy a second home and let my parents live in there for their retirement years.

How should I structure the deal for the least tax liability?

Should I buy it as an 2nd home and let my parents live in it? How do I treat when I file my taxes?

Should I bug it with my parents on the deed, they pay for the mortgage, and they deduct it as primary residence?

What's the best option?

Submitted by flu on November 9, 2012 - 8:48am.

depends on

*do you currently have a primary
*where you are at on taxes.
*where you are at on your income
*and whether you can buy it with cash or not.
*are you single filer or joint filter
*When you file your taxes, are you getting hit with AMT? I ask because second home deductions that normally don't get limited with normal tax calculations get limited under AMT rules.
*Also longer term you want to think about when you sell the property. Primary homes have a $250k cap gain exemption ($500k for joint)... It use to be that you could just move to that home and occupy it for 2 years, an then get the full deduction. But government took that away, so now it's prorated based on how long you live there as a primary.
*Also, putting it in your parents name may have estate taxes issues when the pass away...If you bought it for them, it's probably considered a gift from your estate... If they die and pass it back to you, it probably gets counted again as their estate subject to estate taxes... Consult a tax attorney...

Submitted by FormerSanDiegan on November 9, 2012 - 9:50am.

I think flu touched on many of the things you need to know/consider. I don;t think there is one single answer because of all the factors.

I think there are three basic scenarios (with various options within each) to consider, and lots of issues to sort out with each.
You'll have to consider each under your particular circumstances (e.g. value of home, size of mortgage, your income, your marital status, etc).

1. Buy it yourself as a second home.
Let your parents live in it free or have them separately give you cash gift payments less than the annual gift tax limits (could be as much as ~52K per year as of 2012. $13 K gift from each parent to you and $13 K gift form each parent to your spouse, assuming you are married.

In this case, if your combined mortgage balances on your primary (of you own one) and the secondary are less than $1 Million, then you can generally deduct the mortgage expense on both. However, there is that darn AMT. And second home interest is probably on the chopping block or further limited in the current fiscal cliff environment.

2. Buy it as a Rental property.
You could treat it as a rental property and rent to your parents. The consequences of this depend on several factors:
- If the rent is too low, there are tax consequences in terms of how much loss you can take. - Annual losses on rentals phase out as your income approaches 150K (joint).
- Would you want to hold this as a rental long-term (e.g. after your parents pass) or would you want to move there eventually.

3. Purchase jointly with your parents.
This might allow them to deduct the interest payment , if they are making them. But it depends on what tax bracket they are in, relative to you.
The downside here are all the estate issues you'd have to deal with.

All of these assume you are financing. If you are paying cash, I would simply buy it as a second home in your name.

Submitted by SK in CV on November 9, 2012 - 10:14am.

flu wrote:
depends on

*do you currently have a primary
*where you are at on taxes.
*where you are at on your income
*and whether you can buy it with cash or not.
*are you single filer or joint filter
*When you file your taxes, are you getting hit with AMT? I ask because second home deductions that normally don't get limited with normal tax calculations get limited under AMT rules.
*Also longer term you want to think about when you sell the property. Primary homes have a $250k cap gain exemption ($500k for joint)... It use to be that you could just move to that home and occupy it for 2 years, an then get the full deduction. But government took that away, so now it's prorated based on how long you live there as a primary.
*Also, putting it in your parents name may have estate taxes issues when the pass away...If you bought it for them, it's probably considered a gift from your estate... If they die and pass it back to you, it probably gets counted again as their estate subject to estate taxes... Consult a tax attorney...

I agree on most of this, particularly the conclusion. Though a qualified CPA will do just as well, if not better than a tax attorney.

I'm pretty sure you're wrong on the AMT though. Mortgage interest on acquisition debt for a second home is not subject to AMT, within the other general limitations on mortgage debt. Some non-aquisition debt is.

Submitted by flu on November 9, 2012 - 10:34am.

SK in CV wrote:
flu wrote:
depends on

*do you currently have a primary
*where you are at on taxes.
*where you are at on your income
*and whether you can buy it with cash or not.
*are you single filer or joint filter
*When you file your taxes, are you getting hit with AMT? I ask because second home deductions that normally don't get limited with normal tax calculations get limited under AMT rules.
*Also longer term you want to think about when you sell the property. Primary homes have a $250k cap gain exemption ($500k for joint)... It use to be that you could just move to that home and occupy it for 2 years, an then get the full deduction. But government took that away, so now it's prorated based on how long you live there as a primary.
*Also, putting it in your parents name may have estate taxes issues when the pass away...If you bought it for them, it's probably considered a gift from your estate... If they die and pass it back to you, it probably gets counted again as their estate subject to estate taxes... Consult a tax attorney...

I agree on most of this, particularly the conclusion. Though a qualified CPA will do just as well, if not better than a tax attorney.

I'm pretty sure you're wrong on the AMT though. Mortgage interest on acquisition debt for a second home is not subject to AMT, within the other general limitations on mortgage debt. Some non-aquisition debt is.

I defer to financial people who are experts. I'm just an enginerd that tries to make heads and tails out of a complicated tax law.. I stand corrected. I forget that it's about the home equity loan that is subject to AMT exclusion...
Duh!

http://turbotax.intuit.com/tax-tools/tax...

Thanks CV...

For the original poster. One also can consider implications on property taxes. That's subject to AMT limitation...

In general, a lot of CA people get hit with AMT because on the exclusion list of deductions for schedule A for AMT calculation is

a) state income taxes paid
b) property taxes paid
c) certain elements of a home loan (equity loan).

Those don't count when computing AMT.

The cheaper way to figure this out is get a copy of turbo tax and run through scenarios with purchase X, loan Y ==> tax consequence Z.

I do that all the time.

Do the same thing with your parents...

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