Your Wealth, Health, And Lifestyle Newsletter

How To Rent Your Own Home From Your Children, And Why You Should!

By Jason Markum

The estate tax recently lapsed in 2010. Congress didn’t renew it because they were too busy worrying about health care reform. That means that if you die in the year 2010, you won’t owe any estate tax. Yes, you read that right you will not own a single penny in estate tax for 2010.

But you can bet Congress isn’t going to be idle, they have the whole rest of the year to pass a new estate tax law. And with the Democratic Party running Congress at the moment, you can expect that they’re going to try everything they can to charge you as much tax on your estate as they can get away with. They’re very open about it; it’s one of their main goals after health care reform.

Now there are many different things you can do to lower your potential tax liability when it comes to estate planning. There are Trusts of a zillion different stripes that you can set up that will tailor to your specific situation. Of course you need an accountant and a lawyer who specializes in estate planning and asset protection to set these things up…

One of the easier ways to plan for your estate in order to minimize taxes is to make sure that you don’t have much by way of physical property that the government can tax when you pass away. No I’m not suggesting that you become poor, just that you plan accordingly.

One way to do this is to sell your house to your children now, and pay them rent each month. This way you get to enjoy living in your house, but you don’t own it. So when you die there’s nothing to tax.

The idea is to pay rent roughly equal to what your children will pay for a mortgage to buy the house from you. For example if your kid buys the house and takes out a loan that he or she has to pay $2,000 a month for, you would pay him $2,000 a month in rent. Where do you get the rent money? From the proceeds of the sale of your house of course. You get the idea…

There are a few things that you have to keep in mind when doing something like this. The IRS will scrutinize these sorts of arrangements very closely so you have to be careful not to get tripped up. Here are a few things to look out for…

Be sure to sell the house for its fair market value. If you sell it too cheaply, the IRS may consider it a gift to your children and apply gift tax.

Next, remember that the mortgage interest that your children pay is deductible to them, however it is taxable to you. That is to say, you can’t really deduct rent payments like you can mortgage payments… and if you’re used to deducting mortgage payments on your tax return, this may take some adjusting and getting used to varying it.

Next, realize that the rent payments that you pay your children each month are taxable income to them. That means that they will have to pay taxes on that rent.

Finally make sure you have documented all of this scrupulously. Make sure you create and sign an actual rental agreement between you and your children, and make sure that you actually pay the rent each month. And be sure to keep records of all the rental payments. The more specific documentation you keep, the more realistic the whole thing looks in the eyes of the IRS.

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