You could rent the property to your friend and then gift back the money at the end of the year (or forgive the rent as a gift). It would be better for the tenant to pay, and then for you to gift it back. That way you would be able to take the rental losses against your income.
Hope this helps.
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So, if I treat it as Investment...
Any money I spend on the house could be treated as a Current Expense, rather than a capital investment?
Part of the issue here is I could end up selling in 5-10 years or less. I hope not to, because it will be my friend's death that ends my need for the property. When I am done with this house I amy or may not be looking to buy one to live in myself (like I said...really great cheap flat in SF). Would I avoid any need to re-invest in another home to avoid capital gains, like I would with a personal home?
What is your opinion of putting the utilities in my name and having them pay these as "rent". Would Uncle Sam think a fluctuating rent REALLY below market was too funny?
Thanks for your help.
Investment losses on rental real estate are limited to $25,000 per year, unless the taxpayer is a material participant in the management of the property (which is almost never the case under IRS regulations, unless the taxpayer manages rental properties full time).
If you treat the property as rental property, then you will have a taxable capital gain on sale (assuming the tax laws remain consistent). However, if you reside in the property as your principal residence for two of the last 5 years before sale, then you can exclude your capital gain up to $250,000 ($500,000 if married). Of course, you can't treat the property as a rental and claim it as your principal residence simultaneously. But, you could wait until two years before sale, move into the property and then sell.
Note: I neglected to mention that currently, the maximum annual gift that does not require reporting to the IRS, and does not trigger a gift tax liability, is $13,000 ($26,000 if married). So, if fair market rent for the property is more than that, then you could have a problem, because during an audit, if the IRS were to get wind of the fact that you are routinely gifting back the rent to the tenant, then the IRS could declare the entire deal an abusive tax shelter, and cancel your rental deductions.