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WebCPA
WebCPA, Tax Accountant
Category: Tax
Satisfied Customers: 110
Experience:  Licensed CPA. 10+ years experience.
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Im planning to buy a house for my brother to live in while

Customer Question

I'm planning to buy a house for my brother to live in while attending school. Will that qualify as my second home, or investment property? My intent is to help my brother out instead of me giving the money to rent an apartment. Also, if this ends up as second home and if down the road he ends up having his best friend as a roommate, will I be violating a second home rule?
Submitted: 1 year ago.
Category: Tax
Expert:  N Cal Atty replied 1 year ago.
If you do not ever live there it is not a second home and is more appropriately treated as an investment for tax purposes. There is no rule that prevents a person from making an investment that happens to benefit a brother.

Assuming that he pays a reasonable rent for the property, there would not be any issue of taxation for an "imputed gift".

If he pays no rent, then the value of the rent would be considered an imputed gift and you would have to issue him an IRS Form 1099 for the fair market value of the rent he did not pay, and he would have to pay tax on the 1099 "income".

Your brother having a roommate would obviously help him cover the rent, and would further disprove any claim that this is your second home.

There is a sample of a Colorado lease agreement posted here that you can modify to allow a house mate. You can also find lease forms in stationery stores or at
http://www.uslegalforms.com/co/CO-864LT.htm

You can get a free consultation from some of the landlord tenant lawyers listed by location at
http://lawyers.findlaw.com/lawyer/practicestate/Landlord_Tenant/Colorado

Some towns in Colorado require all rental agreements for a term of over 30 days to be memorialized in a written lease, see
http://www.bouldercolorado.gov/index.php?option=com_content&task=view&id=3767&Itemid=1406#Written

I hope this information is helpful.
Customer: replied 1 year ago.

I don't plan on charging rental from him or his roommate. All I want is for the utility bills he/they used to be paid by them. We do vacation to Colorado at least twice a year for about two to three weeks (non consecutive) so I do plan on using the home for vacation also. Does that still qualify as investment property?

Expert:  N Cal Atty replied 1 year ago.
I am going to move your question over to the Tax Experts.
Expert:  WebCPA replied 1 year ago.

Welcome and thank you for your question. I'll do my best to provide an informative answer. Please let me know if you need any clarification.

This would qualify as a second home. The property taxes would be deductible on Schedule A as an itemized deduction. The mortgage interest would also be deductible on Schedule A, subject to limits (see Pub 936 here http://www.irs.gov/publications/p936/ar02.html ).

If down the road you decide to rent the home, you would then be allowed to deduct depreciation, along with taxes, interest, etc. on Schedule E. Until then, it would just be a second home.

When the home is sold, the gain or loss would be subject to capital gains tax rates.

I hope this helps and if you need further assistance please let me know.

WebCPA, Tax Accountant
Category: Tax
Satisfied Customers: 110
Experience: Licensed CPA. 10+ years experience.
WebCPA and 7 other Tax Specialists are ready to help you

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