How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask socrateaser Your Own Question
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 39187
Experience:  Retired (mostly)
Type Your Tax Question Here...
socrateaser is online now
A new question is answered every 9 seconds

I rent a great flat in San Francisco in a Rent Control situation.

This answer was rated:

I rent a great flat in San Francisco in a Rent Control situation. Meanwhile, a very long term friend lives in Portland with ALS. She now needs a wheelchair accessible home. I can buy one for her without collecting rent (I make good money and have a retirement income from CalPers from my late husband.) I have mortgage issues over whether I can consider this a Primary (as the only home I'll own and I will have a bedroom there), Secondary (because I won't get up there a lot-elderly parents and in-laws to care for), or Investment property.

Which calegory should I "want" from a Tax perspective?

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.


Terms and Conditions: By your continuing in this conversation with me, or by your clicking “Accept”, you are expressly agreeing to all of the following: (1) our communication is for entertainment purposes only; (2) you are not consulting me in my professional capacity as an attorney; (3) you do not seek to establish an attorney-client relationship with me, nor do I with you; (4) you will not rely on anything I say and you will obtain appropriate legal counsel via a traditional/office consultation with an attorney licensed to practice in the jurisdiction where your legal issue arises (and you may not use our communication to avoid taxpayer penalties imposed by the U.S. Dept. of Treasury); (5) by communicating with me in this public forum you are irrevocably waiving any right to privacy, confidentiality and attorney-client privilege concerning the matters discussed. You further separately declare that any payment made by you is not consideration for this contract, nor offered for any services rendered by me on your behalf, but rather is made in genuine admiration and respect for my desire to help others. If you do not agree with these terms and conditions, then you must advise me immediately.



Customer: replied 7 years ago.

Thanks, S.


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.


Hope this helps.

Edited by socrateaser on 9/3/2010 at 4:29 PM EST
socrateaser and other Tax Specialists are ready to help you