A Look at Buy/Lease Deals

“Service to others is the rent you pay for your room here on earth.”—Shirley Chisholm

Despite the recent slide in home prices, people who have lived in their homes for several years are still likely to sitting on a large pile of home equity. The house you grew up in, for example, is probably worth a lot more than it was when you were living there. And if your parents are still living in it, there’s a better-than-average chance that they are property poor.

If they’d like to get at the money that’s tied up in their home without moving out of it, one option is for you to buy it from them and lease it back. That means an immediate infusion of cash for them and possibly some handsome tax breaks for you.

Although you must report your parents’ rent payments as income, you can offset that income as the owner of the rental property, by writing off costs like property taxes, insurance, utilities, repairs, and maintenance. If you took out a mortgage to finance the purchase, those payments are also deductible. If, when you add them all up, your expenses are more than the rent, you have a loss, and you can deduct all or part of that loss, if your modified adjusted gross income is under $150,000.

Caution: To guard against IRS objections, make sure you have a signed lease and charge a fair rent. For full details on the tax issues regarding rental income and expenses, take a look at IRS Publication 527.

$2,185—Maximum monthly Social Security benefit for a person retiring at full retirement age.(Social Security Online, 2008)