16 Mar We’re buying a home for our son. What should we know taxwise?

Q. We are both 71 years old, married for 47, lifelong New Jersey residents. We are financially comfortable for life. We would like to purchase a modest three-bedroom home for about $275,000 in West Virginia for our 45-year-old son and his small family, who currently live in and love this area. They would rent from us, and we do not need or expect a positive cash flow. Upon our demise, the house would transfer to them. What do we need to know about taxes?
— Dad

A. We’re glad to hear you’re financially sound.

It’s very generous of you to want to help your son and his family.

Your purchase would be considered a rental property, said Kenneth Bagner, a certified public accountant with Sobel and Co. in Livingston.

He said from a tax perspective, you can deduct any expenses against rental revenue which includes common expenses such as repairs, maintenance, real estate taxes, commissions, advertising, insurance, travel and any other relevant expenses that relate to your rental.

If the rental is not creating cash flow, you most likely will have a taxable loss, he said.

You cannot deduct a rental loss against other income unless you are a real estate professional or what’s called an “active participant,” he said.

To be an active participant in your rental properties, you must participate only “in a significant and bona fide sense in making management decisions or arranging for others to provide services.”

If that’s the case, you can deduct as much as $25,000 in rental real estate losses, but this begins to phase out if your modified adjusted gross income (MAGI) is greater than $100,000, and you cannot deduct any losses if your MAGI is above $150,000, Bagner said.

A real estate professional is someone who has more than one-half of the total personal services you perform in trades or businesses are performed in real property trades or businesses in which the taxpayer materially participates and the taxpayer performs more than 750 hours of services during the tax year in real property trades or businesses in which the taxpayer materially participates, he said.

“In this situation the taxpayer is most likely an active participant and not a real estate professional,” he said. “If their modified adjustment gross income is under $150,000, they may be able to deduct up to $25,000 of rental losses against other income such as Social Security, interest, dividends, etc.” Bagner said. “If the property is held for more than one year and then sold, you receive long-term capital gains treatment, which are lower rates.”

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This story was originally published on March 16, 2022.

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