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Buying a rental house for your parents to live in doesn't guarantee a tax write-off. Gifts aren't tax-deductible and you can't take a charitable deduction for helping out a family member. Depending on the details, you may not even get the tax deductions you'd normally write off for a rental. You still have a good shot at cutting your tax bill, though.
If you charge your parents the going rate for a rental, you can write off expenses such as repairs, maintenance, mortgage interest, depreciation and property taxes. You deduct the costs against the money you make off your parents' rent check, and may be able to write off up to $25,000 in expenses against other income. If you let your parents stay there free or at a reduced rate, that counts as personal use of the property. In that case, you can't claim any rental expenses while they're there.
Giving your parents a free home won't get you a rental write-off, but you may be able to claim them as dependents. As of 2013, that's a $3,900 deduction from your taxable income for each parent for whom you can claim the dependent exemption. You can claim a parent if she makes less than $3,900 and if you pay more than half her support costs. If you rent out the house to your folks for, say, $6,000 a year less than the going rate, that counts as $6,000 in support money. Paying the utilities would count too.
When figuring if your parents' income qualifies, you only count taxable income, not any tax-free money they bring in. It doesn't matter how much they have in the bank, only what they spend in a year on food, lodging, clothes, recreation and so on. You have to figure the support test separately for each parent. If you contribute $2,800 toward their lodging costs, for instance, you treat that as $1,400 each.
If you itemize deductions, you may be able to deduct mortgage interest and mortgage-insurance premiums as a personal expense. You can take this write-off on a second home in addition to your first home. If you're already deducting the interest on a second home, you can't take your parents' house as a third. You can choose to take the write-off on your parents' home instead of your other second home, however, if that works out better. And, you can itemize property taxes on any number of homes you own.
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