Buy a second house and it rent to parents: what kind of tax deductions are available? Is it considered investment property?
3 attorney answers
There are various ways of structuring this sort of arrangement, each with its pros and cons. To get a complete idea of these you would need to consult in-person with a good tax attorney.
That being said, if you wanted to qualify this second home for the home mortgage interest deduction it would be better if you didn't charge your parents rent, at least not in the sense of having an enforceable agreement with them under which they would either pay or move. There would certainly be no harm in them making a gift to you each year that happened to correspond, more or less, with the mortgage, insurance, and taxes, although there should always be some difference (i.e., don't get too cute). Since each of your parents can make an exempt gift to you up to the exempt amount ($14,000 I believe now), they could give you up to $28,000 as exempt gifts each year. The virtue of doing this is that your parents' use of the house will count towards qualifying use of the house for the purpose of taking the home mortgage interest deduction for this second house.
That is mostly for illustration as one possible alternative; there are others, which is why I suggest you consult with a tax professional first.
My answer does not constitute legal advice and may not be relied upon by anyone for any purpose and does not constitute an attorney/client relationship or an offer to form such a relationship. This disclaimer is intended to be fully compliant with the requirements of Treasury Department Circular 230 and the terms thereof are fully incorporated by reference.
I agree with Mr. Givner. You should consult with. CPA or tax attorney to determine what structure is best for your situation. I am not aware of any provision that would allow you to treat the property as your primary residence if you are not living there.
If you want to rent the residence to your parents then you can claim depreciation on it. If you don't want to rent the residence to your parents then you have the mortgage interest deduction by itself. Why don't you work with a CPA to see which approach turns out better for you?