My mother-in-law wants to lease her paid off home to pay for her monthly rent in a retirement community. Are there any tax consequences?

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CMCOKER, please note that for the residential and commercial investments it all runs on a historical cycle. Right now in my area it is still a Buyer's market for residential sales. The commercial side is the opposite, it's quite busy with new commercial construction, and store fronts renting quickly. Depending on the cycle, all that could change.

I remember some time ago if one sold their house and had a large profit, one could deduct $250k for a single owner [$500,000 if the owners were married]. I don't know if those numbers had changed. But as someone had mentioned above, the owner(s) had to live in the house 2 out of the last 5 years to qualify.

If your mother-in-law lives more than a certain number of years in the retirement community, her previous home could become an investment property with much larger capital gains, and no $250k deduction. My CPA wanted me to move into one of my investment properties for 2 years to help cut my capital gain but I didn't like the house enough to uproot myself... had a HUGE capital gain tax when I sold the house.

I would highly recommend to employ a CPA... just doing the income taxes for rental properties can be quite complicated and very time consuming.
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I'm not clear about this. The property manager does not need a renter to make the retirement community payment, but you think she will make more money by holding on to the house than selling it right now. Where is that money for the retirement community payment coming from now? One thing to consider is that it is not good for a house to sit empty for a long time and that could work against you when you try to sell it. Renting a house is a pain and costly. You will have to weigh all of this with a tax CPA.

I'm curious, since she is retired why doesn't she receive social security payments?
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Unless the pension payments are based on income, there should be no effect on the amount of the payments. However, additional income from renting the house may put her into a higher marginal tax bracket. You should consult an accountant about the future taxability of the sale. She needs to live in the house for at least two years of the five years immediately before the sale in order to use the capital gains exemption. Also, any depreciation claimed during the time that the house is rented must be recaptured at regular income tax rates. You really need to have a tax professional do a comparison of selling versus renting to help you make a decision. Renting might yield more income now, but may result in a much bigger tax impact when the house is sold. As mentioned above, Publication 523 outlines all of these rules.
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Thank you for all of the info. We are hiring a property manager and she does not need a tenant to make the retirement community payment. The house is in a thriving area so I think she will make more money holding on to the house than putting the proceeds of a sale in a conservative short term investment. The capital gains concern is somewhat important. She has owned the house for 40+ years. I thought you could make a one time sale without paying capital gains? I think my question really should have been....will the rental income she receives change the amount of money she receives from her monthly pension payment? She does not receive social security she receives money from a retirement pension fund left to her from my deceased father-in-law.
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CMCOKER, I can understand your mother-in-law wanting to do that, but being a landlord is for the young at heart who know how to do their own repairs to help save cost. Depending on the age of the home, something will always need repair. I remember one of my investment properties where the refrigerator, stove, and dishwasher all decided to break down during the same month. These items need repair or total replacement immediately. I even paid the tenant for lost food in the refrigerator/freezer.

Your mother-in-law could hire a residential property manager who will screen the new tenants and manage the home for her, but that is yet another monthly expense. Unless you yourself want to be the property manager and have her pay you a monthly management fee.

If it was my choice, it would be wiser to sell the home and put the proceeds into stock or money market where it would give her dividends. And no worry if the roof need replacing, the furnace stops in the middle of winter, or the water pipes freeze and break.
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There may be consequences when MIL sells the house. If there are gains, she has to be living in the house for a period before sale or gains will be taxed. Otherwise there is an exclusion up to certain limits. Lot's of rules, see IRS Pub 523.
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Selling the house and using the proceeds to care for her may be easier. Managing a rental property is not easy, as pointed out. In the short term it is typically more profitable to sell than to lease. If she requires certainty of the lease payments in order to pay the ALF, be assured that no tenant is ever certain to pay on time.
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The net income (after deducting the amounts spent for taxes, insurance, maintenance, advertising and depreciation would be taxable income. As Pam said, this would all be entered on Schedule E. Rent in an independent living apartment would not be a medical deduction. If you don't have experience with leases or the screening of potential tenants, you may wish to use a property management service. Bad tenants can eat up several years of rental profits.
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She would declare the income on a Schedule E. If she was in a nursing home, the cost of the nursing home or assisted living would be deductible and offset the income. The next question is, who would handle the tenants and maintenance on the house? I'm guessing you.
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