Iorek wrote:I expect it's worth consulting a lawyer, but my offhand impression is that neither of the daughters is entitled to claim home mortgage interest, but you could probably treat it as a rental property, with a gift to the parents of half the rent (assuming the foregone rent is less than $4k/month or so), and deduct the mortgage interest (as well as depreciation, etc.) for the rental, subject to whatever passive activity loss rules might apply.
Oops - lorek is right.
This isn't a "home" and it isn't a "rental".
Be very careful about "gifting" half of the "fair rent 'value' ".
IF you are going this route, then consult a tax attorney or accountant.
It probably won't pass the giggle test unless the parents PAY a fair market rate, with checks to document.
What the IRS would do (this is IF there is an audit, obviously, but declaring rental income and deductions increases the chances) with any *separate* gifts?
It would probably depend in part on the amounts involved. A token gift is one thing. Gifts equal to half the rent...?
However, there are significant tax benefits of getting this properly used as a rental property. Utilities, repairs, insurance, etc., become tax deductible.
One way to start is NOT to have parents pay utilities, repairs, etc. Have them pay more rent instead, and see if it gets close to fair market value.