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.
MarkNYC wrote:Any day that a property is rented to a family member for less than fair market rent is considered a day of personal use, so in this situation you would have 100% personal use and no rental property for tax purposes. The otherwise allowable deductions for real estate tax and mortgage interest would be deductible as itemized deductions on Schedule A - 50% for each sister assuming each paid half.
Mortgage interest is deductible on a principal residence and one other. Whether a home that is not your principal residence is located across the street or 1,000 miles away is irrelevant in determining its classification as a second residence.
The below-market rental income should be reported on line 21 of Form 1040.
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