# Buying a house to rent to a family member



## DaffyDuck (Oct 7, 2021)

Hi All,

We're purchasing a house to rent to a family member and am looking for the best way to arrange this from a mortgage and tax perspective for both parties.

We are not in this to make a profit, so it will either be a break-even or loss scenario.


Mortgage the house as a 2nd home or rental? (rates lower for 2nd home)
If rent is below fair market value I understand I may not have to claim income, but also can't claim expenses and mortgage (CRA: cost sharing arrangement)
Any advantage of "all-inclusive" utilities under my name?
Anything else to be aware of?

Thanks!


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## spiritwalker2222 (Nov 7, 2017)

If the property is in their name that would be the best situation to reduce taxes. 

Are you willing to gift them a down payment? Would they be able to qualify for a mortgage for the price range you/they are thinking of?


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## Mukhang pera (Feb 26, 2016)

DaffyDuck said:


> Hi All,
> 
> We're purchasing a house to rent to a family member and am looking for the best way to arrange this from a mortgage and tax perspective for both parties.
> 
> We are not in this to make a profit, so it will either be a break-even or loss scenario.


Not sure of you province or anything about you, your relationship with the family member (eg. child, sibling, parent, third cousin), your ages, finances, other properties held, and a lot of things that might influence the decision. That would also include location of the proposed purchase, price to be paid, mortgage amount required, etc. 

Overall, the idea of buying a house just to rent to a family member at break even or a loss strikes me as a plan with little merit, but then I know nothing of your (and the family member's) circumstances.

If, as you say, it's simply a matter of buying to rent to said family member, I do not really see how "mortgage and tax perspective" enter into the equation from the renter's point of view. They are renting. You are landlord. Otherwise, you are looking at some kind of joint venture or partnership arrangement.



DaffyDuck said:


> Mortgage the house as a 2nd home or rental? (rates lower for 2nd home)


As for what you tell any lender about the use being made of the property, it depends on your predilection for deception, I suppose. It seems plain at this point it will be a rental, albeit perhaps a bit atypical. It does not sound at all like it will be a second home for you. Rather than misrepresenting intended use, I would suggest being honest with the lender (and insurer), but maybe that's old school.



DaffyDuck said:


> f rent is below fair market value I understand I may not have to claim income, but also can't claim expenses and mortgage (CRA: cost sharing arrangement)


That's an interesting (if not startling) proposition. I might try that. I have maybe been overpaying tax for years by charging market rents. If I am renting a place for $10,000 a month, and that's fair market, it might just pay to reduce rent to $9,000, which I can demonstrate (and support with expert opinion) that such is below market. At my marginal rate of about 49.5%, I think I would prefer to pay no tax on the net rent (let's say about $7,000/mo. after expenses) instead of collecting $1,000 a month more, but paying almost half of the net in tax. I note your comment about inability to claim expenses, but if none of the rent has to be brought into income if it's below market, then who cares? In any event, it would be a bit much to expect the CRA to allow you to not report the rent, while claiming the expenses. 

You refer to the CRA views of costs sharing arrangements and that is beyond my ken. But, again, it seems to smack of something other than a rental, which is what you have said this will be.


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## DaffyDuck (Oct 7, 2021)

spiritwalker2222 said:


> If the property is in their name that would be the best situation to reduce taxes.
> 
> Are you willing to gift them a down payment? Would they be able to qualify for a mortgage for the price range you/they are thinking of?


We could gift it no problem, or they could buy it with cash to be honest. But they’re in their 70s and have been renting for 20 years so there is no desire for them to own a home at their age.


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## AltaRed (Jun 8, 2009)

I see it much like post #3. Purchase it (and insure it) as a rental unit, charge rent at or slightly less than total operating expenses, so that you do not need to declare rental income NOR operating expenses NOR CCA. CCA is simply a tax deferral anyway that is not worth that much for a relatively short ownership period of say 10 years.

I would be honest with the mortgage lender and property insurer. Otherwise it is technically fraudulent and potentially at risk for property insurance purposes. You need to have a lease agreement with the tenants too to separate the legal responsibilities and obligations, particularly for the property insurer.


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## DaffyDuck (Oct 7, 2021)

Mukhang pera said:


> Not sure of you province or anything about you, your relationship with the family member (eg. child, sibling, parent, third cousin), your ages, finances, other properties held, and a lot of things that might influence the decision. That would also include location of the proposed purchase, price to be paid, mortgage amount required, etc.
> 
> Overall, the idea of buying a house just to rent to a family member at break even or a loss strikes me as a plan with little merit, but then I know nothing of your (and the family member's) circumstances.
> 
> If, as you say, it's simply a matter of buying to rent to said family member, I do not really see how "mortgage and tax perspective" enter into the equation from the renter's point of view. They are renting. You are landlord. Otherwise, you are looking at some kind of joint venture or partnership arrangement.


Hey there, sorry for not providing more details. I guess I was trying to be too discrete on the internet with personal details, but understand how these may help.

We're in Ontario, and all of my parents kids (myself included) moved away. They're in their 70's and will be moving to where we live so we can keep a closer eye on them as they age and need additional help in their lives.

As much as they could buy a house here, they've been renting for 20 years and at their age have no reason to buy, and were not having much luck finding a suitable rental. This is where we come in. With their blessing, we purchased a bungalow row house for $400K and will be renting it to them. We currently own (rough value $700K with $95K mortgage left owing) and will be taking out a mortgage on the new house with a down payment funded from our HELOC. We aren't in this to "make" money, which is why we want to price the rent fairly so our costs are covered on a monthly basis, or just below considering we are building equity in the home and will ultimately own it.

Tax perspective from the "renters view" was more geared toward however we set this up if my parents weren't able to claim their rent on taxes, but I'm not sure it benefits them anyways - something I have to look into.



Mukhang pera said:


> As for what you tell any lender about the use being made of the property, it depends on your predilection for deception, I suppose. It seems plain at this point it will be a rental, albeit perhaps a bit atypical. It does not sound at all like it will be a second home for you. Rather than misrepresenting intended use, I would suggest being honest with the lender (and insurer), but maybe that's old school.


You're right, from a mortgage and insurance perspective, honesty is the best and we will approach it with the same "old school" mentality and consider it a rental.



Mukhang pera said:


> That's an interesting (if not startling) proposition. I might try that. I have maybe been overpaying tax for years by charging market rents. If I am renting a place for $10,000 a month, and that's fair market, it might just pay to reduce rent to $9,000, which I can demonstrate (and support with expert opinion) that such is below market. At my marginal rate of about 49.5%, I think I would prefer to pay no tax on the net rent (let's say about $7,000/mo. after expenses) instead of collecting $1,000 a month more, but paying almost half of the net in tax. I note your comment about inability to claim expenses, but if none of the rent has to be brought into income if it's below market, then who cares? In any event, it would be a bit much to expect the CRA to allow you to not report the rent, while claiming the expenses.
> 
> You refer to the CRA views of costs sharing arrangements and that is beyond my ken. But, again, it seems to smack of something other than a rental, which is what you have said this will be.


Yeah, this is something I came across in my short time of researching this, using the CRA rules of "cost-sharing arrangement", but I certainly have to dive deeper into it to see if it applies to my situation. I would have a higher marginal rate as well, so if there is a way to do something similar, it could be beneficial.

Thanks for your feedback!


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## DaffyDuck (Oct 7, 2021)

AltaRed said:


> I see it much like post #3. Purchase it (and insure it) as a rental unit, charge rent at or slightly less than total operating expenses, so that you do not need to declare rental income NOR operating expenses NOR CCA. CCA is simply a tax deferral anyway that is not worth that much for a relatively short ownership period of say 10 years.
> 
> I would be honest with the mortgage lender and property insurer. Otherwise it is technically fraudulent and potentially at risk for property insurance purposes. You need to have a lease agreement with the tenants too to separate the legal responsibilities and obligations, particularly for the property insurer.


Thanks for the response. It seems investigating the "cost-sharing arrangement" is where I should direct my next bit of time to see how this applies to my situation.

And you're right about being honest with the mortgage lender and insurer. I wouldn't want to be caught in a legal situation with either. Lease agreement also seems like a necessity to keep everything high and dry.


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## Spudd (Oct 11, 2011)

You can just tell the mortgage lender your exact plan. I'm buying this house so my parents have somewhere to live, and they will be paying the mortgage payments (or whatever your plan is). Then the lender can decide if it counts as a rental or not.


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## cardhu (May 26, 2009)

”DaffyDuck” said:


> We're purchasing a house to rent to a family member and am looking for the best way to arrange this from a mortgage and tax perspective for both parties.


If you have equity in your primary home, why not take a mortgage on that, and use those funds to purchase the second home outright … I think you’ll generally get the best rate on your own home. 

As far as tax perspectives, capital gains on real estate are fairly straightforward … they only kick in when you eventually sell the property, and in the absence of attribution rules the capital gain would be reported by the owner of the property … attribution obviously wouldn’t apply between you and your tenant, but it could apply within your own household. 



”DaffyDuck” said:


> We are not in this to make a profit, so it will either be a break-even or loss scenario. .


In this case, interest deductibility is likely off the table. What you’re describing sounds like a personal use property, with the personal use being to house a family member … even if the family member is contributing to the costs, that doesn’t necessarily make it a rental property for tax purposes.



”DaffyDuck” said:


> Any advantage of "all-inclusive" utilities under my name? .


There is no tax or financial advantage either way … but there may be a simplicity advantage … if the goal is to simplify your parents’ lives as much as possible, then take the bills in your own names and factor that into the nominal amount that they pay you.



”DaffyDuck” said:


> Tax perspective from the "renters view" was more geared toward however we set this up if my parents weren't able to claim their rent on taxes, but I'm not sure it benefits them anyways - something I have to look into. .


Trillium benefit (which includes several different components) depends on income … if their income is low, then there may be some nominal benefit to treating their reimbursement of your costs as “rent” … but if you’re going to go that direction, then it would likely be better (safer) to legitimize it as a true rental from the get-go … which means charging enough to generate a net rental income, and reporting that income on your taxes … they’d receive a few dollars of trillium benefit, and you’d pay a few dollars of tax at your marginal rate on the net rental income. 

Is anyone any further ahead? Who knows? … but since you're already gifting them the ability to live in a house at below market rates, if you're concerned about a few dollars of Trillium benefit why not just reduce their monthly contribution to your costs and leave it at that?


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## DaffyDuck (Oct 7, 2021)

cardhu said:


> If you have equity in your primary home, why not take a mortgage on that, and use those funds to purchase the second home outright … I think you’ll generally get the best rate on your own home.


This probably would have been a smart idea, but I'm not certain we'd be able to arrange for that with a quick closing. For now, I think we'll stick with funding the down payment from our HELOC, and focus on paying that off as quick as we can. We've been offered 1.99% 5-year fixed from TD, and am currently pursuing a couple brokers, one said 1.97% 5-year fixed, and waiting on a couple others to respond. Variable rates in the 1.25-1.5% range, but I'd prefer fixed.



cardhu said:


> There is no tax or financial advantage either way … but there may be a simplicity advantage … if the goal is to simplify your parents’ lives as much as possible, then take the bills in your own names and factor that into the nominal amount that they pay you.


This is exactly the plan, they're finding it increasingly difficult to keep track of things these days, so my preference is to keep everything in my name and make it all-inclusive, or some sort of equal-billing utilities where the difference can be made up at the end of the year.



cardhu said:


> Trillium benefit (which includes several different components) depends on income … if their income is low, then there may be some nominal benefit to treating their reimbursement of your costs as “rent” … but if you’re going to go that direction, then it would likely be better (safer) to legitimize it as a true rental from the get-go … which means charging enough to generate a net rental income, and reporting that income on your taxes … they’d receive a few dollars of trillium benefit, and you’d pay a few dollars of tax at your marginal rate on the net rental income.


They're both earning decent pensions, so I'll follow up with them if they even bother claiming their rent for the Trillium Benefit now. It's likely better just to reduce their monthly contribution as you mentioned.

Thanks for the great advice!


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## Mortgage u/w (Feb 6, 2014)

Since you are buying the property to house an immediate family member, you should finance it as a second home.


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