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The Big Move: I want to retire to the San Diego coast. My son wants to invest in real estate. Should I rent a home from him, and rent our $2.5M San Francisco pad to our son?


Dear MarketWatch,

My husband and I are both retired. My husband is collecting Social Security at 64 years of age, while I’m waiting to collect mine at 70 years (which will be in another four years).

We are fortunate to have owned a house since 1999 in one of the hottest markets in the San Francisco Bay Area. It would be worth at least $2.5 million if we were to sell it now. Our mortgage payment is $1,800 a month, and we overpay $300 every month toward the principal.

We would like to enjoy retirement on the San Diego coast without having to sell our house. My son is in his late twenties, earns a six-figure salary and has substantial savings. He would like to invest in real estate to reduce his tax burden.

I’ve proposed that he buy a house or condo somewhere on the San Diego coast that he will rent to us. Then, he and a couple of his friends can rent our house in the Bay Area where they all work. We estimate charging a rent of $4,000 to $4,500 per month, which can give my husband and me additional income while we enjoy retirement. Is this a good proposition? Are there any downsides that we should be aware of? I appreciate your advice.


Retiring on the coast

The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at

Dear Retiring,

On the surface, you have what seems to be a win-win proposition. You and your husband want to retire to a cozy beachfront abode, and your son wants to invest in real-estate. It’s easy to see why you wouldn’t want to try to kill two boardwalks with one stone.

The strategy you’ve concocted, however, is actually more complicated than you might realize, for a number of reasons both financial and emotional in matter.

Let’s start with the latter: Renting to family isn’t for the faint of heart in the most straightforward of circumstances. The arrangement you’re envisioning is far from straightforward. You wouldn’t be just renting to your son and his friends. He’s also renting to you. That inherently complicates things.

Think of the myriad headaches a landlord deals with: Maintenance issues, late rent checks, complaints from neighbors, you name it. That’s enough fodder for conflict, before you throw typical familial squabbling into the mix.

I don’t know what you and your husband’s relationship with your son is like. If the three of you typically enjoy open, reasoned and calm communication, perhaps you won’t be facing too tumultuous a set-up. If you’re often disagreeing and at each other’s throats, why would you go into business together?

Even if your relationship is on steady ground, at the very least you’ll need to draw up contracts with each other and agree on the relevant terms. You don’t want to wait until a problem arises to determine how you’d deal with it.

“If the IRS determines a home is being used for personal purposes, limitations may apply regarding rental-expense deductions.”

As for the financial considerations, you need to be extremely careful when renting to family members not to raise the ire of the IRS. Presumably, both you and your son would wish to be able to deduct relevant expenses for each of your homes — such as mortgage interest, insurance, maintenance and depreciation. That will help to reduce the amount of your rental income that’s subject to tax.

There’s a catch though: According to the IRS, a second home could be considered a personal residence if it is used by “a member of your family or of a family of any other person who has an interest in it, unless the family member uses it as his or her main home and pays a fair rental price.”

If the IRS determines a home is being used for personal purposes, limitations may apply in terms of what expenses are deductible. So if you’re not careful, you could essentially face a double-hit, tax-wise, from renting a home to family.

For that reason, you should be cautious about giving discounts to your son on rent (and vice versa.) You’ll want to research what the fair market rent is for each property — you could get this information from online rental listings or hire an appraiser. Keep records of this, in case the IRS wants proof.

According to the American Institute of Certified Tax Planners, a “taxpayer may be able to give their relative a small price break by using what is known as a ‘good tenant discount.’” In the past that discount could be as large as 20%, but the organization says that these days you’re safer only giving a 10% discount.

And don’t think you could pad things further by giving each other monetary gifts to offset the rent. If you face an audit, those gifts could come back to haunt you.

Finally, because you’re located in California, there are property-tax considerations. As I explained to a recent letter-writer, recent propositions have made it harder to pass along property-tax breaks from generation to generation if the home in question is converted into a rental.

So before you move forward with your plan, you should consult a real-estate attorney well versed in these property-tax matters to determine how this approach could affect any taxes your son might eventually face if he inherits your former home down the road.

Ultimately, the scheme you’re considering has a lot of potential hitches. That doesn’t mean you shouldn’t move forward, but it underscores the need to proceed with caution and ongoing counsel from tax and legal experts. Either way, I hope you and your husband manage to determine a way to get the retirement you dream of and enjoy this next phase of your life with your toes in the sand. Best of luck!

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