Background:
My husband and I bought a house last year and decided to rent out the house we already owned to a few friends and my sister while she was a student. We are not really sure if it's something that will give us a good return as a rental over the long term, but it was easier to set up as a rental than to think about putting it on the market at the same time as buying and moving.
We haven't been classifying the income as rental income or claiming any depreciation on the property or anything, we've just been declaring the rent received as miscellaneous income on our taxes. What we collect in rent basically covers the mortgage payment, plus insurance and taxes, and the amount we pay in taxes on that income. So it feels like a wash, although the rent does pay down the principal on the mortgage, which we would theoretically get at some point if we sold the house.
My sister is graduating this spring, and getting married this summer. She has asked about the option of renting the house with her fiancé, which my husband and I are totally willing to consider. I know they would take good care of the property, and it would be easier for us to manage than it is now, with four different people there. If we charge them what we've been collecting from four people ($1100), the property would continue to be more or less financially self-sustaining, but that might not be the best option for them (they could find an apartment that would be adequate for the two of them for less).
What we've been wondering is--is there any way we could set it up so they just pay the mortgage/taxes/interest ($750) so we wouldn't have to declare that as income? We would have to work something out for maintenance costs, of course. And we're willing to do some paperwork if that's required. It would be a win for them because they'd have a nice place to live that's close to work and the library and parks, etc, for a comparable cost of renting an apartment. It would be a win for us because we wouldn't have to do as much to tend the property, and the mortgage principal would continue to get paid down.
Has anyone else ever done anything like this?