My father is considering buying a house for me to rent, to take advantage of the low interest rates and housing market in my area. I would rent it for the cost of the mortgage, and would purchase the house from him when I can qualify for a loan. He has a mortgage on his primary residence and owns a second home outright. What would be his tax liability on the rental/investment property? What could he reasonably expect to pay in taxes in this situation? I need to find this information so we can discuss the financial impact, and judge the amount of a loan we can handle, as I will be responsible for paying him back for any additional taxes.

From what I gather he would have to pay taxes on any income over and beyond the mortgage interest. For example, If I pay him $6000 in payments (cost of mortgage) and the interest is $5000, then his income is $1000 and he would pay a percentage of based on his tax rate. Is this correct?

Are there any tax issues that could arise when I purchase the house from him later? He would sell it to me for what ever the balance is at that time and I would cover all closing costs.

Thanks for your help!