<prompt> Human: Hi PF. Im wondering if my plan to use my retired father as a tax shelter is going to land me in jail. Basically I want to pay him a very high contractor rate to perform rehab on my investment properties, that Ill then be selling under capital gains. The higher pay rate for his contract work reduces my eventual tax basis on the property. The plan is to then have him gift me back whatever extra money I paid to him. Since he is retired with very low income, his tax rate on that money will be far lower than what Id be paying on it under capital gains. Theoretically we would do this up to his yearly gift limit. Assuming invoices, receipts, etc. is separated and fully documented- is this a legal loophole to avoid some tax, or am I just going to land us both in jail?  <response>: The IRS can question the wage if it is not reasonable. What you are doing is not permitted under the tax code. The fact that he is also gifting back the extra money proves that you are trying to avoid taxes. Dont do it.You will not go to jail, but could see penalties. Its also not the right and lawful thing to do. 