Family member renting 2nd house. Ok to ignore on tax return?

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WhiskeyJ
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Family member renting 2nd house. Ok to ignore on tax return?

Post by WhiskeyJ »

Started doing my own taxes in turbotax a few years ago and still learning: My wife and I bought a nearby condo for her mom who helps with our kids quite a bit. Market rate would be about $1200 with landlord typically paying $250 monthly HOA fee. Instead, she pays us $650/month, and pays the HOA herself, essentially a $300/month discount. Since she is not paying market rate, we don't treat it as an investment property (I.e. no depreciation/maintenance expenses). Is it acceptable from an IRS standpoint to deduct our mortgage interest and property taxes as a second home, but to basically ignore the rest on a tax return? Is that better/safer than having her pay us market rate and turn around and pay her $300/month in intermittent babysitting?-- I imagine that could be better from a tax standpoint but likely to raise some red flags, so I'd rather be conservative and not do anything that could be considered shady/questionable from an IRS perspective. In a sense were getting $7,800/year in checks from her thats not showing up on our tax return. Anything wrong with that?. Any other factors we should consider? We're in the 33% marginal tax bracket if that's relevant.

Thanks!
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bottlecap
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by bottlecap »

You are receiving $7,800 per year in income that's not showing up on your return. The IRS would view that as tax fraud.

JT
steve_14
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by steve_14 »

I'd rather be conservative and not do anything that could be considered shady/questionable from an IRS perspective
You need to declare your tenant's income, both direct and imputed (her HOA payment), declare it a rental property, and depreciate it.

That's not conservative, that's just obeying the law.
expat
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by expat »

Check with your CPA.

In the case of below market rent, I believe your deductions (depreciation, maintenance, fees, taxes) cannot exceed your income.

Or perhaps you could construct another story. A family member is staying as a guest in your second home and the $7,800 is a gift to you. It's under the annual gift exclusion.
carolinaman
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by carolinaman »

I agree that you need CPA advice to get this straightened out. Not sure how long you have been receiving this income but if you start reporting it properly, the IRS is apt to want to know how long this has been going on. You could be subject to back taxes, penalty and interest for the entire time you have been receiving the unreported income. That could get expensive and hence the need for professional advice.
Topic Author
WhiskeyJ
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by WhiskeyJ »

I'm learning there are a lot of grey areas with our tax code. Just so I understand, if I let her live in the condo with no rent (market value $1,250/month) and she pays the HOA ($250/month), I'm essentially gifting her $1,000 per month, which would be totally fine from a tax standpoint (under $13k), so long as I treat it as a second home (deducting only mortgage interest and property taxes), and not as a rental property (no depreciation/maintenance deduction).

Unrelated, there is nothing wrong with her gifting us $650 per month.

But, when the two are done together, I'm probably entering a grey area from a tax standpoint, and if I wanted to be completely safe (option A) I would just declare the $7,800 a year as miscellaneous income and give 33% of it to Uncle Sam. If I didn't mind the grey area, I could consider that I'm gifting her $12k per year in free rent and she is gifting me $7,800 (option B). Or i could go ahead and charge her FMV for rent, pay her FMV for the baby sitting, probably $400/month (misc income on her return) but I could deduct more expenses and treat it as a true rental property (Option C).

There is no lease/contract by the way. So if I do decide to fork over the money to get an opinion from a CPA/tax person (I've been doing turbotax on my own the past few years), can anyone predict what advice they would give? I'm assuming option A is least favorable and C would be most favorable from my tax standpoint. Thanks for all the advice so far!
lostInFinance
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by lostInFinance »

WhiskeyJ wrote:I'm learning there are a lot of grey areas with our tax code. Just so I understand, if I let her live in the condo with no rent (market value $1,250/month) and she pays the HOA ($250/month), I'm essentially gifting her $1,000 per month, which would be totally fine from a tax standpoint (under $13k), so long as I treat it as a second home (deducting only mortgage interest and property taxes), and not as a rental property (no depreciation/maintenance deduction).

Unrelated, there is nothing wrong with her gifting us $650 per month.

But, when the two are done together, I'm probably entering a grey area from a tax standpoint, and if I wanted to be completely safe (option A) I would just declare the $7,800 a year as miscellaneous income and give 33% of it to Uncle Sam. If I didn't mind the grey area, I could consider that I'm gifting her $12k per year in free rent and she is gifting me $7,800 (option B). Or i could go ahead and charge her FMV for rent, pay her FMV for the baby sitting, probably $400/month (misc income on her return) but I could deduct more expenses and treat it as a true rental property (Option C).

There is no lease/contract by the way.
There's really no grey area here. If there's a quid pro quo, it's rental income and failure to pay income taxes is tax fraud. From your post, it's obvious there is a quid pro quo: she wouldn't be paying you $650/month if you didn't provide her a place to live.
Texas hold em71
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by Texas hold em71 »

https://ttlc.intuit.com/questions/12103 ... n-relative

Based on the link, I would pull up IRS publication 527 and read the section called "not rented for profit."
NYnative
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by NYnative »

OK, I understand renting to a relative is still renting. What about owning a condo with a relative who is on the deed but not on the mortgage and pays part of the mortgage to to us who then pay the whole mortgage . We stay with her several weeks a year and treat this as a second home, not an investment property. We take the mortgage deduction because we pay the mortgage. Does this pass the giggle test?
derosa
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by derosa »

Talk to an accounting professional to get the proper and appropriate information about your situation.

If you don't like the information - just ignore it and keep doing what you are doing. At least at that point you will know what your liability is.

Anything that anyone on this board provides you is completely hearsay of course. I can hear you know splaining it to the tax man - but they told me onthe internet I could do this.
Retread
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by Retread »

I disagree with most of the comments here. I see no reason why this can't be treated as a second home by the OP with the relative reimbursing them for a portion of the expenses on the property. No different than if she lived in their home and paid a portion of the expenses. I would treat it as a second home, deducting real estate taxes and mortgage interest. This is not a transaction entered into for profit and is strictly a family sharing expenses.
Bruce
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Retread
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by Retread »

WhiskeyJ wrote:There is no lease/contract by the way. So if I do decide to fork over the money to get an opinion from a CPA/tax person (I've been doing turbotax on my own the past few years), can anyone predict what advice they would give? I'm assuming option A is least favorable and C would be most favorable from my tax standpoint. Thanks for all the advice so far!
As noted above, I would feel confident a good CPA would give you the advice I just gave. Don't waste your money on a CPA.
Bruce
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Auream
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by Auream »

I'm pretty sure Retread is correct, and people telling you this is a rental property and that you owe taxes or are committing tax fraud are completely off-base. To whit:

http://www.forbes.com/sites/anthonynitt ... ff-of-you/
...a personal residence is any home that is rented for fewer than 14 days during the year. Expenses associated with a personal residence, aside from mortgage interest and real estate taxes, are not deductible, but the taxpayer is also not required to report the rental income.

As you can see, the key to making the determination between the three types of properties is the extent of personal use by the owner. But personal use is not always what it seems; for example, if a house is rented to a family member, those days are treated as personal use days by the owner of the property, unless the property is rented for fair rental value for use as the family member’s principal residence.
Topic Author
WhiskeyJ
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by WhiskeyJ »

lostInFinance wrote:There's really no grey area here. If there's a quid pro quo, it's rental income and failure to pay income taxes is tax fraud. From your post, it's obvious there is a quid pro quo: she wouldn't be paying you $650/month if you didn't provide her a place to live.
So maybe this is more of an ethical question. Is it really fraud when a more detailed/accurate accounting and transfer of money would generate less or equal in total tax to the US government? I could charge fair market rent, turn around and gift her money, and probably owe less in taxes...
Sidney
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by Sidney »

WhiskeyJ wrote:So maybe this is more of an ethical question.
It is a tax question. The IRS has nothing to do with ethics. That isn't a value judgement -- it just isn't in their charter.

You might want to read IRS Pub 527
http://www.irs.gov/publications/p527/ch ... 1000219164

There are reporting guidelines that discuss renting not for profit. You'd have to decide if that is the case or whether it is a for profit rental. In either case, the rental income is reportable.
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stan1
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by stan1 »

Retread wrote:I disagree with most of the comments here. I see no reason why this can't be treated as a second home by the OP with the relative reimbursing them for a portion of the expenses on the property. No different than if she lived in their home and paid a portion of the expenses. I would treat it as a second home, deducting real estate taxes and mortgage interest. This is not a transaction entered into for profit and is strictly a family sharing expenses.
Bruce
+1. If she was living in a spare bedroom and contributed her monthly SS income to the household expenses there would be no debates. All that's different here is that she is living in a second home. What you can't do is deduct expenses as if it was an investment property (beyond mortgage interest and property taxes) and then not declare income. Put another way you can't treat the expenses as if it was an investment property and then treat cash flows like its a familial shared living arrangement. OP already knows that.
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jebmke
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by jebmke »

There is an easy way to sort this out. Call the IRS and ask them.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
lostInFinance
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by lostInFinance »

Auream wrote:I'm pretty sure Retread is correct, and people telling you this is a rental property and that you owe taxes or are committing tax fraud are completely off-base. To whit:

http://www.forbes.com/sites/anthonynitt ... ff-of-you/
...a personal residence is any home that is rented for fewer than 14 days during the year. Expenses associated with a personal residence, aside from mortgage interest and real estate taxes, are not deductible, but the taxpayer is also not required to report the rental income.

As you can see, the key to making the determination between the three types of properties is the extent of personal use by the owner. But personal use is not always what it seems; for example, if a house is rented to a family member, those days are treated as personal use days by the owner of the property, unless the property is rented for fair rental value for use as the family member’s principal residence.
I don't buy the Forbes article. Here's straight from Chapter 5 of the IRS pub.
Used as a home and rented 15 days or more. If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income.
Retread
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by Retread »

jebmke wrote:There is an easy way to sort this out. Call the IRS and ask them.
That's often a very poor source for tax advice. Furthermore, they are not in any way bound by the opinion given.
Bruce
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Auream
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by Auream »

lostInFinance wrote: I don't buy the Forbes article. Here's straight from Chapter 5 of the IRS pub.
Used as a home and rented 15 days or more. If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income.
EDIT: Misread the IRS publication... still doing some more research. I'm still leaning towards this income not being reportable, just as if she was paying money towards the mortgage if she was living in your own home.

I think this is a more relevant section that what I originally quoted:
What is a day of personal use? A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons.
You or any other person who owns an interest in it, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). However, see Days used as a main home before or after renting , later.

A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).

Anyone under an arrangement that lets you use some other dwelling unit.

Anyone at less than a fair rental price.
End result the same. Property is used 365 days of the year for personal use, therefore it is used less than 15 days per year as a rental, therefore the income is not reportable.
Last edited by Auream on Sat Dec 07, 2013 8:48 pm, edited 2 times in total.
Retread
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by Retread »

lostInFinance wrote:I don't buy the Forbes article. Here's straight from Chapter 5 of the IRS pub.
Used as a home and rented 15 days or more. If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income.
But it is not being rented. It is strictly personal use by a family member who is sharing in the expenses of the property. This arrangement is done all the time and has no bearing on your tax return.
Bruce
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Retread
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by Retread »

Auream - Agreed. Your post hit before mine. This is strictly personal use.
Bruce
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Rainier
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by Rainier »

I agree, this is not income. But you don't get to double dip as others have explained.

"Call your CPA..." That's the worst advice. Many people on this forum are CPAs, in addition, CPAs don't know all the answers they just know where to find them. Read the IRS publications and prove your own case.
lostInFinance
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by lostInFinance »

Auream wrote: End result the same. Property is used 365 days of the year for personal use, therefore it is used less than 15 days per year as a rental, therefore the income is not reportable.
The property is used 365 days of the year for personal use, but it does not follow that the home is not rented during the days when it is used for personal use. Here's from the IRS pub:

Example 5. You rent an apartment to your mother at less than a fair rental price. You are using the apartment for personal purposes on the days that your mother rents it because you rent it for less than a fair rental price.

The IRS recognizes that your mother can rent the property on days that the apartment is used personal purposes. Perhaps, the real lesson is the OP should hire a CPA instead of getting responses from anonymous strangers on the internet.
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WhiskeyJ
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by WhiskeyJ »

Yes, everything I've researched is if it's below fair market and to a family member it's a personal property, I.e. second home (no depreciation/ maintenance expense deduction), and I'm not claiming any. If I paid everything and charge her zero rent, It could be considered a gift over $13,000 a year.

Reading some of the comments, I'm wondering if I shouldn't go ahead and charge her fair market value, treat it as a rental property instead, and gift her some money each year. While more detailed from an tax reporting standpoint, it's probably cleaner if I was ever audited.
stan1
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by stan1 »

WhiskeyJ wrote:Yes, everything I've researched is if it's below fair market and to a family member it's a personal property, I.e. second home (no depreciation/ maintenance expense deduction), and I'm not claiming any. If I paid everything and charge her zero rent, It could be considered a gift over $13,000 a year.

Reading some of the comments, I'm wondering if I shouldn't go ahead and charge her fair market value, treat it as a rental property instead, and gift her some money each year. While more detailed from an tax reporting standpoint, it's probably cleaner if I was ever audited.
You and your wife can each gift her $14,000 -- so that's $28,000 per year. $13,000 was the 2012 number.

You are seriously over thinking this IMHO.
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denovo
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by denovo »

It's not ok to ignore rent . That's tax fraud.
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sscritic
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by sscritic »

I went to the hardware store today. They had a Christmas tree up. We exchanged presents. I gave them $42.38 and they have me some of the things there were keeping on their shelves. Since these were gifts, there was no sales tax collected. Whoopee! I love Christmas gifts.
stan1
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by stan1 »

denovo wrote:It's not ok to ignore rent . That's tax fraud.
Did you read Pub 527 Section 5?
I'm curious how you came to that conclusion after reading the applicable IRS publication.
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inbox788
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by inbox788 »

WhiskeyJ wrote:
lostInFinance wrote:There's really no grey area here. If there's a quid pro quo, it's rental income and failure to pay income taxes is tax fraud. From your post, it's obvious there is a quid pro quo: she wouldn't be paying you $650/month if you didn't provide her a place to live.
So maybe this is more of an ethical question. Is it really fraud when a more detailed/accurate accounting and transfer of money would generate less or equal in total tax to the US government? I could charge fair market rent, turn around and gift her money, and probably owe less in taxes...
I think Retread/Bruce nailed it in a couple of posts above. Here's an excerpt from Publication 527 Chapter 5 Page 19 that you might want to revisit:
Used as a home but rented less than 15 days. If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). You are not required to report the rental income and rental expenses from this activity. The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses.
You're not making any money, or even trying to. It's a family matter and the government should stay out of it. Take your allowed deductions (no more, no less) and move on:

http://homeguides.sfgate.com/can-deduct ... 48203.html
denovo
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by denovo »

WhiskeyJ wrote:In a sense were getting $7,800/year in checks from her thats not showing up on our tax return. Anything wrong with that?.
Thanks!
Even if you knew nothing about taxes, it should be plainly obvious that not reporting income on a form which you are supposed to declare your income is illegal.
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denovo
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by denovo »

inbox788 wrote:
Used as a home but rented less than 15 days. If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). You are not required to report the rental income and rental expenses from this activity. The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses.
You're not making any money, or even trying to. It's a family matter and the government should stay out of it. Take your allowed deductions (no more, no less) and move on:

http://homeguides.sfgate.com/can-deduct ... 48203.html
He's renting it 12 months a year, which is more than 15 days. This section does not apply to him, therefore he must report income. Whether or not the government "should stay out of it" is neither here nor there. It's what the law says. You should leave your agenda out of it. If OP doesn't want to report income from rent, there's a simple solution. Don't charge your in-law for rent.

Of course, there is an alternate solution. OP should make the HOA payment. Treat this as a rental property and deduct depreciation along with other expenses. But since you are not renting this property to profit, if your net income after deductions and expenses is negative, you can not deduct the losses from your other income when calculating income taxes.

However, since you are actually exchanging this for babysitting , you can report the rent as $1,200 if the fair market value of her babysitting is $300.00 and then go ahead and deduct losses if you have any after depreciation( subject to income limitations, phased out by 150k agi)
Property or services. If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income.
If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.
http://www.irs.gov/publications/p17/ch09.html
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inbox788
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by inbox788 »

denovo wrote:
inbox788 wrote:
Used as a home but rented less than 15 days. If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). You are not required to report the rental income and rental expenses from this activity. The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses.
You're not making any money, or even trying to. It's a family matter and the government should stay out of it. Take your allowed deductions (no more, no less) and move on:

http://homeguides.sfgate.com/can-deduct ... 48203.html
He's renting it 12 months a year, which is more than 15 days. This section does not apply to him, therefore he must report income. Whether or not the government "should stay out of it" is neither here nor there. It's what the law says. You should leave your agenda out of it. If OP doesn't want to report income from rent, there's a simple solution. Don't charge your in-law for rent.

Of course, there is an alternate solution. OP should make the HOA payment. Treat this as a rental property and deduct depreciation along with other expenses. But since you are not renting this property to profit, if your net income after deductions and expenses is negative, you can not deduct the losses from your other income when calculating income taxes.

However, since you are actually exchanging this for babysitting , you can report the rent as $1,200 if the fair market value of her babysitting is $300.00 and then go ahead and deduct losses if you have any after depreciation( subject to income limitations, phased out by 150k agi)
Property or services. If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income.
If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.
http://www.irs.gov/publications/p17/ch09.html
I'm not pushing any agenda, it's what the laws says. You're reading the wrong part of the law that doesn't apply. There is no rental property. It's personal use, period. There is no role for the IRS here, there are no profits, and there are no losses to deduct, no tax benefits, (ignore Schedule E) except the mortgage deduction, etc. on a second home which is clearly allowed (schedule A). It's in black and white on the above quoted section. Further:
What is a day of personal use? A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons.
...
Anyone at less than a fair rental price.
http://www.irs.gov/publications/p17/ch0 ... 1000284016

As far as the childcare, it's more complicated, but there ARE BENEFITS to making it a bonefide arrangement. However, the paperwork is hideous and the benefits small, so it's simpler to make it informal, exchanging small favors, and forgo the benefits. If you're ever audited, the IRS may actually owe one or both of you monies. The cost of these audits would be senseless, spending thousands to collect hundreds (or maybe pay out).

http://www.forbes.com/2009/03/18/nanny- ... -care.html
denovo
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by denovo »

The sub chapter you are referring to that defines "personal use" is about the determination of EXPENSES , not the reporting of income. Two different things.
Rental Expenses

This part discusses expenses of renting property that you ordinarily can deduct from your rental income. It includes information on the expenses you can deduct if you rent part of your property, or if you change your property to rental use. Depreciation , which you can also deduct from your rental income, is discussed later.

Personal use of rental property. If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Also, your rental expense deductions may be limited. See Personal Use of Dwelling Unit (Including Vacation Home) , later.

As previously acknowledged, there are certain line items that can be deducted when you are renting the property for FMV (utilities, HOA, depreciation, a phone line you install), that you can not deduct when you are using it for personal use (i.e. renting below FMV to a relative)

The other sub chapter could not be more clear.....
Rental Income

In most cases, you must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property. In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income.
The exception being.... Retal of property also used as your home. If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses.
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heartwood
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by heartwood »

WhiskeyJ wrote:Started doing my own taxes in turbotax a few years ago and still learning: My wife and I bought a nearby condo for her mom who helps with our kids quite a bit. Market rate would be about $1200 with landlord typically paying $250 monthly HOA fee. Instead, she pays us $650/month, and pays the HOA herself, essentially a $300/month discount. Since she is not paying market rate, we don't treat it as an investment property (I.e. no depreciation/maintenance expenses). Is it acceptable from an IRS standpoint to deduct our mortgage interest and property taxes as a second home, but to basically ignore the rest on a tax return? Is that better/safer than having her pay us market rate and turn around and pay her $300/month in intermittent babysitting?-- I imagine that could be better from a tax standpoint but likely to raise some red flags, so I'd rather be conservative and not do anything that could be considered shady/questionable from an IRS perspective. In a sense were getting $7,800/year in checks from her thats not showing up on our tax return. Anything wrong with that?. Any other factors we should consider? We're in the 33% marginal tax bracket if that's relevant.

Thanks!
From a slightly different perspective, at least one state has a sales tax on rental income plus a transient and accomodations tax on rentals of less than 6 months, in addition to taxation as income. Both sales and TA taxes require state licensing, essentially filing a simple form and paying a small license fee. Periodic payments are required during the year to the state.

You might check on whether the state treatment of your rental income is different than how the feds consider it. Some federally exempt income may still be taxed at the state level or be subject to sales tax.

This reminds me a bit of the nanny tax stories you see. Chances for getting caught are low except if you're being vetted for something. However once your in the headlights, you probably wonder why you took the chance. BTW, is your mother-in-law telling her neighbors and friends about her good deal on rent? Don't underestimate the potential for someone reporting it.

I'm not the IRS or the state, but so far your presentation here doesn't pass my common sense understanding of how taxes work. Overall I'd have my rationale straight in my mind and then on paper. If you do get audited (your words in a subsequent post above) can you present a credible story and a logical interpretation? By posting here you acknowledge that you have concerns about not reporting the income. Take the sections of the tax code that cover your situation: income, rental income, below market rental, gifting, etc and jot down how you would respond to a question about each. Feel comfortable that the answers will convince the IRS and the state? That's a plan. Not comfortable? Get professional advice and follow it.
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heartwood
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by heartwood »

WhiskeyJ wrote:Started doing my own taxes in turbotax a few years ago and still learning: My wife and I bought a nearby condo for her mom who helps with our kids quite a bit. Market rate would be about $1200 with landlord typically paying $250 monthly HOA fee. Instead, she pays us $650/month, and pays the HOA herself, essentially a $300/month discount. Since she is not paying market rate, we don't treat it as an investment property (I.e. no depreciation/maintenance expenses). Is it acceptable from an IRS standpoint to deduct our mortgage interest and property taxes as a second home, but to basically ignore the rest on a tax return? Is that better/safer than having her pay us market rate and turn around and pay her $300/month in intermittent babysitting?-- I imagine that could be better from a tax standpoint but likely to raise some red flags, so I'd rather be conservative and not do anything that could be considered shady/questionable from an IRS perspective. In a sense were getting $7,800/year in checks from her thats not showing up on our tax return. Anything wrong with that?. Any other factors we should consider? We're in the 33% marginal tax bracket if that's relevant.

Thanks!
How do you determine that you're charging below market rent? Are there comparables or actual rental listings?

I'm curious because of your situation, but also to understand the overall condo rental subject. I've posted on this forum about a condo we bought in November. Our situation is different so I won't go into it here.
jebmke
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by jebmke »

Retread wrote:
jebmke wrote:There is an easy way to sort this out. Call the IRS and ask them.
That's often a very poor source for tax advice. Furthermore, they are not in any way bound by the opinion given.
Bruce
That may be true if you ask a complex question to the first person that answers the phone. On the other hand, asking a random person on the street isn't any better.

I do about 500 returns a year. During the season I speak with the IRS maybe 2-3 times a week. Usually my questions relate to more subtle topics so I ask to speak with someone who has expertise in the subject matter (usually IRAs, pension topics and topics related to resident alien returns). I have found the IRS people quite helpful.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Retread
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by Retread »

denovo wrote:
WhiskeyJ wrote:In a sense were getting $7,800/year in checks from her thats not showing up on our tax return. Anything wrong with that?.
Thanks!
Even if you knew nothing about taxes, it should be plainly obvious that not reporting income on a form which you are supposed to declare your income is illegal.
Not all forms of income are reportable. The Internal Revenue Code provides that all income is reportable unless specifically excluded. Being personal use property, this is one of them. I agree with the poster who says the OP is overthinking this, as are many of the other posters. This is clearly not income which is reportable and is merely expense sharing among family members. The OP, of course, is free to treat it however he wishes.
Bruce
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Rainier
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by Rainier »

Income equals revenues less expenses. It doesn't sound like you have positive income here.
Sidney
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by Sidney »

Presumably if the income is really sharing of the mortgage expense then the mortgage interest deduction should be reduced by that amount. That would be the equivalent of declaring the "rent" as Miscellaneous Income on Line 21 and taking the full deduction of interest.
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Retread
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by Retread »

Sidney wrote:Presumably if the income is really sharing of the mortgage expense then the mortgage interest deduction should be reduced by that amount. That would be the equivalent of declaring the "rent" as Miscellaneous Income on Line 21 and taking the full deduction of interest.
This is plain and simple - wrong! If he owns the property he can deduct the full mortgage interest. Because someone reimburses him for a portion of this is irrelevant. There has been a great deal of layman speculation on tax law in this thread!
Bruce
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WhiskeyJ
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by WhiskeyJ »

heartwood wrote:How do you determine that you're charging below market rent? Are there comparables or actual rental listings?
Yeah it's 1000 sqft in a new building with 40 units, and 3 other similar buildings nearby. So Craig's List and other sites show a pretty tight sqft range.

Thanks for all the input, I appreciate all the perspectives and in particular the IRS references. I feel like I my question was sufficiently answered.
stan1
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by stan1 »

Mom is not a renter and she is not paying rent. She is contributing to the family's household expenses associated with owning a second home.

Some similar examples:
- Mom is 85 and has dementia. She lives in a spare bedroom in daughter's house. Mom's SS is direct deposited into a Joint account with Mom and daughter's name on it. Daughter uses this account to pay mortgage and upkeep on the house. This is personal use and there is no rental income.

- Mom is 60 and divorced, laid off in 2009, and now on disability. She owns her home but has a mortgage. Daughter moves in and gives mom money to pay all household expenses (mortgage, property tax, upkeep) amounting to $12,000 per year. This is personal use, not rental income (although probably not financially smart for daughter). A few years later daughter moves out and Mom decides to rent out several spare bedrooms at market rental rates. That is now rental income. A few years after that Mom decides she doesn't like strangers in her house and invites her best friend to move in. House is now paid off and the two of them can get by pooling their SS income. Best friend is not being charged market rent. This is personal use and there is no rental income to declare.

- Mom and dad decide to buy a condo near campus when 25 year old son goes to graduate school. Mom and dad agree to pay all condo expenses but son is expected to contribute $200/month from his stipend. This is personal use and there is no rental income. After son graduates mom and dad advertise the property on Craigslist at a market rent of $1000/month. That is rental income.

I think the tax law as explained in Pub 527 handles all of these situations exactly right. Families are permitted to take care of each other.
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Retread
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by Retread »

Thanks, Stan1. Your detailed examples support the position I've taken all along. This is not a business transaction and has nothing to do with income taxes.
Bruce
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jebmke
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by jebmke »

Retread wrote:
Sidney wrote:Presumably if the income is really sharing of the mortgage expense then the mortgage interest deduction should be reduced by that amount. That would be the equivalent of declaring the "rent" as Miscellaneous Income on Line 21 and taking the full deduction of interest.
This is plain and simple - wrong! If he owns the property he can deduct the full mortgage interest. Because someone reimburses him for a portion of this is irrelevant. There has been a great deal of layman speculation on tax law in this thread!
Bruce
I haven't read the entire Pub 527. Does it (or another IRS publication) distinguish between related party and non-related party?

Also, is the distinction here based on the existence or non-existence of a lease document?

What would prevent someone from letting someone live in a property that was not their own primary residence, accepting payment and simply claiming "they are helping with the expenses" and not declaring the income, despite the fact that it is indeed income from a third party?
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
jared
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by jared »

As long as the house is being rented at less than fair market value, it is considered to be personal use. However, that doesn't automatically mean that rental income isn't received and that rental income shouldn't be reported. It means that you are limited to the expenses you can claim against the rental income (mortage interest and real estate taxes on Sch A). Again, it doesn't mean you don't have to report the income.

If anyone thinks that renting to a parent at less than FMV has no impact on the tax return, then perhaps you should read the Jackson case: http://ustaxcourt.gov/InOpHistoric/JACK ... CM.WPD.pdf

Whether or not this is a rental arrangement or an expense reimbursement arrangement isn't so clear. The title of the post suggests a rental arrangement. If this is an expense reimbursement arrangement, what expenses are being reimbursed? If it's mortgage interest and/or real estate taxes, then I would certainly think the deduction must be reduced by the amount of reimbursement.
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FrugalInvestor
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by FrugalInvestor »

Here is a somewhat similar question asked on the H&R Block Tax forum with two different answers, one from an H&R Block Tax "expert" and one from a community member relaying his CPA's response.

http://community.hrblock.com/t5/Your-Ho ... qTMm9JDty0

I think as you've seen on this forum, there may be no clear-cut answer or at least no reliable way to distinguish it and I imagine that the more tax you pay the less hassle you may have with the IRS down the road.
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inbox788
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by inbox788 »

jared wrote:If anyone thinks that renting to a parent at less than FMV has no impact on the tax return, then perhaps you should read the Jackson case: http://ustaxcourt.gov/InOpHistoric/JACK ... CM.WPD.pdf
It is a perfect example of how the regulation is supposed to work.

First mistake and source of much confusion is that op says "family member renting", but IRS considers it personal use and not rental. Everything else leading from rental is just wrong. If OP goes down the wrong path of Schedule E, he may meet same fate as the defendant in the quoted case.
The issues for decision are: (1) The amount of rents received by petitioners during the taxable years in issue; (2) whether petitioners are entitled to any deductions with respect to the rented property; (3) whether petitioners are entitled to any deductions for unreimbursed employee business expenses; (4) whether petitioners are entitled to charitable contribution deductions in excess of the amounts allowed by respondent; and (5) whether petitioners are liable for the section 6662(a) accuracy-related penalties.
1)They filed Schedule E claiming they received rent less than $10,000 a year (the specific amounts at issue was a question for decision, and court determined a lower value making rent below FMV) and expenses over $20,000 (but they could only substantiate little over $10,000), so they claim they lost money and tried to get a tax break they were not allowed. :greedy

2) Personal use disallowed deduction, except interest and taxes paid.
Pursuant to section 280A(d)(2)(A), petitioners are deemed to have used 2117 Hollins Court for personal purposes during the taxable years in issue. Since 2117 Hollins Court was not rented at a fair rental for any day of the taxable years in issue, none of the claimed deductions are allowable under section 280A(c)(3)
We hold that petitioners are entitled to additional Schedule A itemized deductions for the foregoing amounts of interest and taxes paid on 2117 Hollins Court under section 163(h)(3) and section 164(a), respectively.
3) Worse, they claimed unreimbursed expenses that were not qualified, or were in fact reimbursed. :greedy

4) They were unable to substantiate a vast majority of their charitable deductions. :greedy

5) They were penalized for their underpayment of taxes mainly for the charitable deduction issue. :moneybag

stan1 wrote: Families are permitted to take care of each other.
I hope so. If I were to say government shouldn't prohibit families from taking care of each other, I might be accused of some agenda. :confused
stan1
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by stan1 »

I think the most important thing for OP to do is to pick whether to operate this as a business (renting a condo at market rent) or as personal use/second home. Pick one and stick with it using the correct terminology. There isn't a hybrid. If the property is personal use don't say Mom is paying "rent" and OP should write the check for the mortgage, property tax, HOA, and insurance himself. If it's a business gift her money to pay market rent and then OP can deduct all the the expenses (but would also have to declare money that he has gifted Mom to pay rent as income). I think the IRS would be more skeptical if this is treated like a business than personal use (which is likely how our friends the Jackson's first got in trouble). Anyone renting to a relative needs rock solid estimates of market rental rates and good record keeping. The H&R Block example also got complicated because the father was continuing to pay the property tax even though the sons owned the property. If the sons had paid the property tax they could have deducted it as an expense for a second home. Again, pick whether the property is a rental business with family paying market rent or personal use.
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Re: Family member renting 2nd house. Ok to ignore on tax ret

Post by sscritic »

stan1 wrote: The H&R Block example also got complicated because the father was continuing to pay the property tax even though the sons owned the property. If the sons had paid the property tax they could have deducted it as an expense for a second home.
This is one rule I think I know. You can't deduct property taxes on a property you don't own (the dad), and you can't deduct property taxes you don't pay (the sons).
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