Parent bought condo which I rent out

This is a potential mess, so be very careful.

Your mother files the Schedule E. All transactions are done on her behalf.

Are you getting anything out of this? If so, you will have to declare it as taxable income. But exactly how to do that could be a problem, because if you don't have a real estate license you may not legally be allowed to manage property for someone else unless you are considered an employee rather than a contractor. That leads to other tax issues.

Then when your mother sells the property to you later for the same price she paid, she will have taxable income in the amount of the depreciation she took.

In addition, if the value of the property goes up in the mean time, your mother may have to file a gift tax return.

There are probably other issues too that I can't think of off the top of my head. You really need to consult a good tax preparer and real estate lawyer before you and your mother both cause more trouble than you can deal with.

___ Stu

I meant to say, I will be collecting all the profits from the rental. The expenses are all coming out of my pocket. The rent all goes to my bank account. So I think my filing schedule E makes the most sense, no?

I plan to buy it from her in a year or two. So there is little chance of it going up in value much. Regarding depreciation, I may not even claim that expense. Seems hardly worth it, since I doubt it will save any taxes and just make the sale transaction more complicated.

It doesn't matter. The IRS considers depreciation that you could have taken as if you'd taken it.

Seth

No, it doesn't make sense at all, because you don't own the condo, so you can't collect rent for it or deduct expenses for it. The rent payments don't belong to you.

This is a big mess. You really need to take Stu Bronstein's advice and consult a lawyer and a tax professional to help you straighten out the mess you have created.

Bob Sandler

Yeah, my impression is that the parents are effectively giving him the rent as a gift; they're just saving the process of moving the money between bank accounts.

So they should be filing Schedule E, and they might also be subject to gift tax depending on how much this adds up to (plus any gifts they've been giving him outright).

I should add this is an all cash sale. So there is no mortgage/bank involved at all. According to your reaction, if you have a mortgage you can't rent it out since technically the bank owns your condo...

========================================= MODERATOR'S COMMENT: For proper context please include the portion of the post you are responding to.

According to your earlier posts, the sale has not taken place yet. You said you plan to buy the condo from your mother in a year or two. For now your mother still owns the condo.

The bank does not own your condo. People informally talk about the bank owning their home because they have a mortgage, but actually the bank has no ownership interest. If you buy a condo with a mortgage, you own the property

100%. You bought it with borrowed money, but that does not make the lender an owner. The bank only has a lien on it, but that is not ownership. If the bank owned the condo, there would be no such thing as foreclosure, because the bank would already own the property. Foreclosure is the process of the bank taking ownership because you defaulted on the loan. They don't own it until the foreclosure is completed.

Bob Sandler

Based on what OP said, he will be performing services for whatever money goes to him. So at least some of that might be considered payment for services. But if the parents aren't making any money because it all goes to the son, perhaps it would be considered a hobby.

___ Stu

No, that's not what was said and that is not the point.

You came here asking for advice, but you appear to only want the advice that you were hoping to get. You need to lose the attitude and take this seriously or you and your parents could get into trouble.

Fine, if you don't like it, don't take my advice. It's worth every penny you paid. But don't expect me to come see you on visiting days.

___ Stu

wrote

Your mom owns the condo. She files a Schedule E reporting the rental income and expenses that you collect and pay on her behalf. So you need to be responsible and account for and report those transactions to her so she can report them properly on her return. She would take depreciation on the property, and take a deduction for the "fees for your services" that you retained.

You, being in the property management business, file a Schedule C reporting your income from the activity of managing someone else's rental property. Be sure to get the proper licensing required by your taxing jurisdiction (ie: business license, etc). You'll owe self-employment taxes on that profit along with federal and state (and local?) income taxes.

As has been mentioned already, both of you need to get competent legal and tax advice on this matter. It is cheaper to pay a little now to avoid paying a lot later on.

Ok, I am going to have my Mom file schedule E. I will not be taking any payment for my services so will not have to file anything. If my Mom wants to pay me, I assume she could gift me the money? One problem is I already collected first month's rent in my name and also paid the first month's condo fee. Can my Mom write me a check for that and then include those expenses on her schedule E?

========================================= MODERATOR'S COMMENT: Please include the portion of the prior post you are responding to, so others who read what you write will know what you are talking about, without having to go back and reread past messages.

No one has said you can't do this the way you want, with you getting the income and deductions. But you have to do it the right way or there could be expensive consequences if you are caught.

Paul Thomas has indicated the best way to structure this - your mother files Schedule E, and pays you as property manager.

If you don't do it properly, your mother could be charged with income and penalties even though the money goes to you. If she receives money and it goes to you as a "gift" even though you perform services, that could be characterized as fraudulent and you could be required to claim the "gift" as taxable income.

The bottom line is that you either do it properly now, or you do it properly later when caught. And at that point it will be a lot more expensive than it will be now.

You are not being advised to seek competent professional advice because we don't know what to do. We do. But it is too complicated for us to set it all up for you here and now without additional facts from you, and additional work that we can't do here.

___ Stu

Not sure I follow this, as any gift has indirect ties to work/service someone has done for them. During the year I help my Mom with many things, including managing this rental. If she wants to give me a gift , why/how would that be taxable and fradulent?

wrote

Sorry, but true gifts aren't the result of rental profits, nor are they the result of work performed. You can argue all you like, but the courts have not fallen for your argument.

No, it doesn't. That's pay, not a gift.

I just gave a gift to my cousin's daughter, who recently got married. She hasn't done any work/service for me; in fact, I've met her only a handful of times (and most of them she was too young to legally do any work).

If the gift is based on managing the rental, it's pay. If she gives you money for your birthday or Christmas, that's fine (but if the amount matches the profit on the rental, that's suspicious).

It would probably have been better for you to buy it in the first place, perhaps with money borrowed from your mother. (That would avoid a second transfer tax, too.)

Seth

So is the solution never to accept any cash gift from parents since it could always be proven it has ties to work performed. Does the fact that I am working for my Mom makes me ineligible to ever receive any gift from them? Sounds rather harsh to me.

You are not paying attention to what is being said. Of course your mother can give you gifts. But if it can be shown that it is related to services performed by you (like giving a server a tip in a restaurant) the IRS requires that it be treated as taxable income.

Your mother can certainly pay you for work you do on a rental home she owns - she may even be able to deduct the payments to you. Of course you will be taxed on what you receive, and if your marginal tax bracket is lower than your mother's, the total tax will be less if you do that.

But it needs to be properly documented. If it's not, the IRS could characterize the transaction any way they like that will maximize the amount of taxes and penalties due, and the courts will likely go along with them unless you can establish that you did it properly so that you can characterize it in the way that works best for you.

___ Stu

So basically I collect all rent and pay all expenses like property tax, condo fee etc. Do I just file schedule E as thought I own the condo? And when she sells it to me in a few years for the same price, will either of us owe any taxes? ================ No. You file Schedule C because you're a property manager. She files Schedule E (as others have noted), but there will be taxes due on the sale from depreciation taken (or that should have been taken) if at the same price as it was originally purchased.

Any discount between the current price and a higher future fair market value will be taxable compensation for services.

If he gets compensated for his work as property manager, I think it would be reasonable to treat the increase in value as a taxable gift from his mother, not necessarily compensation.

___ Stu