Rent as income ?

You have a second home, for which you can deduct real estate taxes and qualified mortgage interest.

Your son who gets the rent has unearned income equal to the amount he's paid. He reports that on his return, where it will result in tax due, assuming he's your dependent.

I would add that assuming that the son is not acting as an agent for the owner (nothing in the post leads me to conclude otherwise) it is in the best interest of the son to report the rental income on Schedule E where he can deduct any of his out of pocket expenses relating to the sublet. E.g., an allocation of the utilities he is paying mentioned in the OP.

Technically this is not correct, because when you sell the home, you're required to pay taxes on the depreciation you should have taken over the years. So if the IRS somehow finds out that this was a rental, they will hit you with additional recapture taxes when you sell.

Why 1/3? I imagine a 3 bedroom house has a good sized living room and kitchen. So the allocation of the rented room might be 1/5. Typically, you have to measure the square feet.

Technically, the answer depends upon whether the room is being rented to the third student or the three students have simply agreed to share expenses.

Laymen often misuse technical terms such as "hobby" and "rent." Therefore, the real facts need to be established.

I think the facts have been established. One of the two sons, not both, is receiving the payments, called rent but not necessarily actual "rent" as we think of it. So if anybody has income it would be number one son, who of course can't take depreciation since he doesn't own the property.

This case is merely a sharing of expenses.

ChEAr$, Harlan Lunsford, EA n LA

I have a problem with this situation.

The FATHER appears to be the owner (cf. he's "financing" the place). One of two sons is collecting the rent.

If the son is not "turning over the rent" to his father (i.e. NOT acting as an agent), then the income he has by keeping it is EMBEZZLEMENT income, subject to self-employment tax (since he has no other income producing activity).

If the son is acting as an agent, then he has NO income, and the amounts used count as support (when used for living expenses) or a GIFT (when not) by the father. The father reports the income and offsets it with his expenses.

Alternatively, the son is an agent and has earned income equal to the rent for acting as the agent/manager, again with self-employment tax.

The son CANNOT have unearned income in this situation, regardless of all cases above. He's not the owner and therefore not entitled to collect "rent" in his OWN right.

NOTE ALSO: The gross income test for dependency states less than, NOT less than or EQUAL to the personal exemption amount. Make certain that either the under age 24 full-time student exception applies or that the rent is less - as the rent is currently about equal to the exemption amount depending on which year(s) the question applies to.

If father provides a house for his son to live in, and the son (with the father's permission) chooses to have a roommate, I don't see any embezzlement.

On the other hand, if the payments by the roommate were characterized as his contribution to the shared expenses (utilities, etc.) I don't see that there would be any income.

Seth

Thanks all, Inspired to buy the TurboTax version that figures rental property, guessing I'll be able calculate how much of house is actually rental, and how much of house depreciates.

The son collecting $ 300 rent still needs about as much money from me for both sons' food, books, school supplies etc. The renter could pay me directly, then I pay it back to my sons- but that seems like a waste of time and postage. So I don't see this as an agency or embezzling - he's a full time college student for goodness sake.

I plan to sell the place (or gift it to one of them) when they graduate. So I see I should be depreciating as much as legally possible for my cost basis at sale time.

Any other advice is still very welcome.

Nothing wrong with that so far.

It's only embezzlement if it's not consentual. The father approves, so there's no problem on that score.

The potential income tax problem, if there is one, would be with assignment of income. Normally you can't assign someone else taxable income that you would receive.

This situation is similar to cases where a wealthy relative would lend a large sum of money at no interest. The loan does have a value, so the lender has made a taxable gift to that extent.

In those cases I believe any income earned from that loan should be taxed to the lender. The IRS has apparently never argued that, as far as I can tell, and generally taxes the debtor for income earned on the loan.

Master tenants sublease all the time. Are you saying that rent they receive in excess of what they pay isn't taxable? Or is taxable to the master landlord, whether he knows anything about it or not? That's simply ridiculous.

Stu

I concur with both Stu and Seth and rebut Stussy's presumption of income to the father. This is more common a situation that you think, where a parent let's a child live in a house with no rent. The child can then with consent of the parent/owner lease or not as he/she sees fit. If it's a true rental situation, then the child has rental income with some expenses (not depreciation). If it's a sharing of expenses, no income.

Hope the OP has read all the comments.

ChEAr$, Harlan Lunsford, EA n LA

If the father approves, then the son IS acting as his agent.... Think about it.

taxable

Imputed interest is mentioned in the IRC (somewhere in the section

No mention of a sublease, so I didn't consider it.

Thanks yes, thats why I posted

What concerns me is what if the money received by the son ($300 in this thread) is more than the expenses. Then it seems we have a rental situation here, so a Schedule E on someone's return is in order.

Also, what expenses are considered in the "sharing of expenses" above? If that $300 is mean to cover property tax, mortgage payment then it sounds like rental income. If that $300 is mean just for groceries, phone bill, etc then it's not rental income.

Again, not necessarily. If it was the son's obligation to find a roommate to reduce expenses, then I might (depending on other circumstances) agree with you. But if the son was just given a place to live and he decided to find a roommate, even if the father agreed, that does not make the son the father's agent.

In a sublease situation, which is what this appears to be similar to, a tenant is normally required to get the landlord's consent to sublease. But that does not make the tenant the landlord's agent with respect to the sublease.

It's not an imputed interest issue as much as an assignment of income issue.

Take a look at the Crown case, 67 T.C. 1060 (1977). In that case a no-interest, immediagely callable loan was made. Because the loan could be called at any time, based on the definition of gift in the Code, the gift had no commercial value and thus incurred no income tax.

This case was subsequently overturned by the Supreme Court, which, in my opinion, got it wrong. They wanted to find a way to tax the donor, and gift tax was the best they could come up with, even though it conflicted with the IRC.

What they should have done was to considered it assignment of income and taxed the donor on the income received from the gift rather than gift tax. They didn't. It IRS attorneys really screwed up that one, in my opinion.

Stu

place

agreed,

But it does require permission. If the parent is deducting the expenses of the property (as owner), then the parent gets the rent.

income

I didn't say that imputed interest applies to this case. I was following your interest-free loan position.

Of all the people living in the home during the year (paying either actual rent, or imputed rent in the form of gift or support), none are the taxpayer, so is it a qualified second home for the purpose of deducting mortgage interest? My reading of Pub 936 is that it is not.

The real estate taxes of course are deductible regardless.

-Mark Bole

Well, we read it differently, specifically the paragraph labeled "Second home not rented out."

Of course, I'm just a simple soul, so coming up with "imputed" rent because the taxpayer's dependents live there part of the time doesn't compute for me. Why isn't there imputed rent for their rooms in the house the taxpayer lives in?

I got a little carried away with the "imputed rent" bit, and realized it shortly after I hit "send". When calculating support for a (potential) dependent, you need to impute rent at FMV, but it's not rental income.

But if there is indeed a renter in the house at $300/month (and not just an expense-sharing arrangement), wouldn't that eliminate the "second home" aspect?

The other thing that's not clear to me, does use of a home by a dependent (child) of the taxpayer count the same as use of the home by the taxpayer?

I can own a home and leave it vacant, or let anyone live there rent-free, and treat it as a second home.

I can own a home and use it myself more than the minimum amount, and even if I also partly rent it, still treat it as a second home.

But the OP's home *is* rented, and is *not* used by the OP, so how does it meet the test for a second home when deducting mortgage interest?

-Mark Bole

Not only the full-time student exception, but the residency test as well. If the sons live in the house year-round, it probably wouldn't be a temporary absence and they would not be qualifying children of the taxpayer for dependency purposes. (Might still be qualifying relatives).

-Mark Bole