Rent as income ?

In addition to my questions (other post) regarding whether the mortgage interest is fully deductible as a second home of the taxpayer in this case, I'm also curious about other "facts and circumstances" that might come into play here. Insurance coverage, liability for the tenant, possible rent control, and other issues come to mind.

If a QTP (section 529 qualified tuition plan) were involved, would the two sons have any room and board expenses for purposes of tax-free withdrawal?

If a client were to ask about setting this up before actually buying such a property, what would be good advice? To treat the whole thing as a true for-profit rental activity, and explicitly give money to the sons each month to cover their share of the rent, while collecting the rent from the third tenant? Then the groceries/utilities payment becomes true expense sharing, and the taxpayer probably gets a deductible loss on his Schedule E, especially if the property is vacant during school breaks.

-Mark Bole

Reply to
Mark Bole
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Just a reminder to reread the thread called "Qualifying Child Question" from 10/19/08 and my two comments regarding a change in domicile when dealing with children who go off to college.

Reply to
Alan

I don't think so, since the owner of the house isn't the one doing the renting. As I said in my original post, it looks to me like the son has the rental income.

Reply to
Phil Marti

This thread raises some interesting questions which only go to show that nobody can correctly advise on taxes without having all the facts:

-- If (contrary to likely facts) the student offspring are not dependants for which the father is required to provide housing (and given that the cost of the housing is not paid directly to the university as tuition) then the rental value of the house may be subject to gift tax if it exceeds the annual exclusion:

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Spitzer's Manhattan town house, owned by his father) This isquite a different issue from imputed rent as income, which seemsunlikely. Nor is the amount of money in question enough to create adispute with the IRS involving recharacterization and, potentially,double taxation (perhaps because a statute of limitations hasexpired): United States v. Dalm, 494 U.S. 596 (1990) (gift tax andincome tax).

-- Subletting the gifted right of occupancy, or part of it, would not on its face seem to raise an issue of agency or, even less, theft. A proper agreement might justify assigning all or part of the proceeds to "shared expenses". But convenient characterization by the recipient of money is not binding on the IRS (nor, sometimes, on the payor: there's a case reported in the UK press of a Spanish family that was allowed to occupy a vacant Spanish vacation property and payment to the owner for utilities was deemed by the Spanish court to be rent, thus qualifying the payor as a protected (or "sitting") tenant who could not be evicted).

-- Any excess of income over expenses is likely to be small. There is in practical terms some flexibility in the way it is accounted for. Since services of some kind are provided it might be deemed B&B income, and become subject to SET and pensionable. That works best when an entity is established to "manage" the business: some portion of "unearned" income can reasonably be converted to "earned" income, thus (among the other things just mentioned) excluding it from taxation at parents' rates if the offspring are minors.

-- It doesn't seem that there is anything to depreciate based on the facts given since the father is probably not deemed a "landlord"; nor that the owner will be entitled to any exclusion of capital gain. But in this market there isn't any likelihood of gain anyway.

The above are volunteered as ideas for the curious, not as tax advice.

Reply to
sufaud

I think some of us are making this way too complicated. To me it looks like a second home for dad, eligible for Schedule A deduction of mortgage interest and property taxes. He allows sons to live there (personal use). Sons take in a friend who agrees to share expenses to the tune of $300/mo. No income, no deductions (except for dad's interest and taxes), no depreciation, no complications. On sale of house dad will have capital gain or nondeductible personal loss, depending on the market.

Katie in San Diego

Reply to
Katie

Suppose my college-age son lives with me in *my* house. Can he rent out a spare bedroom in my house and claim it as his income, and thereby allow me to assert that I am not renting out any part of my house, nor earning any income from it?

How is this situation any different from the OP? Or if it's not, then should I conclude there is nothing in the law stating that receipt of rental income requires that you own the property generating the rents? (This seems to be what Pub 527 indicates.)

-Mark Bole

Reply to
Mark Bole

than, NOT

certain

wouldn't be

relatives).

Note this: Do the children live with the parent? No. However, do they live in ONE of the parent's properties? YES. There might be a way around the new rules when parents have multiple residences....

Reply to
D. Stussy

either actual

compute for

realized it

(potential)

income.

Not necessarily. However the tradeoff is that it would eliminate any net loss (except for items otherwise allowed on Schedule A - cf. Section 280A).

Yes. Member of immediate family and dependent.... However, less than FRV could also kill any claimed loss.

How do you conclude it is not used by the OP? Use by an immediate family member and dependent is his use....

IRC Section 262: ...or FAMILY expense. (emphasis added). Section 280A(d)(2)(A): Personal use includes any use ... by any member of the family of the taxpayer ... Family (267(c)(4)) of Taxpayer: Spouse, any sibling, any ancestor (*parent), and any descendant (*child). * - no generational limit.

Reply to
D. Stussy

A QC must live with the parents. Temporary absence is OK. If parents have more than one home, only one of those homes is considered the main home. The QC would have to live in the main home for more than six months to continue to be a QC. Temporary absence is OK.

Reply to
Alan

I thought Main Home was required for HoH qualifying person, but not for dependency exemption purposes. For a QC to meet the residency test for the dependency allowance, won't any old house do?

Reply to
Arthur Kamlet

"The child must have lived with you" is the rule. In this case, the parents are not living in the house that the son is using. Therefore, it is the main home where the child would have to live. This was in response to D. Stussy's comment, which I assumed belonged to the same set of facts.

If we do not use this instance, but use a different set of facts, then the child could live with the parents in any number of homes to meet the >6 month rule.

Reply to
Alan

If you don't object, why not?

If property owner has no objection an occupant may indeed rent to another.

ChEAr$, Harlan

Reply to
Harlan Lunsford

Actually, I think on what the $300 is used for. The original post said: "Renter pays one son $ 300.00 ( not me) each month who uses it to pay utilities, food etc". If the etc includes the renter's share of property taxes or mortgage on the house, or just profit for the sons or father, then there is rental income. If it's just for splitting groceries, phone/internet bill, beer bill then there is no rental income. $300 seems kind of low, so I guess it's the latter.

Reply to
removeps-groups

It's a possible IRS objection I'd be concerned about...

I'm still trying to assimilate all the interesting items that have been brought up in this thread.

Like many, given the OP's facts as presented, I would call it expense sharing in a qualified second home, congratulate the dad for being so generous (and finding a clever way to get his young adult offspring to actually leave home), and leave it at that.

It's the what-if's that keep me stuck on this -- suppose, in addition to his share of groceries and electricity, the tenant *was* paying an amount that approximated fair market rental for a room in a house? Given the other reply that use by a family member counts as personal use by the taxpayer, the OP would only be hurting himself by not treating this as his rental income, and deducting depreciation, insurance, repairs, etc on the rental portion, while still getting the mortgage-interest deduction on the personal-use portion. I guess you'd have to run the numbers both ways to see if the rental income to the dependent without any deductions incurs less tax than rental income to the owner with deductions.

Or is the son actually renting the "gifted right of occupancy", as another reply mentioned? Is that real-type property or intangible personal-type property? Is this a passive activity with active participation? Is all the investment at risk? If the property is sold at a loss, would any of it be recognized for tax purposes?

Eh, time for me to go get some fresh air.

-Mark Bole

Reply to
Mark Bole

Or take a chill pill . Way too complicated, Mark. Just relax and think of it as expense reimbursement. That's all it really is. Dad owns the property, pays the mortgage, maintenance, etc. If the $300 were paid to Dad, I'd say he had rental income. As it is, it's just expense sharing. Keep it simple.

Katie in San Diego

Reply to
Katie

I see I didn't address the question "Why isn't there imputed rent for their rooms in the house the taxpayer lives in?". The answer is because the law is otherwise. It's an interesting point related to economic choices made by societies and their governments.

Imputed rent is taxed as income in a few countries -- as I recall from college economics Canada used to be one and the following journal article says that the UK was another as recently as 1960:

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. Googling will yield lots more discussion in the literature. I know that Switzerland taxes imputed rent today: imputed rent is added to cash income for income tax purposes to equalize the situation between homeowners and tenants. The result, in Switzerland, is that

2/3 of the population are renters not owners, roughly the reverse of the US and UK (post-Thatcher) situation. The subprime crisis, which thus far has escaped Switzerland (although not its international and its private banks because they invested abroad and bought those duff CDOs; only its cantonal banks have been exempt), tells us that perhaps some people are not suited to be homeowners.
Reply to
sufaud

How can taxing imputed rent have such a large effect (ie. 2/3 are renters). There may be other, perhaps larger, reasons for why most everyone is renting.

Reply to
removeps-groups

I doubt that imputed rent causes most people to rent. In San Francisco

75% of the residents rent - because the cost of real estate is so much higher than in the rest of the country.

Getting back to the issue, imputed rent might be taxed in some situations - it's not always exempt. When talking about a family member it could be considered either a gift of an obligation of support, neither of which are taxable.

Speaking of rent and income, apparently a lot of residents of DC will be renting out their homes for large sums of money to people attending the inauguration. For federal income tax purposes, if a home is rented out for two weeks or less in any given year, the rent received is tax free.

Stu

Reply to
Stuart Bronstein

Easy: owning costing you an additional $3,000/year in income tax can have a significant effect on the decision.

Seth

Reply to
Seth

text -

Thank you, Katie, for this simplified approach to a very simple question. I would fully agree with you.

This seemingly is the approach given the contextual framework. Now if the facts were stated differently, then clearly a different response might be appropriate, including potentially the embezzlement issue raised by another responder (of course, for it to be embezzlement it would appear that there was an intent to embezzle, as opposed to blind ignorance in this instance).

George

Reply to
None

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