Rent from a live-in boyfriend , no mortgage on property

Wrong on many counts. A rental agreement for $0 is probably non-binding as a contract. (I'm not a lawyer, but I've been told that a contract must provide for an exchange of consideration). The IRS could then look at the facts and circumstances and reach its own conclusion as to what the payments were for. A notation on the memo line of a check is not legally binding. Of course, you might try to argue that your $500 checks were gifts. The counter argument would be that a gift must be given out of selfless generosity with no expectation of anything in return. You are expecting continued use of the living facility. If it looks like rent, smells like rent, it probably is rent.

Ira Smilovitz

Wrong on many counts. A rental agreement for $0 is probably non-binding as a contract. (I'm not a lawyer, but I've been told that a contract must provide for an exchange of consideration). The IRS could then look at the facts and circumstances and reach its own conclusion as to what the payments were for. A notation on the memo line of a check is not legally binding. Of course, you might try to argue that your $500 checks were gifts. The counter argument would be that a gift must be given out of selfless generosity with no expectation of anything in return. You are expecting continued use of the living facility. If it looks like rent, smells like rent, it probably is rent.

Ok, makes sense. what about no rental agreement then? If I live with a girlfriend and pay her $500 a month with no rental agreement, who's to say it's not a gift? After all, is it so odd for a boyfriend of girlfriend to let her s/o live for free with him? Especially if they decide to contribute in other areas and there's mortgage ? What if I write "groceries and utilities and gift" on the check and there's no rental agreement ?

It doesn't matter what you write on the memo line, the IRS can argue otherwise. Whether they prevail will depend on the facts and circumstances and previous case law.

Ira Smilovitz

"It doesn't matter what you write on the memo line, the IRS can argue otherwise. Whether they prevail will depend on the facts and circumstances and previous case law."

Is there actually case law here? I wonder if the IRS has ever taken a non-arms length "roommate" from a lover/friend situation where rent is involved from two people living in the same house.

There is lots and lots of case law regarding situationw where the IRS has recharacterized transactions as income. The IRS cares not a whit about your relationship other than "are you legally married". As to specific citations, either do your own research or hire competent counsel to do it for you.

Ira Smilovitz

So far, it's been suggested that this is a rental situation, a cost sharing arrangement or "gifts." You need to decide what it is. Based on your original post it sounds like a cost sharing arrangement between two unrelated parties that live together. If it is, it's not rental income and I can't think of any reason why your girlfriend would report it as such.

As for the IRS, they understand these situations. I can't see them raising any issue because if they did, it most likely would show that your girlfriend would have a nondeductible loss because the transaction wasn't entered into for a profit motive. They would have a very difficult time showing a profit intent.

There is lots and lots of case law regarding situationw where the IRS has recharacterized transactions as income. The IRS cares not a whit about your relationship other than "are you legally married". As to specific citations, either do your own research or hire competent counsel to do it for you.

I'm well aware that there are lots of cases regarding recharacterization of transactions as income, but was just wondering, this being a tax group, if anyone had ever happened to hear of a case that was more like my specifics. I guess you haven't. I will try to find one. Certainly depending upon how the transactions are setup this could be a gray area.

This isn't the same issue really, but I remember when students weren't allowed to deduct student loan interest that their parents paid on their behalf. Now they are. It was silly because many parents simply gifted their children the amount to pay so they were technically paying for it through gifting. The question becomes if I want to give my girlfriend a gift and call it a gift in the absence of a rental agreement, how likely is the IRS to call this not a gift and rent instead. I will try to find out.

========================================= MODERATOR'S COMMENT: If either you or your girlfriend is audited, the chances are very high that the IRS would recharacterize a supposed gift as income. On the other hand the chance you will be audited is probably very small.

Anyway, I know it's probably silly to even talk about this since this is likely one of those situations where of course it's technically rental income but where the IRS would likely never say anything about this. But just for giggles, let's just pretend someone was wanting to be mean and, say, turn us in and the IRS actually did something. Let's assume she wanted a rental agreement with me just in case she decides she doesn't want to be with me anymore and would like me to move. Let's say I signed a rental agreement for $0 monthly rent. But then I wrote her a check every month for $500 and put "grocery/utility reimbursement" on it. This is air tight they have no case right?? =========== A fixed amount per month implies rent. Therefore, that won't work. A variable amount suggests expense splitting. That may work.

Don't forget that certain jurisdictions may still have anti-cohabitation "blue laws" on the books that the IRS may avail themselves of to reclassify the relationship and thus the nature of the transactions.

Your question is actually a lot more complicated than you think, and an entire book (or books) could be written on the many issues involved in your question.

expenses (e.g. utilities and groceries - deductible expenses such as mortgage interest and taxes are probably not included in this), it's not income to your girlfriend. To the extent what you pay her is over and above those expenses, it will technically be taxable income to her.

If she allows you to live there without charging you any rent, then if she doesn't have taxable income, you might be considered to have taxable income in the amount of the rent you should have paid based on fair market value.

You can claim your payment is a gift, but if audited you will probably lose. On the other hand, your chances of being audited may be small.

surely that "free rent" would be a gift.

No, if he is paying for any of the expenses, it would/could be deemed a barter transaction.

Ira Smilovitz

Barter for what?

This is one of those posts where you could argue theoretical tax law ad nauseam while overlooking the practical aspects of the issue. One of the proof's of that is everyone here has posted their opinion, but the posts are devoid of any reference to a specific statute, ruling, regulation or court decision. I would challenge anyone to find a specific ruling or court case held that -

--- a simple arrangement for sharing only costs among unrelated roommates resulted in taxable rental income to one or the other.

--- a simple arrangement where inviting your boyfriend/girlfriend to live with you resulted in some type of imputed income for some type of service to the one who was a guest and not paying costs.

As an example, years ago I used to visit my parents. They didn't charge rent. Should I have reported income? Does the situation change if I visited a girlfriend under the same circumstances?

Here is what I advised couples who were contemplating this arrangement. Open a joint account and contribute equal amounts to the account. Use the account to pay for the common expenses of living (food, sundries, utilities, subscriptions, etc). The owner should pay the mortgage, property taxes, homeowner insurance and repairs out of separate funds. If the non-owner resident wants to offer a larger amount for living on the premises, then that person ought to make a gift from his/her separate funds. The current annual limitation on gifting to avoid having to file a gift tax return is $14K. This creates a trail that reflects the nonexistence of a rental property.

Why would cohabitation have anything to do with it? If they are unrelated adults and one pays the other for the privilege of living in the other's house, I don't see how their sleeping arrangements have anything to do with whether a payment is considered income or not.

You want a citation, here's a citation. 26 USC 61 defines gross income as

"(a) General definition Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:..."

So, the burden is upon the taxpayer to show where in the Code a specific receipt of money or benefit is excluded from income.

Ira Smilovitz

That's nothing more than a general citation for income (it was referred to as the "shotgun clause" when I was taught taxes. Notice it doesn't say all "receipts" are income. Rather, it presumes up front that what you are talking about is income and you need to show it's not. I suggest that cost sharing is not income, so it doesn't come under that clause.

However, if it does, I'm sure you can find a case that says so, as almost nobody that does cost sharing reports it as income, giving the IRS plenty of opportunity to take issue with at least someone.

And there is substantial doubt, based on recent Supreme Court decisions, that that provision is still even enforceable, although it is in Sec. 152 of the state. There, it refers to "An individual shall not be treated as a member of the taxpayer's household if at any time during the taxable year of the taxpayer the relationship between such individual and the taxpayer is in violation of local law."

I live in one of those remaining three states where it is a violation of local law and if Florida were to enforce that provision, the jail space would need to be expanded a hundred fold. As for the IRS, I haven't seen them even attempt to enforce that provision in this state for years. I doubt there is a practitioner in the state that would leave such a dependent off a tax return because of it.

It is at moments like this that I regret not having started to write my book "Living in Sin for Fun and Profit."

Shortly after I began cohabitation with my childbride, I handed her a check for her monthly rent and said since I live here, I should pay my share of monthly expenses. This was 37 years ago and the rent was $250.

She did ask me if it was income to her. To wit I replied. "No, it is reimbursement of expenses".

Do not make things harder than they are.

Dick

Damn! I've been waiting for that book for years.

Well, she was apparently never audited, or if she was the IRS didn't make an issue of it.

My mother (with no training) used to do the books and taxes for my father's business. Whenever equipment was purchased, she would both write it off and depreciate it (she thought she was supposed to). Even though the business was audited twice over 20 years, this mistake was never looked into by the IRS.