Rent as income ?


T

tex shalter

Wondering how to handle rent for tax filing in this situation:

I have two sons going to the same college and living in a house I am
financing.
It is 3 bedroom, they are renting the 3rd bedroom out to a friend.
Naturally he has use of the whole house excepting the two other bedrooms.
Renter pays one son $ 300.00 ( not me) each month who uses it to pay
utilities, food etc.
The son who receives the rent has no other income.

The easiest thing for me to do is take a blind eye, not bother doing
depreciation etc. for taxes.
I think the depreciation & repairs vs. rental income would about be a
wash.( presuming I depreciate 1/3 of the value of house over 31 years)

Is this legal ? Again, I do not receive the rent.

Thanks all
 
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P

Phil Marti

tex shalter said:
Wondering how to handle rent for tax filing in this situation:

I have two sons going to the same college and living in a house I am
financing.
It is 3 bedroom, they are renting the 3rd bedroom out to a friend.
Naturally he has use of the whole house excepting the two other bedrooms.
Renter pays one son $ 300.00 ( not me) each month who uses it to pay
utilities, food etc.
The son who receives the rent has no other 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.
 
R

removeps-groups

The easiest thing for me to do is take a blind eye, not bother doing
depreciation etc. for taxes.
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.
I think the depreciation & repairs vs. rental income would about be a
wash.( presuming I depreciate 1/3 of the value of house over 31 years)
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.
 
B

Bill Brown

Technically this is not correct,
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.
 
H

Harlan Lunsford

Bill said:
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
 
D

D. Stussy

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.
 
S

Seth

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 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
 
T

tex shalter

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.
 
S

Stuart Bronstein

D. Stussy said:
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.
Nothing wrong with that so far.
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).
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.
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.
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
 
H

Harlan Lunsford

Stuart said:
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
 
D

D. Stussy

Stuart Bronstein said:
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.
If the father approves, then the son IS acting as his agent.... Think
about it.
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.
Imputed interest is mentioned in the IRC (somewhere in the section
400's).
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.
No mention of a sublease, so I didn't consider it.
 
T

tex shalter

Hope the OP has read all the comments

Thanks yes, thats why I posted
 
R

removeps-groups

If it's a sharing of expenses, no income.
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.
 
S

Stuart Bronstein

D. Stussy said:
If the father approves, then the son IS acting as his agent....
Think about it.
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.
taxable income that you would receive.

Imputed interest is mentioned in the IRC (somewhere in the section
400's).
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
 
D

D. Stussy

Stuart Bronstein said:
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.
But it does require permission. If the parent is deducting the
expenses of the property (as owner), then the parent gets the rent.
It's not an imputed interest issue as much as an assignment of income
issue.
I didn't say that imputed interest applies to this case. I was
following your interest-free loan position.
 
M

Mark Bole

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

Phil Marti

Mark Bole said:
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.
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?
 
M

Mark Bole

Phil said:
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
 
M

Mark Bole

D. Stussy said:
I have a problem with this situation.
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.
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
 
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M

Mark Bole

Harlan said:
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.
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
 

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