Another Strange One

[S T]

Had a client contact me with the following question.

I was thinking about adding my name to our son's deed. The Deed would read (Son's Name and Father's Name. . The existing loan is and will remain in son's name only.
Now, if I (father) rent out a room in the house to someone else and they pay me that rent I would declare it as income on my taxes, right??

Would there be any obligation on Son for rent income, etc., because he is an owner even if he did not rent out the room??

Son occupies the house as personal residence, Father does not occupy the house. Not a duplex, it is a Single Family Residence.

Would Son either gift or sell % to Father?

Is it possible that Father could rent out a portion of the house and not affect the Son's taxable income?

Thoughts,

Sandy

[Gretel]

Had a client contact me with the following question.


Son occupies the house as personal residence, Father does not occupy the house. Not a duplex, it is a Single Family Residence.

Would Son either gift or sell % to Father?

Is it possible that Father could rent out a portion of the house and not affect the Son's taxable income?

Thoughts,

Sandy

Wow, very creative.

I think son will need to gift or sell to Father, who then needs to participate in taxes and upkeep. Then he can do with his part as he pleases.

Just putting the name on the title to avoid tax consequences won't fly. A wolf is still a wolf even if he finds a very fancy costume.

[S T]

Purpose behind transaction

Yes, it is creative, but I am not sure why they want to do this? Not understanding what the purpose would be, so I have asked some more questions.

I know that Father had loaned the son some money, so maybe they are approaching it as a repayment of the loan for a percentage interest in the property.

Is it possible that Dad could rent out a portion of the property and claim as rental income, and then that would pose no tax consequences for the Son.

If the son deeds over a portion of the property to Dad and satisfies the loan, then the son would report as a sale or partial sale of personal residence, and the amount would meet the $250,000 exclusion?

Any other thoughts?

Sandy

[WhiteOleander]

Not sure this helps:
Page 6-20 TTB:

Exclusion of Gain
Individual homeowners. Individuals can exclude up to $250,000
of gain on the sale of a home if:
1) Ownership. The individual owned the home for at least two
years during the 5-year period ending on the date of sale,
2) Use. The individual used the home as a principal residence for
at least two years during the 5-year period ending on the date
of sale, and
3) The individual did not exclude gain from the sale of another
home during the 2-year period ending on the date of sale.

A taxpayer who owns a home jointly with another individual can
exclude gain from the sale of an interest in the home if the individual
meets all three conditions. Co-owners must figure gain or
loss according to his or her ownership interest in the home and
then apply the exclusion rules on an individual basis.

################################################## ##############

I haven't done any intense study yet. But, can you sell only a portion of the residence and claim the exclusion? If you were originally a co-owner, then you could certainly sell your percentage as your residence. But, this is the reverse of that. So, would the son have to stay another 2 years to qualify for the exclusion again?

If you were a co-owner originally, I can see where the other owner might decide to rent out their portion. Maybe they bought in only as investment, not as residence. (personally, this would be my nightmare) So, if son reverses into co-ownership, can't the co-owner do as they please with their share?

Just thinking out loud. HTH

[ChEAr$]

deja vu

Here's one we discussed over on the NAEA webboard some time ago.

And why does client propose this? (father going on deed and then renting a room out)

Son is in much higher tax bracket, that's why. And I'd bet a dollar/donut that son will
get the rent and keep it.

But if it's done that way, both are now owners of the property and have a joint venture to rent out the premises. Split income and expenses. Probably a 1065 is not needed.

[Lion]

Undivided Interest

Seems like the dad would have a percentage of the whole and not just the back two rooms, for instance. So, income would also apply to both in their percentages of ownership. And, if the only purpose is tax avoidance, well you know how that ends....

[Gretel]

It seems like it all boils down to what exactly the dad owns/buys?

Some houses have two kitchens one on the first floor, one in the basement. I would think if dad owns a definable part of the house he can do as he pleases.

[Davc]

################################################## ##############

I haven't done any intense study yet. But, can you sell only a portion of the residence and claim the exclusion? If you were originally a co-owner, then you could certainly sell your percentage as your residence. But, this is the reverse of that. So, would the son have to stay another 2 years to qualify for the exclusion again?

I believe you can't retain any part of the residence and claim the exclusion. See the examples re vacant land. Son would originally report the gain on sale of a partial interest and if the remainder was sold within two years he could amend and take a partial exclusion.

[WhiteOleander]

I believe you can't retain any part of the residence and claim the exclusion. See the examples re vacant land. Son would originally report the gain on sale of a partial interest and if the remainder was sold within two years he could amend and take a partial exclusion.

I thinK this is more accurate than my thoughts.

[ChEAr$]

well it's like this

It seems like it all boils down to what exactly the dad owns/buys?

Some houses have two kitchens one on the first floor, one in the basement. I would think if dad owns a definable part of the house he can do as he pleases.

Lion hit the nail on the head with the phrase "undivided interest".

There's no way someone can buy part of a house from another. Imagine going to the
county title office with request to title one room and a kitchen with pantry in the name of my father? And leave the rest of the house and land in my name?

[Gretel]

Lion hit the nail on the head with the phrase "undivided interest".

There's no way someone can buy part of a house from another. Imagine going to the
county title office with request to title one room and a kitchen with pantry in the name of my father? And leave the rest of the house and land in my name?

Of course not, grin, made me laugh.

But I am still not convinced that you couldn't do this on your tax return. It all goes by fact and circumstances, rather than by county records, right?

We have a similar scenario with HOH claims, depending on how the actual living situation is, given the same room set up, one set could both claim HOH, another would not be allowed to do this. Maybe I am mixing apples and pears here.

[erchess]

What if Dad Rents and Sublets

What would happen if Son and Dad signed a rental contract?

Dad could rent exclusive use of specified space or spaces and specified rights to share use of specified other spaces for an agreed upon sum which could even be subject to the rental not for profit rules and the contract could give Dad the right to sublet.

The son has to report his nominal rent as income while Dad reports the rent he receives as income and everyone is happy until tax time when Dad and Son find out that neither has deductions for any rental expenses and Dad better not be caught gifting money to Son.

[S T]

More Info

Well I am finding out the "why" behind this

The son just concluded a divorce, he has minor children, and has retained the residence property. The children would inherit the residence if anything were to happen to him, and thereby the ex-spouse would have control of the property via guardianship of the children, until the children reached age 18.

So, Son and Father, thought if Father was added to the Deed, that would eliminate the ex-spouse from gaining control of the property. Father would not be acquiring stated percentage, but rather a joint tenant .

Father is thinking that he could rent out a room, he would claim the rental income and the Son would not be involved in the Rental portion.

I just don't see how this can be accomplished when the Son is using the property as his personal residence, it would seem the Son would still be involved in the transaction of the rental.

Sandy

[Burke]

Good grief. Tell the son to make a will, direct that the house be sold, and the funds be put in a trust (he can make his father trustee) for the minor children until their age 18, 21, or whatever age he feels is necessary.

[S T]

Clients Perception

Burke, Thanks for your post

Good Grief! is appropriate.

My thoughts are at this point, trying to discern the underlying motive for the OP is that the Son just needs to set up a Living Trust, which he places the Real Estate and any other assets, make the Father the Trustee, and then the Son's Assets are protected from the ex-spouse and the Father can ensure that the kids will receive the benefits. At least that is the concept!

Not sure where the whole idea came in for the Father on the Rental portion, but not going to advise going there - way too complicated and probably "full" of pitfalls. Also going to advise seeking out an attorney's opinion and some estate planning.

Thanks to all who posted on this "crazy" scenario, but we all learn something everyday, and thank you all for being here!

Sandy