Payment received from girlfriend

[NSNM]

A single status taxpayer, lives in his own residence, with his girl friend.

The taxpayer pays his mortgage and property tax, and takes deductions for interest and property tax on his Schedule A (Form 1040). In addition, he also pays for gas, electric, water, sewarage, home owners' association fee, home insurance, repairs, etc. relating to home property.

They share their expenses with regard to groceries, eating out, entertainment, household appliances, and maintaining their two cats, etc. Each has a car and bear their own expenses on it.

Taxpayer's girl friend pays him $700 a month to defray the cost of maintaining the home property. She does not have a separate marked rental area within the home. They both use all areas within the home as common area. If the entire house is rented, it could fetch about $2000 in rent.

His girl friend is not claiming her rental rebate on her state tax return. They do not have a formal lease agreement.

How do you report $8400 (700 x 12) on taxpayer's return. Is it rent reportable on Schedule E or not ? Is it proper to take half of deductions relating to home property related costs. What are the tax and legal consequences. Has anyone handled this tax situation? Any input is greatly appreciated. Thanks.

NSNM

[AJsTax]

no reporting

There is no taxable transaction for sharing the costs of keeping a house that they share.

[Bees Knees]

I could see the arrangement of her paying him directly a set amount each month to border on some type of rental arrangement. The tax code does not directly address or recognize the issue of unmarried couples living together and transferring funds between themselves to cover the cost of living. If it were my client, I would advise them to open a joint checking account for the purpose of paying household expenses. She could deposit her $700 per month into the account and he could deposit whatever the difference is into the account each month to cover the expenses. That way, she would be treated as directly paying her share of the living expenses out of her bank account, rather than having to rely on some gift tax rule to keep it out of a taxable transaction.

[erchess]

But Bees

How could he then deduct the entire amounts of what was paid?

On the other hand I think bees has a good point. The couple needs to decide which of at least three possibilities has the risks and rewards they want. I believe that it would be wise for the preparer to document explanation of all options to this couple. The decision should be theirs because they are entitled to make their decisions based on their values and their future plans without pressure from the TB based on anything but Tax Law

They could get married but of course if they break up there are a lot more complications than if they simply stop living together.

They could do what they are doing now which has the more favorable tax consequences now but could lead to financial pain in the future if the IRS decides to challenge them.

They could do as Bees suggests but unless I am wrong (a not unprecedented situation) their tax situation now would be less pleasant but they would have the knowledge that it was not going to get worse because of this issue.

[S T]

As Bees stated

They could open a joint checking and have that cover only the household bills, such as Food, and other items that do not pertain to the deduction on the Tax Return. They are simply sharing costs much the same as a room mate.

Sandy

[FEDUKE404]

No tax issues

I usually encounter situations such as this from the other extreme, i.e. the GF wants to claim some of the mortgage interest, property taxes, et al on her own return.

I don't see any tax event here, as it is merely sharing expenses. If there is an eventual pitter-patter of tiny feet, then it might get interesting to see what would happen with a potential head of household filing status pursuit due to the qualifying rules for such.

Otherwise, it's just $$ versus expenses. She could pay "all" of the food and "none" of the mortgage, etc.

FE

[RLymanC]

Is There

anything wrong with just considering the $700 as a gift.

[Bees Knees]

anything wrong with just considering the $700 as a gift.

I believe that is exactly what it is now. It is a gift, which is below the $13,000 annual exclusion, which means it is currently a non-tax issue. What-if, however, it goes above the $13,000 annual exclusion? Do we suggest filing a gift tax return?

A simple expense sharing arrangement seems logical, rather than the gift tax route. However, if they are in fact sharing expenses, I suggest the financial transactions be structured as such rather than as a rental arrangement. It is one thing to reimburse a friend for an expense that is shared. It is another thing to pay the same regular flat monthly amount. If this truly were an expense sharing arrangement, the boyfriend would be submitting a list of receipts to the girlfriend and then have her reimburse half. That is not what is currently taking place.

[DaveO]

I agree with FEDUKE on this

It's not income to the man and not a deduction or gift on the part of the GF. They are simply sharing non-deductible living expenses. I do taxes for a number of same sex couples who generally want to split the mortgage interest and property tax deductions. When I show them the greater benefit of putting those deductions on the higher income partner's return and letting the non-itemizing partner have the standard they see the value of hiring a pro to sort the return out for them.

[Gretel]

Thanks for this discussion. I never was involved in a situation like this (at least not that I know of) but I don't think it would have occurred to me that this might be a tax issue.

[JohnH]

I believe that is exactly what it is now. It is a gift, which is below the $13,000 annual exclusion, which means it is currently a non-tax issue. What-if, however, it goes above the $13,000 annual exclusion? Do we suggest filing a gift tax return?

A simple expense sharing arrangement seems logical, rather than the gift tax route. However, if they are in fact sharing expenses, I suggest the financial transactions be structured as such rather than as a rental arrangement. It is one thing to reimburse a friend for an expense that is shared. It is another thing to pay the same regular flat monthly amount. If this truly were an expense sharing arrangement, the boyfriend would be submitting a list of receipts to the girlfriend and then have her reimburse half. That is not what is currently taking place.

Bees:
Maybe he's reluctant to submit a list of receipts to her for reimbursement out of concern that she may in turn hand him an invoice of her own...

[FEDUKE404]

Yet another possibility

Bees:
Maybe he's reluctant to submit a list of receipts to her for reimbursement out of concern that she may in turn hand him an invoice of her own...

Has she perhaps been getting advice from an ACORN representative??

FE

[JohnH]

Excellent point!

[NSNM]

Few facts

Sorry for not responding earlier. I was away from my base.

The taxpayer (man) has been owning the house, has property title and sole mortgage payer since 2005. GF moved in only this year. No plans yet to marry and not likely to marry this year. So he need to deal with 2009 tax year's situation, and possibly 2010.

Both promptly settle every month-end all nondeductible commom expenses relating to running of the home. GF was paying $500 rent, before she moved into his residence. Being a very decent lady, she wants to pay him a reasonable amount ($700) to her present ability to compensate for the upgraded accommodation, facilities and location.

Sharing deductions (Mortgage interest & Property tax) with GF is not acceptable to him. He also claims property tax rebate credit as he has been doing for the past 4 years.

Just a point. No advice is received from ACORN rep. They both want to keep their tax issues clean and be prepared for any questioning from IRS.

RLymanC and Bees sliced it as a possible gift. The reason I also believe that way is the man said if his GF loses her job (which appears that way at this time) he will let her stay without she paying any amount.

Just another thought. Under the "assignment of income" doctrine, income from property is taxable to the person who owns the property. However you slice it, it appears to be income from property, especially the recurring receipt of $700. May be it does not fit IRS's standard reporting of rent.

To safeguard the interest of the taxpayer, could this be reported on Form 1040 Line 21 as Other Income (after deducting related property expenses).

I appreciate and thank readers and your responses/views on the subject. You all are a great source of tax information, sometimes we don't get in IRS publications. I thank you all for your help.

[FEDUKE404]

Is it rent?

...
Sharing deductions (Mortgage interest & Property tax) with GF is not acceptable to him. He also claims property tax rebate credit as he has been doing for the past 4 years.
...

Regardless of any "acceptable" issues, GF could never claim any of the mortgage interest and/or property taxes as her own deductions unless her name appears on the relevant legal documents (deed and loan papers).

And then to really muck up things, what are you going to do with a Schedule E and any related depreciation issues ("allowed or allowable")??

I still do not see a "rental income" issue here (what portion of the residence is she really renting??), and good luck figuring out what constitutes "related property expenses." I suppose you could go the line 21 route, but then what dollar amount would you show there?

FE