Adult Family Home

[Harvey Lucas]

My client purchased a home to be used as an "Adult Family Home", ie, he and his wife provide housing and services for up to 6 elderly adults who live there in this home with them.

He paid $350,000 for the home, which he financed, has normal costs for maintaining the home, ie mortgage payments, taxes, utilities, repairs.....also has direct costs associated with caring for the elderly adults, ie food, transportation, supplies and the like.

2005 was the first year, bought the facility/home in July 2005. He and his wife moved out of their old home, which they left vacant, and moved into this new "Adult Family Home" to care for the adults, maintain the property and operate this activity.

They recieved a 1099 from the State dept of social and health services for 2005 in the amount of $23000. The client states this is the entire source of the income from the activity because the state pays for all the patients and none of them are direct private pay.

The client was told by "someone who knows about adult family homes" that he can exclude from income the $23000 because of a special exclusion rule that allows you to do so when you care for 5 or less adults. (I remember seeing something about this in Quickfinder/TaxBook but now I can't seem to find it)

Assuming that is true (where is this in TaxBook), are we required to exclude it?

It seems very obvious that this is a losing business bigtime....ie, even when you count the $23000 of income, when you deduct all of his operating expenses, plus interest, taxes, depreciation on the activity you have a big loss.

He still has his old home and will probably move back into his old home and hire employees to run the adult family home.

He has signifigant income from other sources and thus a loss from the operation of the "Adult Family Home" would aide him an his 2005 tax return.

Am I missing something?..I am assuming that if I exclude the income the I can't deduct any of the expenses, except of course the interest and real estate taxes on this as his new primary home.....is this wrong?

Help!

[Black Bart]

As Granny would have

said, "I never heared of sich a thing!" But that doesn't mean it ain't so. Maybe Bees/Armando will chime in with the dope or denial from The Taxbook.

Still, if it does exist; what would be the point of excluding it (assuming you have the option to elect/not elect), thereby wiping out your loss which could be used against the other big income?

[jainen]

Foster Care

Foster Care on the chart on Quickfinder page 4-2. As you observe, such an activity could never hope to realize a profit. Claiming a business loss would not be right. Anyway, you can't deduct expenses for receiving non-taxable income.

[Black Bart]

Hobby?

Foster Care on the chart on Quickfinder page 4-2. As you observe, such an activity could never hope to realize a profit. Claiming a business loss would not be right. Anyway, you can't deduct expenses for receiving non-taxable income.

Why couldn't it hope to make a profit? There are several of those around here and they all make a killing (although the buildings don't cost as much as his and some are able to pay personal money). They get all of the patients' SSA checks--one of the owners gets a new Mercedes every year.

[jainen]

non-taxable

Sure, the homes that take private patients and aren't limited to five can make money if the facility cost is reasonable. None of that applies to Harvey's client. That's why it's non-taxable.

[JON]

Missing something

usually group homes get part of the adults social security (all of it in most cases). I have heard of gifting buildings to organizations with group homes. I have seen foster care facilities. I guess there can be differences between states. I can not believe you have net income-do you have a net loss you can take????

[Harvey Lucas]

A Choice?

Foster Care on the chart on Quickfinder page 4-2. As you observe, such an activity could never hope to realize a profit. Claiming a business loss would not be right. Anyway, you can't deduct expenses for receiving non-taxable income.

Thank You Jainen..as you state, QF chart page 4-2 says, "payments recieved from state for fostercare for 5 or less adults (individuals over 18) are in the "Not Taxable" column...

My "hunch" is that this provision was provided to allow the homeowner/caregiver the abilty to provide a much needed, low paying service and as a bene for doing so, they would be allowed to exclude the income as taxable, as long as they didn't have over 5 customers.
Seems logical and fair to me to allow these charitable souls to do this, take elderly people into their homes and care for them and not have to pay tax on the stipend they recieve for doing so.

But, it still seems to me that the caregiver would/should have a choice...if the caregivers intent is to somehow, eventually make a profit from this activity them to me it seems like a straightforward sch c business is in order.

We live in the metro area so real estate is very expensive...however, it always creeps up in value as real estate usually does...and if the money he gets from caring for these folks is enough to pay for food and utilities and help with the mortgage payment then the owner is building equity and may someday show a profit.

I think it comes down to intent....did he intend to do this thing to make a profit?...I think he did, even if he probably won't, I don't think he knew that when he started.

I think he should claim the $23000 income that he has recieved on the 1099misc form and then claim his allowable expenses for operating the facility...since he and his wife also live their we should make an adjustment for his personal use of the facility as his home, possibly a percentage, say 25% of the facilty is his home only and 75% is business property.

It is diferent than a "daycare" because with daycare, the customers go home...his customers stay there 24/7 365 days per year...because of that, the portion of the property where the customers stay is not limited by the "business portion of home rules" that apply to daycare situations?

Please advise if I am off track here.

Thank you so much for your input.

Authors of Quickfinder created the standard, TaxBook is the nextstep logical evolution.
We are so fortuneate to have this forum, no longer do we have to be alone in our battle with the dragon.

HarveyLucas

[jainen]

some other motive

>>then the owner is building equity<<

What you are describing is an investment, not a for-profit business activity. I don't know if QF is referring to the code or a court case, but I do know you can't elect to treat non-taxable income as taxable just so you can create a loss against other income.

Note that the whole question only applies to foster care in your own home, when business-use-of-home rules limit your deductions to net income. When they get it set up and move back to their old house, it might become a business at that time.

If you continue to lose money without making changes, you must have a purpose other than making money. Profit motive means you either make changes or give it up. This client can't make the changes that would generate profit--his minimum expenses are basically fixed, and his revenue is completely locked in. If he doesn't give it up, he must have some other motive.

[Harvey Lucas]

I can live with that

>>then the owner is building equity<<

What you are describing is an investment, not a for-profit business activity. I don't know if QF is referring to the code or a court case, but I do know you can't elect to treat non-taxable income as taxable just so you can create a loss against other income.

Note that the whole question only applies to foster care in your own home, when business-use-of-home rules limit your deductions to net income. When they get it set up and move back to their old house, it might become a business at that time.

If you continue to lose money without making changes, you must have a purpose other than making money. Profit motive means you either make changes or give it up. This client can't make the changes that would generate profit--his minimum expenses are basically fixed, and his revenue is completely locked in. If he doesn't give it up, he must have some other motive.

Thank you again Jainen,

Using the "its not taxable income "approach, I then list the $23000 1099misc income on 1040 line 21 and then below it, also on line 21, I list an adjustment of <23000> and describe it as "nontaxable fostercare income"

I ignore any of the expenses relating to caring for the folks such as food, utilities, transportaion and incidental expenses.

I claim the mortgage interest and real estate tax of this new home on schedule a because it is his new main home.

I also claim on schedule a the mortgage interest and real estate tax of his old home because it is now a qualified "2nd home".

I could live with this approach.

Anyone disagree?

Thanks again

Harvey Lucas

PS...sorry to hear about your keyboard

[JJ EA]

Sec 131

IRS code section 131 defines qualified foster care payments and qualified foster care individuals. It's possible that the payments, even though received from the state, may not qualify if they do not conform to the code definitions. The payments do not qualify if the care is not provided in the caregivers personal residence. I know you said that is the case for 2005, but if they move and hire caregivers to assist them then the payments would be taxable.

I have one client who operates an adult foster care home and she has one client at a time that she receives tax-exempt payments for. All expenses have to be allocated for personal use by the caregiver and her family (food being the main item) and also for the tax-exempt income. We do the business use of home based on the square footage that is used exclusively by the family as a reduction of the total square footage to arrive at square footage for business use.

My only thought about the way you have decided to treat the mortgage interest and RE taxes is that they have converted part of their home to business use and that part is no longer considered their personal residence. They are receiving income for business use of their home. The only reason they can't deduct the expenses is that the income is not taxable.

I would fill out a schedule C. I then would put an adjustment on the "other" line to zero out the loss with an explanation of "loss allocated to tax exempt income". They are in fact running a business. They can choose to take in private-pay clients and deduct expenses against income that would be taxable. It is also good to get your clients to keep track of all expenses from the beginning.

[veritas]

To make it more interesting, some income may ot be taxable and some could be taxable. If the individuals pay some of their car personally it is my understanding that portion is taxable.

[JJ EA]

How many clients?

Another thought: How many beds/bedrooms were available and how many were filled? If they had unfilled beds that were available and they were trying to get private-pay clients to fill them would they be able to use the expenses allocated for those beds to take some of the loss? I'm thinking of the situation being similar to having a residential rental available to rent and being able to deduct expenses. This probably doesn't apply to 2005 but it might help them in planning for the rest of 2006 and the future.

FYI: this is not considered a residential rental and depreciation of the home is for 39yrs.

[Unregistered]

Grouip home

or foster care-I think they are different....

[Black Bart]

Nursing home operation

if the caregivers intent is to somehow, eventually make a profit from this activity them to me it seems like a straightforward sch c business is in order.

may someday show a profit

comes down to intent....did he intend to do this thing to make a profit?...I think he did, even if he probably won't, I don't think he knew that when he started.

I think he should claim the $23000 income that he has recieved on the 1099misc form and then claim his allowable expenses for operating the facilityproperty.

I agree with this your conclusion. He meant to make a profit--it just didn't work out. Why should he lose the deduction? There's no law that says a business must actually show a profit--only that he must intend to generate a profit.

I'd put in on a "C" and the 75-25 split sounds just fine.

[Harvey Lucas]

Licensed for 6 beds, 3 were filled in 05

You guys are all so greaaaat?

Where else are you going to get this kind of input unless you work in an office with lotsa other practicioners...even then it would not be as good as this...thank you so much to TaxBook Guys/Gals for making this happen.

I am leaning back towards BlackBarts consensus....it was a business...he recieved income for providing a service..it came on a 1099misc form...if he were filled to capacity he "may" have made a profit..if it looks like a rose why not call it a rose?

JJ EA is right...that portion of the residence that is being used to house the customers is not their home anymore for purposes of the mortgage int and re tax deduction...

Also, if he intends to move back to his old home and hire employees to operate the activity then clearly it is a business...he kept costs low in the startup...then after it developed he hired help and moved back tohis old home...

All things considered, I think the Sch C approach is most correct...make an allocation for personal use of the home.

Thanks Again,
HarveyLucas