Mother-in-Law paying rent or making a gift?

[DonB]

Mother is moving in with daughter who is going to build an in-law addition to her home ($225,000). Mother wants to reimburse daughter for the new loan payment and her share of living expenses and wants to structure this (like as a gift) so it is not income to daughter. My thoughts are this is rental income. But maybe this could be considered a gift if mother gave an equal amount to her other children.

This has not happened yet and all comments will be appreciated.

[Matt Sova]

Gift?

A gift does not have to be equally given to all children. My parents have 5 kids. One of us (not me) has received a lot more financial support than the rest of us. We don't really care about that, but it is not income to my brother as it is simply a gift.

Mom is paying for her own utilities and such, perhaps they could have an additional gas and electric meter for the in law suite. If not, mom could simply reimburse her daughter for her share of the utilities. I don't see how someone paying for their own living expenses could be construed as rent.

[DonB]

I don't see how someone paying for their own living expenses could be construed as rent.

I agree, but the question is if she also gives them the amount of the new loan payment say an additional $1,000 per month?

[David1980]

Is the payment conditional on mom living there? If daughter kicks mom out and rents to someone else, I assume those payments will stop. So I see this as being rent. Depreciation, mortgage interest, real estate taxes, and whatever other expenses exist would help offset the income. I wouldn't be surprised if it ended up a loss (possibly limited due to personal use.) But obviously that would result in accumulated depreciation.

[taxea]

if she is renting it has to be at FM rent or daughter can only take Sch A expenses. If it's a gift it is limited to the yearly gift amount.

[EdCEA]

gift is limited

I believe you meant the gift is limited to the annual gift exclusion only to avoid filing a gift tax return. Otherwise there is no limit to the gift amount.

[JohnH]

Correct. And for $1,000 per month (which as you point out is under the annual limit for filing a gift tax return) why jump through a bunch of hoops to try and make it rent?

Mom is free to give money to whomever she wishes, including the owner of the home she lives in.
As long as there isn't an agreement (written or implied), that it is intended as rent, then it isn't rent.
As long as the recipient can do whatever they wish with the money, it's a gift.

[ATSMAN]

I ran into one of these arrangements couple of years back. In that situation the mother in law on advice of her attorney had an agreement with the homeowners (her daughter and son-in-law) that she had a right to live in those quarters until her death and all she was responsible was her personal expenses. The lady did write a check for $75,000 to her daughter so a gift tax return was filed.

The zoning laws did not allow subletting so there was no rental agreement.

[Roland Slugg]

Hmmm. If someone pays money to another person for the privilege of living in that other person's residential property, that payment is rent. Isn't it? Then the question becomes, "Was the tenant a family member?" and if so, "Was the amount paid fair market rent?" If less than FMR, then Code §280A kicks in, limiting the deductions to the amount of rent received. I don't see how the mother's payments to the daughter could legitimately be construed as a gifts.

[ATSMAN]

Intention!

Hmmm. If someone pays money to another person for the privilege of living in that other person's residential property, that payment is rent. Isn't it? Then the question becomes, "Was the tenant a family member?" and if so, "Was the amount paid fair market rent?" If less than FMR, then Code §280A kicks in, limiting the deductions to the amount of rent received. I don't see how the mother's payments to the daughter could legitimately be construed as a gifts.

If IRS takes that strict position with family members living with another family member then America is in deep trouble. I bet half of Americans have had at some point "rented" a room in their home to a child or another family member who had no place to live and got some compensation (cash or barter) to pay for bills and other expenses etc.

I think the key point here is whether there was an intention to create a rental unit and if the zoning allowed such rentals particularly in a single family dwelling. In my town you are not allowed to sublet in a single family dwelling. I know a whole bunch of people that will rent a room or two to students, single people and never claim it as a rental or have any written rental agreement!

[TaxGuyBill]

I agree with Roland, IF the payments are FOR 'housing' and are usually given on a consistent basis (such as monthly). As it sounds, that is currently the MOTHER'S intent.


However, the way you worded it it sounds like the DAUGHTER may be building the addition and be willing to let the mother live there regardless of any payments. It's common for parents to live with their children for free. If the mother is not paying for housing, she may be a kind, generous person. As such, she may choose to give a large GIFT to the daughter for such things as holidays, anniversaries, etc.

[ToledoEd]

The IRS does not care if there is a no sublet clause in the local code, or that the arrangement is illegal for any other reason, only if there is "Payment for the use or occupancy of property." (From The Tax Book)

I would guess from the stated facts that this would be a rental situation, most likely under fair market value as it is rented to a family member. As it will most likely not generate a tax loss, I know many would likely not bother with putting it on a return, but it probably does belong there.

[oceanlovin'ea]

taking care of a parent

We all have an obligation to care for our aged parents. How we do that might be different for different families. My mother is 93 and still lives alone. We check on her daily and help take care of her needs. We take her to appointments,etc. If the time came and she needed to live with me, I would have to make some changes to my home to accommodate her. If she offered to help pay for that, I would gratefully accept. It is expensive to add on to a home. If she is financially able and wants to help with electric bills and food bills, that is just a family helping each other.
Another example would be that many times as a family, my daughter and son-in-law have suggested that we buy a house with an in-law suite and we could all live together. We could comfortably exist with one kitchen (neither of us like to cook that much). We would share in the payments and expenses. But we would not be renting from them. We would be sharing expenses.
Sometimes as tax people and accountants, we always look at the money and income angle. This situation is not that at this point. It is a daughter helping out her mother or vice versa. Maybe the mom is actually helping out the daughter.

Linda, EA

[ATSMAN]

We all have an obligation to care for our aged parents. How we do that might be different for different families. My mother is 93 and still lives alone. We check on her daily and help take care of her needs. We take her to appointments,etc. If the time came and she needed to live with me, I would have to make some changes to my home to accommodate her. If she offered to help pay for that, I would gratefully accept. It is expensive to add on to a home. If she is financially able and wants to help with electric bills and food bills, that is just a family helping each other.
Another example would be that many times as a family, my daughter and son-in-law have suggested that we buy a house with an in-law suite and we could all live together. We could comfortably exist with one kitchen (neither of us like to cook that much). We would share in the payments and expenses. But we would not be renting from them. We would be sharing expenses.
Sometimes as tax people and accountants, we always look at the money and income angle. This situation is not that at this point. It is a daughter helping out her mother or vice versa. Maybe the mom is actually helping out the daughter.

Linda, EA

Very well said Linda! I agree with you completely that accountants can become super analytical.With that said can anyone point to a case where IRS successfully prevailed in such a family living arrangement?

[TXEA]

Let's consider a few scenarios:

Adult child moves back home and pays 100 month to cover living expenses. Is this rent?

One college buddy (not on the lease) moves in with another who rents a home. He pays 300/month to cover his/her share of rent, utiilities, cable, - is this rent or a sublet that is taxable?

A house is being remodeled and a family moves in with parents and pays 500 month to cover out of pocket costs? Is this rent?

A woman lets her boyfriend move in with her. He reimburses his share of the costs. Is the reimbursement taxable as rent?

A mother moves in with her daughter in law and reimburses her share of the costs....Is this rent?