Rent Inherited House to Relative

[ruthc]

Client (daughter) inherited house from her mother. The will stipulated her son can live in the house until his death if he wants. Daughter has her brother and nephew living there paying a certain amount (FMV) to live there. Is she now obligated to treat this as a rental where she has to claim that income? I know if so she can claim the expenses. She just wants to treat it as a second home. Thanks for any responses.

[TaxGuyBill]

Daughter has her brother and nephew living there paying a certain amount (FMV) to live there.

I think that is the definition of "rent". :-)

[New York Enrolled Agent]

Daughter has her brother and nephew living there paying a certain amount (FMV) to live there. Is she now obligated to treat this as a rental where she has to claim that income? I know if so she can claim the expenses. She just wants to treat it as a second home.

I don't think §61(a)(5) [Rents] has any exception due to "wanting to treat it as a second home". Actually, depending on the circumstances this situation might fall under the "vacation home" rules under §280A

[ruthc]

In the beginning stages of info

I had just heard about this info from the client so I surely have more questions for her. We agreed she should get a lawyer for the whole issue of getting the house on the deed, etc. I am sure other issues will arise. I just want to make sure I tell her the correct info concerning her taxes, income she has to claim if considered a rental, etc.

Thanks for the info I should inquire about.

[Burke]

I am assuming you have not seen a copy of the will. A Life Estate (which is what this is) can be designated in a will; it can also be done during the original owner's lifetime via a Life Estate deed. Either way, there should have been a clause or provision in the relative document detailing who is responsible for the expenses. The son (brother) has apparently been granted a life estate; the daughter of the deceased is the remainderman. If done while the mother was living, she would still have been responsible for all the expenses, including taxes, insurance, upkeep, etc. Normally, in the case of the original owner's death, the life-tenant is the one who pays the normal on-going expenses. The remainderman usually pays for capital improvements. All this may be determined by specifics in the will and in the absence of any, could revert to state law where the property is located. The son now owns what is a tangible asset, which can come into play should he ever apply for Medicaid, etc. Its value would be calculated using the applicable IRC factor for his age at the time. Depending on your state's laws, it is possible he could sell it to another party; however, they would only own the life estate and the right to live there, and the property would still pass to the remainderman (daughter) at the son's death. Unless the will specifically stated that he could live there for free, she has the right to charge rent, IMO. The life-tenant could object, however. These life estate situations are fraught with such problems, especially where there are not good relationships. I think it is a good idea to have an attorney familiar with these issues to review the will and prepare a new deed, even if the locality would accept the will as documentation of the life estate. I think you need a copy of the will to determine how to treat it on her tax return. The property as you indicate it was designated would have passed outside the normal estate.

[ruthc]

Still waiting ofr info on will

Burke, you had given excellent info concerning this type of situation on another thread I had posted last year. It is very helpful in knowing some questions to ask the client and how the "remainder" works. The daughter stated that the will states that her brother can live there as long as he pays the bills. If he doesn't it can be sold. I get the feeling that the will does not state that the house is the daughter's. She told me that her brother has a lot of problems (drinking, etc) and the mother has been taking care of him for years. That is why the mother is letting him live there. The daughter has also been enabling him by doing many things for him along with the mother. She said she is paying the mortgage, taxes, and insurance with the money she gets from him. He is supposed to pay all other expenses on his own. If he doesn't pay her then she will sell the house. She got a lawyer to probate the will.
So I really need to see the will because I think he really is the one that owns that house with the daughter taking control to make sure he does pay so he won't lose the house. I need to see the new deed too. Thanks for your past info. I am more knowledgeable on what to look for, but may need further assistance on questions after I get more info later on.
And I also know how the "remainder" works if that is what she comes out to be.
Thanks for all the help!!!

[Burke]

Without the will, you are flying blind. However, it appears she may have been appointed executor? If so, she is the one who would sell the house "if the bills are not paid." That may mean his eviction, which is a messy process and will involve a lawyer. The power to sell the real estate is an estate issue. If the daughter is not a remainderman who receives the property upon her brother's death, then that means the estate owns the property and would be the one filing a Schedule E every year. Definitely get a copy of the will. If the estate sells the property, then proceeds would split among the heirs or as otherwise directed by the will.

[ruthc]

Thanks for that info Burke. Again, your help is very helpful. I am waiting for more info (including will, deed, etc.). It will take time to get this.