Rental Income?

[BR Tax Office]

I have a client who brought in her elderly aunt for some tax work. I noticed that the aunt has the same address as my client, and I did some inquiring to find out what the situation is, looking for possible dependent, etc. It turns out that the aunt is loaded, gives the niece money all the time to buy groceries, fix the car, pay the bills, etc. and there's no way the niece pays over half the support. In fact the niece is probably coming out ahead on the deal when you add up everything. This relationship has been going on for years.

Now I'm worried about having uncovered a rental situation. I wish I hadn't noticed that address.

Are the amounts that the aunt gives to the niece includable in income? The aunt gives more than her share of expenses.

Am I going to spend all summer doing 1040X's?

-helpppp-

[Bees Knees]

Probably just a gift

The question you ask your client is, are you charging your aunt rent to live with you? Your client will say no. You then ask, why is the aunt giving you money? Your client will say it is to help cover expenses. You ask your client, did you say you could live with me if you help pay expenses?

From that point on, your client may start to squirm, or not. A rental relationship exists if it is understood on both sides that the aunt has to pay to live there. If the aunt is just being generous, then the money she gives to the niece is non-taxable gifts. It is normal for relatives to live together and give gifts to each other. It is also OK for relatives to be generous and let their aunt live with them as long as they reimburse expenses. That too would be OK – not a taxable rental activity.

The problem comes when there is any kind of expectation that someone has to pay so much a month to live there, with the possibility of making a profit. Then that would be a rental activity. You indicating the niece is coming out ahead is not a good sign.

Ask questions and write down the responses the client gives. Then give your client the rules after the questions are asked and have your client decide if it is a rental activity. If there is any grey area where it is not clear, have the client decide, but also have the client sign a statement that you informed the client that it is possible the IRS will see it as a rental.

[BR Tax Office]

Not so Clear

"The question you ask your client is, are you charging your aunt rent to live with you? Your client will say no. You then ask, why is the aunt giving you money? Your client will say it is to help cover expenses. You ask your client, did you say you could live with me if you help pay expenses?"

I asked her all those questions. It was not considered a rental situation when the aunt moved in. There's not a profit motive with the niece. But there may be "profit" if you subtract Auntie's share of expenses from the money and FMV of things she's given. Auntie moved in because she's getting old, and it was a mutally beneficial relationship between Auntie and niece. The situation would not exist if not for the family relationship, but the niece is coming out ahead financially.

For example, Auntie bought a car for niece to use, which includes driving Auntie around.

I know there are situations like this all over. I just don't know how to deal with it. Either ignore it as gifts between family members, or start reconstructing income and amending returns going back several years.

[Armando Beaujolais]

Too Complicated

This seems to be an age-old discussion. I've seen the issue kicked around a lot before, but with no definitive solution.

Here's my opinion.

The purpose, intent, and mechanics of the transactions indicate sharing expenses and gifts. Neither party entered into the relationship with an expectation of profit, other than financial benefits of spending power resulting from an extra person in the household. As long as the intent was not a rent situation, it is not rental.

It's a split between sharing expenses and gifts. Sharing personal expenses is a non-issue from a tax standpoint. Ignore it. The only possible ramification is with gifts. That can be a mess trying to figure out who gave what to whom.

I believe this is one of the primary reasons why the law allows the annual exemption for $11,000 in gifts from one individual to another. There has to be some latitude for people to transfer things of value back and forth without having to hire accountants to sort it all out for them. Otherwise you'd have to figure the fair market value of George down the street who keeps Old Lady Crabby's lawn mowed just to be nice.

As long as the situation is not being used as a device for tax avoidance, I wouldn't worry about it. If Auntie bought niece a car, you may want to allocate value in the unlikely event the transaction is challenged by the IRS.

[Lance Emerson]

Be Careful

You should do everything you can to establish the relationship as not a rental.

If it is a rental, I'd bet that the numbers work out to where Niece is charging Auntie less than fair rental value. In that case 100% of the rent received is reported as income, but 0% of the expenses are deductible.

[Bird Legs]

Rental? Gifts?

Does the niece cook, wash clothes, clean house for Auntie? If so, maybe auntie is just trying to be nice in return and showing appreciation the only way that she is able.
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[Chief]

Living together

Armando:
I agree with you. We should be careful and not makes these kind of situations more complex than they really are. Thanks for your response.