Rental or no rental, that is the question.

[GIMoe]

Client purchased 1 acre of land in 2005 for $10,000 (back taxes due). This is currently divided into two tax parcels (1/3 acre and 2/3 acre). Client states that he will eventually split the bigger parcel in half, giving him three 1/3 acre parcels, but for 2005 and all of 2006, he did nothing on the larger parcel. There is a residence on the 1/3 acre lot and the original owner (a family friend) lives in it. When my client purchased this, he entered what he calls a 'Life Trust' with this person to allow her to live there rent free for the remainder of her life. Here is my question: is this considered a rental situation? If so, does he have to show fair market value of the rent as income, even though he did not actually receive it?

Any help would be greatly appreciated.

[solomon]

It looks like

he is gifting the rental at FMV to her. Curious if this "Life Trust" is a legal document created by an attorney.

[Davc]

Was the property purchased from the owner or the tax authority? If the property was purchased from the owner with the Life Estate retained, there is no rent, and no gift unless the remainder interest was discounted and then the gift would be from the original owner to the TP.

[GIMoe]

More info

Curious if this "Life Trust" is a legal document created by an attorney.

Yes this is a legal document created by a lawyer. It states that she is entitled to stay there rent free as long as she chooses to do so. She pays utilities, my client is responsible for all repairs.

Was the property purchased from the owner or the tax authority? If the property was purchased from the owner with the Life Estate retained, there is no rent, and no gift unless the remainder interest was discounted and then the gift would be from the original owner to the TP.

The property was purchased from previous owner. The price was around $17,000; $7,000 to pay off the existing mortgage and $10,000 back taxes.

This is shaping up to look a lot like a normal Land Lord / Tennant relationship. I would have to do a Sched E to be able to take any expenses. The question is, if I do a Sched E, do I show no income or do I show the FMV of the rental as income?

I appreciate any input on this.

[Davc]

This is not a rental. Your client bought a remainder interest in the property. The expenses are investment expense.

[GIMoe]

Need more clarification

This is not a rental. Your client bought a remainder interest in the property. The expenses are investment expense.

Pardon my ignorance on this, I don't have any real experience with 'Remainder Interest'. My research on the subject hasn't made it real clear on how it applies here. I do see how it fits in as an investment; I have thought about that, but the problem is that I can not take any deductions (please correct me if I am wrong) for expenses against it, since there is no investment income.

Any further clarification or help on the subject would be greatly appreciated.

[Bees Knees]

Pardon my ignorance on this, I don't have any real experience with 'Remainder Interest'. My research on the subject hasn't made it real clear on how it applies here. I do see how it fits in as an investment; I have thought about that, but the problem is that I can not take any deductions (please correct me if I am wrong) for expenses against it, since there is no investment income.

Any further clarification or help on the subject would be greatly appreciated.

A remainder interest means it is not completely yours until all other parties go away.

As to the ability to deduct expenses, yes that is your problem. As others have tried to tell you, this is not a rental because your client is not receiving rent. The FMV is not rental income to your client because your client receives no benefit from it. Your client is forced to let the other person live there per the terms of the purchase agreement. The purchase price would probably be higher if there was no remainder interest issue to have to deal with.

The fact that your client receives no benefit from deducting investment expenses is irrelevant. Those are the rules.

[Bees Knees]

BTW, a point of clarification. Investment expenses may be deducted as miscellaneous itemized deductions, subject to the 2% AGI limitation, regardless of whether or not there is investment income.

What is limited to investment income is investment interest expense.