Discussion:Supporting Family/Rental Property
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| 26 November 2005 | |
| TP bought a "Rental Property", Mother and Brother will rent. (Both on Fixed Income - Mother on Social Security & Military Pension/Bother recovering drug user)
TP will gift up to $11,000 yearly to Mother Mother/Brother will pay @ lease 80% of FMV of local rent Mother/Brother will directly pay utilities & other minor upkeeep expenses. Mother/Bother will sign long term lease TP will set up separate bank account for rental property - and "manage" as a rental property in form and substance. TP is a Real Estate Agent, Married, AGI (combined over $150K) Question: If all the protocols are followed (Rental Properties) - do you think this will withstand an IRS Audit? | |
| 26 November 2005 | |
| I would think so. Any rental forgiven( 20%) would be subject to gift reporting if over $11000 to either mother or brother. You may want to check up on 1099 filings by the mother and brother for payment of rent to the TP. Also check the related party rules for depreciation of the rental..
The rental would be be subject to the passive loss rules but the Real Estate professional rules may help in taking the loss by the TP. | |
| 28 November 2005 | |
| I think so. You should document local rent for a long term lease and not compare directly with month to month rentals. You may want to reduce annual gifts to include rent forgiven (if any), so you don't have gift tax returns every year. But since this is a long-term situation, it may actually be best to file a gift tax return every few years, by actually going over the limit slightly on purpose. This serves the purpose of having the statute of limitations run on these earlier years, so they cannot go back to the first year (or even before this arrangement) and challenge gift tax or rental values. | |
| 29 November 2005 | |
| By the way, the annual gift tax exemption rises to $12,000 in 2006.
2006 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits | |
Lanetxgame (talk|edits) said: | 14 December 2005 |
| Consider an alternative. What if TP uses the home 14+ days and does not rent it? Then the house may be considered a second/vacation home. Assuming TP doesn't already have second home then taxes and interest would be itemized deductions. Avoids the gift trade off for depreciation deductions. In the end it may be less cumbersome and reduces the gain on sale because the property basis was not reduced. Under the present scenario TP is making a gift and trying to recover by taking depreciation. In the end the depreciation will be recovered as part of the gain on sale. | |
