12

If my business partner purchases a home and I move in with him, presumably the money I'd give him to help out with his mortgage would be considered rent, and so he'd have to pay taxes on rent income. (Please correct me if I'm wrong already.)

Is there a legal way to arrange it so 28% of my money to him doesn't go toward taxes?

We're not trying to do anything sketchy. But of course we're interested in legitimate arrangements that can save us money. For example we're wondering if putting my name on the deed too (because we plan on splitting equity and expenses down the middle) can turn the money into a contribution toward the mortgage, rather than taxable rent income.

Thank you very much in advance.

Improve this question
7
  • 6
    Something to consider: have the business own the home and allow you both to live in it as an employment benefit. Neither of you pays any rent or mortgage payments. The business deducts the expenses to run and maintain the house. I know someone who did this in Canada when his home was grossly over-valued by a property tax valuator: he sold the home to his business, who then "let" him live there rent free in exchange for mowing the lawn etc. The company paid and deducted all the costs. Nice deal.
    – Kate Gregory
    Jun 9, 2014 at 12:11
  • 6
    Why wouldn't such an employee benefit be taxable?
    – JTP - Apologise to Monica ♦
    Jun 9, 2014 at 14:06
  • @Kate don't know about Canada, in the US this probably won't fly well. Owning a real estate property through a corporation is usually a very bad idea in the US.
    – littleadv
    Jun 9, 2014 at 16:18
  • Are you splitting EVERYTHING 50/50? I've always had roommates but the amount of money I receive from them MIGHT cover some minor expenses like electric bill, cable ect. If you put your name on such expenses they aren't directly receiving any money from you.
    – Andrew Walters
    Jun 9, 2014 at 17:02
  • 3
    The deleted question makes more sense. Buy the property together. You each get a tax write-off for your half of the deal. No rent or potential imputed income.
    – JTP - Apologise to Monica ♦
    Jun 9, 2014 at 19:59

4 Answers 4

Reset to default
13

I am also neither an attorney nor a tax advisor.

Yes, the rent money you pay to your friend is taxable income, but suddenly all kinds of expenses around the house - including a fraction of the interest paid on the mortgage - become tax deductible.

For example, let's say that the mortgage is $1000 / month and you pay your friend $500 / month.

If you live in 50% of the house, then he can deduct 50% (plus or minus) of the expenses associated with owning the house, including:

  • Interest on the mortgage (but never the principal)
  • The insurance and taxes on the property
  • Repairs
  • Upgrades (stretched out via depreciation rules)
  • Depreciation on the building itself (1/27.5 of the value of the building every year)

All of these things (50% of them, anyway) become tax deductible. It'd be quite possible for him to take a loss on the endeavor and actually reduce his taxes every year.

Until it comes time to sell; selling a property that has been used as a rental is more taxable than selling a property that has been a personal residence.

Improve this answer
4
  • I doubt he could take a loss on a mixed-use rental.
    – littleadv
    Jun 9, 2014 at 16:19
  • 3
    I've got friends who have been in a housemate situation for many years, structured as owner/renter. The owner takes full advantage of the fact that roughly half the upkeep costs are deductable. I don't know whether that completely offsets the rent (I don't know any of the numbers), but it certainly helps pay down the mortgage... at the cost of having to be a bit more careful to properly record all the costs and all the expenses so they can defend it if they get audited. DEFINITELY talk to a tax advisor and/or tax lawyer; it's worth the investment in expert advice.
    – keshlam
    Jun 9, 2014 at 18:47
  • And there's also the possibility of a 1031 tax-free exchange of rental property, if your partner wants to invest some money in real estate.
    – Snowbody
    Jun 9, 2014 at 19:08
  • He can already take deductions on the interest and taxes (prior to 2018, 100% of that, now he'll hit the SALT limit) - before this quasi rental situation. So, his tax situation is only improved by being able to reduce the rental income by depreciation, upgrades, repair, and insurance.
    – iheanyi
    Feb 17, 2018 at 0:03
7

I'm not an attorney, nor am I a licensed tax adviser. I suggest you talk to these two types of professionals.

From my limited knowledge, without proper documentation/organization, I can't see how the IRS/State will not consider this as a rent payment. The mortgage responsibility is of the person signing the mortgage contract, and you're under no obligation to pay that person anything. Had you not lived at the property, you might argue that it was a gift (although I'm not sure if it would stand), but since you do live in the property - it is quite obviously a rent payment.

Putting your name on the deed may mitigate this slightly but I'm not sure how much - since you're still not obligated to pay the mortgage. However this is probably moot since it is unlikely for a bank to give a mortgage on a property to person A when it is also owned by a person B, without that person B being side to the mortgage contract.

Improve this answer
4

I'm not an attorney or a tax advisor. The following is NOT to be considered advice, just general information.

In the US, "putting your name on the deed" would mean making you a co-owner. Absent any other legal agreement between you (e.g. a contract stating each of you owns 50% of the house), both of you would then be considered to own 100% of the house, jointly and severally:

  • neither of you would be able to perform any transaction on the house without permission (or possibly, physical presence) of the other
  • this leads to potential hassles if the partnership is dissolved (including via death)
  • both of you would be 100% liable for any liability caused by the house (e.g. real estate taxes; injuries to visitors or tradesmen performing work; damage to nearby houses, trees, or cars)
  • both of you would owe capital gains taxes after selling the house at a gain

In addition, the IRS would almost certainly interpret the creation of your ownership interest as a gift from your partner to you, making them liable for gift tax. The gift tax could be postponed by filing a gift tax return, which would reduce partner's lifetime combined gift/estate tax exemption. And if you sought to get rid of your ownership interest by giving it to your partner, it would again be a taxable gift, with the tax (or loss of estate tax exemption) accruing to you.

However, it is likely that this is all moot because of the mortgage on the house. Any change to the deed would have to be approved by the mortgage holder and (if so approved) executed by a title company/registered closing agent or similar (depending on the laws of your state). In my similar case, the mortgage holder refused to add or remove any names from the deed unless I refinanced (at a higher rate, naturally) making the new partners jointly liable for the mortgage. We also had to pay an additional title fee to change the deed.

Improve this answer
0

I'm not an attorney or a tax advisor.

Maybe you could work out another arrangement with your friend where you assume some of his other expenses.

For example, you pay the utilities directly instead of your friend.

I'm not sure if that's considered tax evasion... someone else could chime in on if that's legal or not...

Improve this answer
1
  • 1
    If their arrangement is to share the house and he's not paying the person specifically to live there, then it wouldn't be tax evasion. Otherwise, people would be evading taxes every day when they chip in gas money when a friend gives them a ride.
    – iheanyi
    Feb 17, 2018 at 0:09

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .