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I live in Washington state and my mother lives near my brother in California. I was considering purchasing a house with cash, for her to live in. The cost of the house would likely be around $600,000.

I understand if she lives there, without paying fair market rent, that’s considered a gift that I would have to report (assuming fair market rent exceeds 15,000/year).

I was wondering if that still applied if I gifted my mother a small percentage of the home ($15,000 or approximately 2.5% of the home) of the value; at the time it was purchased? Would that free her of responsibility of paying rent and free me of responsibility of reporting her rent-free living as a gift?

Update 2022-01: I no longer plan to gift my mother equity in the home, but do plan to gift my brother and his wife equity in the home (approximately 8%). Presumably, that would mean some of the fair market rental value would be sourced from them. In other words, if fair market value is $2500 per month… $2300 would be considered a gift from me and $200 would be considered a gift from my brother and his wife ($100 each)?

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  • Why do you think you’re mother has an obligation to pay you rent?
    – quid
    Sep 13, 2021 at 1:59
  • It’s my understanding that if a relative is not paying rent, for a property I own, the US government treats it as a gift. If the fair market value of rent exceeds 15,000 per year then I’d have to report it. I’m wondering if she owns a portion of the residence, whether that would allow her to live there rent free and not having that treated as a gift. Sep 13, 2021 at 3:54
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    Why do you want to avoid reporting your gift?
    – DJohnM
    Sep 13, 2021 at 6:13
  • Can you please reference the IRS rule you are getting this from?
    – jwh20
    Sep 13, 2021 at 9:39
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    The real risk here in under-charging on rent for relatives is that you might lose a lot of tax deductions that you'd normally get for a rental property.
    – JohnFx
    Sep 13, 2021 at 14:04

1 Answer 1

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I understand if she lives there, without paying fair market rent, that’s considered a gift that I would have to report (assuming fair market rent exceeds 15,000/year).

There's no "deemed rent" rule such as that. There are a couple of court cases related. Wineman v. Commissioner, T.C. Memo. ¶ 2000-193 (2000) dealt with commercial property (a ranch). Dickman v. Commissioner, 465 U.S. 330 (1984) dealt with a free loan. Both are not exactly applicable here as is.

The IRS does have a rule on how to handle related party rental transactions, and it basically states that if you rent below FMV - you can only deduct expenses up to the rents received. That's it.

I wouldn't worry about it and definitely wouldn't make a complicated transaction with small portions of equity assigned to other people just because you want to avoid filing form 709 in some extreme case.

I'd suggest you talk it over with a EA or a CA-licensed CPA.

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