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My wife and I are purchasing a house where her parents will live rent-free. We are in the U.S.

Obviously (?) this is a gift from us to them, which by my understanding will not be taxable. The house and equivalent market rent are modest.

Her parents want to show their gratitude by... doing things for us. At what point would that become less like mutual gift-giving and more like a renter/landlord arrangement? For tax purposes, I mean.

For example, could they "give" us monthly checks? How about paying for our kids' music lessons?

If this is a blurry line, assume I want to stay definitively on the safe side of it.

[Update, since there seems to be some confusion]

My in-laws are under no obligation to give us (or our kids) anything. Actually, I would prefer that they not, but they are insisting. In the interest of -- shall we say -- "domestic tranquility", I am willing to accept their generosity, but not if it creates a taxable event. My question is whether this is possible.

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  • "Her parents will live rent-free" "Could they give us monthly checks?" These statements don't align. Sep 21 at 20:25
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    Are you trying to work out an arrangement where they can provide you some payback that doesn't run afoul of tax law or just concerned that any gifts they choose to give will be viewed as rent? What is your plan long-term for the property?
    – Hart CO
    Sep 21 at 21:42
  • @Grade'Eh'Bacon Not at all; see my update. I will go out on a limb and guess your family works differently :)
    – Nemo
    Sep 22 at 15:35
  • @HartCO - See my update in the question. They really want to give us (or our kids) something. They will live there as long as they want/need. After that, maybe we will sell the property, or maybe we will rent it out, or maybe we will move into it ourselves. All part of the indefinite future.
    – Nemo
    Sep 22 at 15:41
  • Not to get overly morbid about it, but it sounds like what your in-laws want to give you is most often called 'inheritance'. If money is not an immediate concern for you, and you are able to frankly have the conversation with her parents, this seems the most pragmatic approach. Sep 22 at 18:03

2 Answers 2

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Her parents want to show their gratitude by... doing things for us. At what point would that become less like mutual gift-giving and more like a renter/landlord arrangement? For tax purposes, I mean.

From the start. Since they're not showing you "gratitude" now, but will show "gratitude" once you allow them to live "free" on your property, the "gratitude" is tightly coupled with your "free" living arrangements.

The "gratitude" is called rent.

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  • Gratitude is not why I pay for my morning coffee, and I am pretty sure it is not why my employer pays my salary. See my update. They are under no obligation to give us anything. Or do you view every gift exchange as a commercial transaction?
    – Nemo
    Sep 22 at 15:36
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    @Nemo if one gift is directly tied to the other - yes, I do. More importantly - the IRS does too.
    – littleadv
    Sep 22 at 16:15
  • Can you define "directly tied"? Specifically, what evidence would I need to show that mutual gifts are not "directly tied"?
    – Nemo
    Sep 22 at 17:32
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    Facts and circumstances. That's a question that only the revenue agent auditing you could answer. Even that you may end up appealing to a judge. To me the situation you've described is a clear quid pro quo, to you it obviously is not.
    – littleadv
    Sep 22 at 18:00
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They are allowed to give up to $16,000 a year tax free under the gift tax rules. They can give each of you $16,000 that is. https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes

If this solves your problem, perfect, but if the "rent" is higher than $16,000 a year they can compensate you in other ways such as paying for your vacations, your meals, or kids activities which is something that occurs a lot and I would not worry about the government coming after you unless you are moving hundreds of thousands of dollars this way.

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    The 16K exemption is for gifts, in this case we're not talking about a gift but rather rent. There's no exemption for rent in the income tax provisions. It doesn't matter how they pay the rent - cash, vacations, meals, whatever. It is still rent. As to your last sentence - generally you shouldn't suggest breaking the law on this site. We're not here to guide folks in their criminal endeavors.
    – littleadv
    Sep 22 at 4:48
  • @littleadv It is not rent; they have no obligation to give us anything. Also I am asking about other gifts, like paying for kids' enrichment activities.
    – Nemo
    Sep 22 at 15:37
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    @Nemo that's not how it works. Gifts by definition have no strings attached. You're describing a clear quid pro quo: you're giving something and are getting something in return.
    – littleadv
    Sep 22 at 16:14
  • @littleadv Not at all. They are welcome to live there as long as they want without compensating us in any way. In fact, I do not want them to give us anything, but they are insisting. Please read the update to the question.
    – Nemo
    Sep 22 at 16:17
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    You asked I answered, I understand the situation. You can do with that whatever you want.
    – littleadv
    Sep 22 at 16:18

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