1

My wife and I do not live in a community property state, but we treat everything as jointly owned/spent/taxed. (In case it matters for the question)

She inherited a house appraised as (Value)

We are renting it to a relative for monthly (Rent) which we keep in a credit union account separate from other accounts. That account earns monthly (Interest).

From that account, we pay property tax (Tax) & (Insurance)They pay any repairs/maintenance.

If that were the whole story, we would each year report the appropriate things on 1040 schedule E (not sch. 1 as I originally misinterpreted).

But there is anticipation that some year in the near future, they will buy the house for the original (Value) with (Rent) minus (Tax) & (Insurance) credited as down payment.  (A loss due to inflation & appreciation, but we don't mind because their future inheritance is reduced by exactly that loss.)

So how do we resolve the conflict between the year of sale (which might not happen—they could change their minds or not get a loan approved or something) and all the years up to that time? Do we have to hire a professional for this? I'm 69 and I've always done all our tax forms myself.  Our total income is such that a preparer's fee would exceed the tax amount!

Do we treat it as a rental, and then turn in amended returns if/when the rent payments change to down-payment on purchase? Don't want them to be double-income (first as rent, and then as sale receipt).

1
  • FYI: in a CP state, that house is hers, and hers alone.
    – RonJohn
    Apr 7, 2023 at 18:49

1 Answer 1

4

If that were the whole story, we would each year report the appropriate things on 1040 schedule 1.

I'd say Schedule E, not schedule 1. Schedule 1 is for primary/secondary residence, which this is not.

But there is anticipation that some year in the near future, they will buy the house for the original (Value) with (Tax) & (insurance) minus (Tax) & (Insurance) credited as down payment.

Seems complicated for whatever reason. Do you have an actual written contract? When you say "anticipation" - are you anticipating they'll make you an offer?

So how do we resolve the conflict between the year of sale (which might not happen—they could change their minds or not get a loan approved or something) and all the years up to that time?

There's no conflict. You inherited the house for $Value, and you sold it for $Sale_Price in some future year. You'll have a gain of $Sale_Price - $Value. You'll pay taxes on the difference. There's additional consideration of the depreciation recapture (the fact that you're currently choosing not to deduct depreciation is irrelevant to the recapture) which is taxed at a flat tax rate of 25% IIRC.

How you reach the $Sale_Price when you sell doesn't really matter, it's between you and the buyer. Unless you have an explicit signed contract now for a transfer of ownership at some future date, there's nothing you should concern yourself about with regards to the "anticipated" future transaction.

7
  • But if we say we sold it for $400K when we already reported $100K of that as rental income, that's $100K taxed as part of the sale when it was previously reported as rent and taxed then. We have a contract, which pretty much says what I described. Mentions their plan to buy under the terms I stated but also says if they don't do so for any reason, we keep all the rent and they either move out or continue to rent.
    – WGroleau
    Feb 1, 2023 at 1:11
  • 1040 Sch. 1, line 8l: Income from the rental of personal property if you engaged in the rental for profit but were not in the business of renting such property / / 1040 Sch. 1, line 24b: Deductible expenses related to income reported on line rental of personal property engaged in for profit –
    – WGroleau
    Feb 1, 2023 at 1:19
  • Oh, "personal property" (not real estate) is on Schedule 1.
    – WGroleau
    Feb 1, 2023 at 17:49
  • 1
    @WGroleau you'll probably want to run this agreement by a tax adviser, but it sounds like you have a "rent to own" transaction.The proper tax treatment depends on the wording of the agreement. It could be just rental with a purchase option, or it could be an installment sale, or it could be seller financing - these all would be handled differently.
    – littleadv
    Feb 2, 2023 at 6:17
  • 2
    @WGroleau lesson learned - write proper contracts. If it could be "any of those" you're running a risk of the IRS taking the most stringent position in audit which would probably be undesirable for either you or your relative. The least ambiguity there's in the contract the better your position with the IRS would be.
    – littleadv
    Feb 2, 2023 at 18:38

You must log in to answer this question.

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