Tax implications of living rent-free

Question

Suppose Adam owns a house and rents a room to Bill for $300 a month, and pays Bill $300 a month to mow the lawn, clean the rooms and do other maintenance. Assume U.S. law in a no-income-tax state like Texas or Florida or New Hampshire. Bill must pay Federal income tax on $300 a month. Adam must give Bill a Form 1099-something each year. Adam must report the rental income. Can Adam deduct the money he pays Bill as maintenance costs?

Suppose Carl owns a house and allows Dave to live there rent-free in exchange for doing the yard work, cleaning and other maintenance. Does either owe tax? Is the value of the free rent income to Dave? Is the value of Dave's work income to Carl?

Suppose Edward owns a house and lets his girlfriend live with him. Does either owe tax? Based on what?

Answer 1

In the first example, I would say yes, but only to the extent that it's maintenance on the portion of the house rented. You see, as a homeowner, I can't deduct maintenance as an expense, I can only do that for rental property. But in this scenario, the house isn't purely a rental, so all expenses (heat, A/C, yard work, etc.) are prorated to the amount of space rented out.

Answer 2

It is a murky area, and there was some political controversy last year when it came out that Rahm Emmanuel (President Obama's Chief of Staff), sleeps in a rent-free bedroom in a friend's basement.

In general, I would argue that in absence of a formal contract exchanging services valued at a specific dollar value, living with a friend rent-free and contributing to the household as a friend isn't a taxable event. After all, a friend using a bedroom doesn't have any expenses associated with it.

Accepting services in lieu of a specific payment creates a grey area. Trying to deduct the value of services, in my mind crosses the line and is something that will get you in trouble.

Answer 3

In France, implications are not only on taxes but also on other government aided areas such as retirement and out-of-work situations. In the first case, Bill's work is taken into account for determining his rights when he retires. In the second case, Dave will be in trouble when he retires.

Answer 4

As I understand it:

1. Yes, Adam can deduct the $300 he pays Bill for taking care of the place, just as if he hired any other contractor to do the job. The fact that the contractor is also his tenant is irrelevant.

2. In Carl's situation, if he is treating the property as a rental property, he would owe tax on "fair market rent" regardless of whether his tenant (Dave) is actually paying rent or not.

3. In Edward's situation, neither would owe tax, since Edward's house is not a rental property and he isn't treating it like one.