2

I live in the United States.

If I have a family member (brother) occupy a section of my primary home on not-for-profit basis (just to cover expenses), need I claim that part of my home as rented when I sell, impacting cap gains & depreciation recapture?

I would be "renting" (the brother is occupying) part (20%) of my home on a not-for-profit basis. The "rent" is below fair market value, and only designed to cover expenses.

As I understand it, the IRS wants even this type of situation to be reported as income on Line 21 / Other Rental Income.

If I collect funds from the brother and report it on line 21, will I lose capital gains exclusion on the 20% and need to pay depreciation recapture on the 20% of my home occupied by him?

  • 3
    Renting to family (or to anyone but a recognized tax-exempt organization) does not benefit from any attempt to claim it was not-for-profit, so you can drop that phrase from your question. Have you been claiming the rent as income and paying taxes on it? – keshlam Jan 21 '17 at 15:00
  • 3
    What does "not-for-profit" mean to you? It certainly doesn't match the tax code meaning, but presumably it means something to you. In particular, are you charging rent in exchange for space (which would be for-profit; you should already pay taxes) or are you charging for things like utilities and groceries? You can probably get away with charging them for their share of the utilities and groceries. You can't charge rent on anything but a profit basis. – Brythan Jan 21 '17 at 15:29
  • I have not had the opportunity to claim the income yet, I am trying to figure out the correct approach. – John Jan 21 '17 at 22:56
  • I'm trying to avoid the "rented" portion of my home being brought into capital gains / depreciation recapture. I'm charging to cover expenses only, not in exchange for space. – John Jan 21 '17 at 22:58
  • If by 'not for profit' you mean that your brother is simply helping with expenses, then I think you could reasonably claim you weren't renting to him. His payments would have to be limited to a reasonable fraction of actual expenses, I.e. utilities, not mortgage or taxes. – DJClayworth Jan 22 '17 at 2:54
1

Honestly why not just report the rent? I own multiple rental properties and I live in one of them. There's a TON of tax benefits that let you drive that rental income to zero. I pay tax on a very very VERY small portion of my rental income.

I'd talk to your CPA and see what they say. The tax code benefits you, you should check it out.

0

I wouldn't add considerable complexity + audit risk just to get "tax free" status. Simply take the money and pay bills with it.

I doubt you made your brother sign a lease. "Income" from your brother isn't a business transaction. It's your family pooling its resources to help out one another.

There are plenty of cases where income like this is not reported. A few examples...

1) A significant other helps pay part of the mortgage even though the house is not owned by them. Technically, the person owning the house should report this as income (especially if they are not married).

2) Parents "help out" their kid in college with thousands a year either in real money, or with food + clothing help. The kid doesn't report this as income either

3) A teenager with a babysitting or lawn mowing business doesn't file taxes on money they earn either.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.