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My mother quit claimed her mortgage-free home to me many years ago. It was understood that she would retain financial control the remainder of her life, although never formalized as a living trust. She did not occupy the residence, choosing to live with me for nearly ten years prior to her passing, which afforded her the ability to charge below market rent from her favorite grandchild (my sister's daughter who resided there for many years with her husband and two children).

It was understood that she wanted my niece to live there as long as she chose to, and on her passing, be given a 1/3 interest to assist in facilitating the sale of the home to her, with the other 2/3 interest to be divided between my sister and me.

With poor credit history and large unpaid balances (medical bills-her husband had suffered several heart attacks), as well as having defaulted on a 25K student loan, credit cards that were maxed out and not being paid, they live paycheck to paycheck. We discussed selling the house outright, but with two kids in school, everyone agreed it was best to keep the status quo if at all possible, and commit to improving credit scores and debt-to-income ratios going forward. This most closely aligns with what my mother would have wanted as well. the fear being, the money would be short lived, resulting in no home ownership and facing the prospect of paying fair market rents, sooner, rather than later.

Discussion led to agreement that she could afford and would be willing to pay 2/3 of fair market rent, retaining a 1/3 interest (although no changes have been made to date, to the deed). Taxes and insurance are deducted from the 2/3 rents received each month and into put into an escrow account, with the remains (income) split 50-50 between my sister and I. Repairs (when needed) are split 1/3 each, with my nieces share to be due only when the house is sold. My niece, for all intents and purposes, enjoys double the monetary benefit my sister and I enjoy, as together, our combined "income" combined is equal to her 1/3, as she contributes nothing towards the escrowed amounts earmarked for taxes and insurance. A concession my sister and I are willing to make.

For example, if fair market rent is $1500, my niece pays $1000. After escrow is deducted, $500 remains. My sister and I enjoy $250 each. Not a bad deal for my niece if you ask me!

Now cometh tax season and the tax man! (and I have unanswered IRS tax questions!) An HRBlock person advised me not to report any of it as income and treat it as a second home! Personally, I think that is fundamentally and ethically, the wrong answer!

Substantial rents are collected. Being the only legal owner as listed on the deed, my gut tells me the IRS may look to me as being the liable party for all of it. My sister should be liable for her half.

How do I report 50% of the rental income to attributable to another to avoid being liable for it all? A 1099-MISC?

In practice, we are 1/3 partners and realize equal income and expenses, with my niece receiving a larger benefit. I have doubts whether anyone can deduct insurance and taxes other than myself. Is my niece enjoying a monetary benefit worthy of IRS scrutiny as well? What is her exposure?

Being a family member, does this disqualify the home as rental property, to be viewed as investment property only? If so, would only the taxes be deductible?

The income is also passive in nature, as we are not material participants in a business as defined by the IRS.

I am afraid that one of us is going to shoulder an unfair tax burden. (I fear that may be me!)

HELP! (Any constructive feedback is very much appreciated).

Thanks in advance!!

  • Just to clarify, the 'her' and 'they' in para 3 refer to your niece and her household, right? – AakashM Feb 14 '18 at 9:03
  • Yes. You are correct. – FamilyGuy Feb 16 '18 at 0:49
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You will need to sit down with a tax and legal expert.

My mother quit claimed her mortgage-free home to me many years ago. It was understood that she would retain financial control the remainder of her life, although never formalized as a living trust. She did not occupy the residence, choosing to live with me for nearly ten years prior to her passing, which afforded her the ability to charge below market rent from her favorite grandchild (my sister's daughter who resided there for many years with her husband and two children).

It was understood that she wanted my niece to live there as long as she chose to, and on her passing, be given a 1/3 interest to assist in facilitating the sale of the home to her, with the other 2/3 interest to be divided between my sister and I.

If she gave you a quitclaim deed, then that means that you owned 100% of the home. The tax issues started with that gift from your mother. They were compounded when you had a niece as a tenant. Then made even more complex by giving 1/3 of the house to your sibling and 1/3 to your niece.

Sit down with an expert, who can determine what the tax implications are beyond the forms that are due in April.

  • And given that one could just have used part of their lifetime estate exemption, the trail of quitclaims with no forms is awful. Not to mention the loss of stepped up basis on one's passing. – JTP - Apologise to Monica Feb 14 '18 at 12:22
  • I sat down with HR Block and was told not to claim the income and treat it like a vacation home. Not exactly who will be doing my taxes! Figured I needed expert assistance..but this looked like an interesting forum to learn from another's perspective. – FamilyGuy Feb 16 '18 at 0:48

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