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Home owned by client but rented by his father


GingerM

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Deed and mortgage in my client's name. He is a resident alien. His father (a resident and citizen of Brazil) "technically" owns the home. He "gifts" my client money to cover the mortgage. The father began renting the home late last year. I believe my client needs to report as a rental on his tax return. Am I correct?

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What do you mean "Technically owns the home"?

Either the title is in his name or it's not. From the facts you stated - he's a tenant. You haven't stated whether the son lives in the home as his personal residence as well and he's charging his father FMV rent or he's simply sharing operating expenses of living in the home. Rents at below FMV to family members are considered personal use, in which, yes, he must report the rental income (at FMV) but cannot take losses.  Is there a written agreement?

 Could it also be possible that father is gifting money to son - and if in excess of annual exclusion - must file a gift tax return.

More concrete clear facts should be disclosed - your fact pattern is too vague to give a reliable response.

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As explained to me by the son. Father is not a citizen making purchase of real estate difficult in US. Property is titled in son's name and money gifted by father to pay mortgage. My client does not live in the home but his brother did until it became a rental. The lease is in the father's name and he receives the rent. He still gifts money to my client to pay the mortgage.

 

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1 minute ago, DANRVAN said:

Sounds to me like client is the owner of home purchased with gifted money.  Maybe intent was to someday quit claim deed to father?  Is father now living in house and covering  mortgage?

Father has never lived in the home but his other son has. Buying real estate in the US with a mortgage is difficult when not a US citizen. I will ask about the quit claim deed.

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"Father never lived in the home"  Really? In your opening post you say "he began renting the home late last year".

Which is it? Seems like the facts you present contradict each other.

Did he pay the rent for the son who lived in the home?

Then he's gifting money and perhaps a gift tax return is due if he exceeds the annual exclusion.

Yes your client needs to report the rental income.

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1 hour ago, Evan S. Golar said:

"Father never lived in the home"  Really? In your opening post you say "he began renting the home late last year".

Which is it? Seems like the facts you present contradict each other.

Did he pay the rent for the son who lived in the home?

Then he's gifting money and perhaps a gift tax return is due if he exceeds the annual exclusion.

Yes your client needs to report the rental income.

The home was purchased as an investment and a place for his other son to live in while attending college and did not charge his son rent. He began renting it to an unrelated party. It is difficult to have a mortgage on real estate in the US when you are not a resident alien. That is why the loan and deed are in my client's name.

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So it appears that the father gifted the deposit money for your client to obtain the mortgage for the property to be in your client's name. Then subsequently the property was rented out to an unrelated third party.  So the father more than likely made a gift in the year of acquisition that may have exceeded the annual gift tax exclusion.

So the father doesn't "technically own the home" as you say - your client does. All he does now is gift your client sufficient funds to support the mortgage. That's subject to the annual gift tax exclusion for gift tax purposes.

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3 hours ago, GingerM said:

The home was purchased as an investment and a place for his other son to live in while attending college and did not charge his son rent. He began renting it to an unrelated party. It is difficult to have a mortgage on real estate in the US when you are not a resident alien. That is why the loan and deed are in my client's name.

Sounds like your client is the owner and will need to report the rental income and deduct interest and property tax.  If the house is sold he will also have to report the sale since dad is not on the title.

Maybe dad will reimburse for resulting income taxes.

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So father "rents" home from son for mortgage payment cost only, so probably less than FMR. Then father sublets home on the open market. I take it father is not your client? If so, he has US-sourced income and must file. If son is your client, he has related-party issues in renting to his father for below FMR. I think that means he cannot claim losses, right? And, please tell them to work with a lawyer versed in rentals and NRAs.

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3 hours ago, Lion EA said:

So father "rents" home from son for mortgage payment cost only, so probably less than FMR. Then father sublets home on the open market. I take it father is not your client? If so, he has US-sourced income and must file. If son is your client, he has related-party issues in renting to his father for below FMR. I think that means he cannot claim losses, right? And, please tell them to work with a lawyer versed in rentals and NRAs.

Interesting take on the situation - I hadn't considered a sublet. The father is not my client.

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6 hours ago, Lion EA said:

So father "rents" home from son for mortgage payment cost only, so probably less than FMR. Then father sublets home on the open market.

Lion EA, I read this as an "assignment of income doctrine" issue vs sublease where father collects rent from unrelated tenant and turns it over to son (legal owner of property) to make payments.  Does dad even touch the rent or does son collect and make the payment?  Agree legal input is needed to sort this out.

Phase one of the arrangement is grayer where dad was 'gifting" payments in return for college student to live in the house.  Maybe not a gift since dad received a place for his son to live in exchange for providing cash to make payments.

On the other hand, if dad had bought the house and kept  client out of the transaction , there would be no tax consequence of allowing college age son to live there

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I have a lot of trouble understanding the OP scenario. If father has been giving son money all along, then whatever it is now (rent? gift?) it probably was earlier when college son lived there, also. Yeah, I don't know who's collecting rent and paying operating costs, just that father is paying an amount equal to mortgage payment to son who owns the house and is obligated on the mortgage.

My advice would be to use bullet points, a timeline, actual dollar amounts, cash flow, etc., to clarify the earlier and current situations as clearly as possible and take the whole mess to a lawyer to work out ownership, rent, gift, personal use, other income, etc. issues before you try to compute tax consequences.

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Gifts of intangible property (e.g., cash) from foreigners are not usually subject to gift tax reporting unless they exceed something like $100k.  There are treaties that exempt gifts between countries.  Sounds like the father has constructive ownership, and it seems like he has US income too.  There's a lot going on here that is beyond the reach of our expertise.  Definitely refer them to an international attorney.

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Aren't we getting carried away here - international tax attorneys?

All the IRS is interested in is getting their cut.

This house or condo was purchased so a college student would have living quarters.

GingerM is in AZ, so I assume her client is also.  The bulk of the college students in AZ live in the Mesa, Tempe, Scottsdale area.

Some properties there were going for under $50,000 not so many years ago. 

I would treat is any other rental.

 

 

 

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5 hours ago, SaraEA said:

Sounds like the father has constructive ownership, and it seems like he has US income too.

 

On 5/19/2019 at 5:09 PM, GingerM said:

. I believe my client needs to report as a rental on his tax return. Am I correct?

 SaraEA got me back on track, I think you could have a strong case that father has equitable ownership and your client would not report rental income.

Case law has allowed taxpayers without legal ownership to deduct interest and property tax as equitable owners.  Now flip it over and use the same argument that the legal owner is not the equitable owner and therefore not required to report the income.

For example, look at TC MEMO 1997-551 and put your client in the place of the legal owner in the case. The case involved an unrecorded quit claim, if your client goes a step farther and records a quit claim deed it would help wash his hands of equitable ownership and pass it on to father.

I would work with a trusted real estate attorney to address the equitable ownership issue.

Then going forward, look at how  equitable ownership is applied to a residence converted to rental in TC SUMMARY 2008-84.

If father is not your client, then his United States income is not your concern, although it would not hurt if you were involved to see that it was properly reported.

I would also look to see how much extra tax your client would have if income and expenses were reported by him if and if worth the trouble of doing otherwise.

In regards to gift from a foreign country, although form 709 might not be required,  I believe your client would report on form 3520 any foreign gift received over $100,000.

 

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