Rental income

[CRMcKelvy]

My parents gave their rental income to my sister and I while they’re still the rental property owner. The tenant sent me a 1099-MISC form under my name. Would My sister and I file the rental income or my parents? Can my parents still file deduction for repairs?

[maglib]

What is being done is your parents are still the owners and MUST record all the income and related rental property expenses.

They are gifting to you their rights to the rental income.

They are allowed to give up to $14k per person per year without any tax impact (2 parents can gift up to $28k). If you give a gift valued at more than $14k to any one person or trust, you need to file Form 709, United States Gift (and Generation Skipping Transfer) Tax Return.  This form is not supported by Turbo Tax as it does not impact your income taxes, it impacts your Estate Taxes and will reduce the tax free estate. https://www.irs.gov/forms-pubs/about-form-709-united-states-gift-and-generation-skipping-transfer-ta...

[LudwigVan_fan]

I agree with maglib.  Since your parents still own the property, they must include the rental income in their return, along with the rental expenses.  They can gift the money to you, but they can't assign the income to you and not report the income themselves.

[CRMcKelvy]

Thank you Maglib.  The 1099-MISC was issued to me under my name from the tenant instead of my parents.  Will that cause an issue if my parents is claiming the rental income?  I'm afraid the IRS will ask me about my 1099-MISC.  

[CRMcKelvy]

Thank you LudwigVan_fan.  Now I'm concern about the 1099-MISC that was issued to me.  

[maglib]

Do you have any legal documents between your parents and you entitling you to be the AGENT for the property and the lease says as much? You really need legal documentation drawn up by someone who specializes in these related party transactions. Depending on the legally written agreements this can be tricky. The IRS has numerous rules when it comes to related party transactions and arms length agreements. Unless this transaction is documented correctly it may be very unfair tax wise.  Related party transactions may make this that only expenses get recognized to the extent of income on the property by your parent, it can become personal property and lose the ability to claim some expenses.

In your case, your parents are gifting you rights to the income (are you paying the expenses).  Gifts are not taxable income and don't have to be reported by the receiver, the payer only reports amounts greater than $14k ($15k in 2018) given as discussed originally. Your parents would actually be gifting you an annuity now that I think about it and the FMV of all future cash flows would have to be calculated as the value of the gift. Probably not what you wanted to do.  While no taxes may be owed, the money in excess of the $14k does reduce the amount eligible for estate exclusions which most this won't matter as the amount is now $10mm).

What you want is this transaction to meet IRS rules and it has to be set up correctly to qualify. Best thing to have done is move the cash to your father and let him gift the money back to you.  Then there is no question as to what happened.  He pays the expenses and keeps the Schedule E rental property... No issues, just a cash gift yearly.

What you need to do though in the meantime until you get it legally worked out as to who the owner is, who the agent is, how money moves between you and who pays the costs..... not just the lease, the legal gift part.

1 way: You would be a nominee recipient of the 1099Misc and would have to prepare a 1099Misc for your parents or get the payer to correct the 1099Misc and make it to your parents as that is simplest.  You would have to report the amount on your return and create an offset with the words nominee income if they won't correct it. 

Your parent then files the 1099Misc as income. Claims expenses of property on Schedule E.

This is simplest way.  IRS can deem though it didn't happen if they ever follow the cash or look to the legal arms length transaction.  Only the cash given to you would be reported as gift income then.

2way: you are legal owner of the income and claim related expenses you paid as rental income on your return as the agent of the property, just like if you subletted your own rental you report then on schedule E. Since you have a vested interest in the property you could claim the property taxes and mortgage interest that you actually pay even if you are not the listed owner. You are not the owner since the property wasn't gifted to you so you could not claim any depreciation.  (note the gift tax return on this for the FMV of the gift, does not mean any taxes are due, but it would reduce the estate value).

Your parents would have no rental income nor expenses  since it would not meet the arms length rules and they never received the rental income, the property to them no longer qualifies as a rental and can no longer be depreciated, it fails arms length rental from your parents. 

I was in a rush typing this. I hope it makes some sense.  I would really eliminate the gift, have the 1099 issued to your parents and let them declare the rental and just let them gift to you the net cash annually....  it is cleanest and simplest.

[CRMcKelvy]

We don’t have any legal documents recording the transaction. The lease agreement is under my name and the tenant. I agree, the simplest way is to issue my parents a 1099-MISC but I’m afraid I may have missed the deadline.

[maglib]

You have but, the IRS normally does not fine people when the 1099 is issue late.  

Did your parents sign the lease with you as the agent and notify the tenant to pay you as the agent?

[maglib]

it is still the better option, the other way, opens up more headaches. 

I do suggest you speak to someone to make this all legal.  Related party transaction with you as the agent and no monies going to your parents may create the worst tax scenario.

[CRMcKelvy]

Thank you so much for your help maglib.  I will go with the first option you suggested.  I will file for an extension on my tax return and ask the payer to change my name on the 1099-MISC form to my parents name.  I live in Washington State and we do not have state income tax here.  Do I still have to file the 1099-MISC?   Reason I asked was on the 1099-MISC form I received says "To be filed with recipient's state income tax return, when required."

"1 way: You would be a nominee recipient of the 1099Misc and would have to prepare a 1099Misc for your parents or get the payer to correct the 1099Misc and make it to your parents as that is simplest.  You would have to report the amount on your return and create an offset with the words nominee income if they won't correct it. 

Your parent then files the 1099Misc as income. Claims expenses of property on Schedule E.

This is simplest way.  IRS can deem though it didn't happen if they ever follow the cash or look to the legal arms length transaction.  Only the cash given to you would be reported as gift income then."

[maglib]

If they send a corrected one with your parents names instead of yours (then 2 of them one removing the income from you and 1 for your parents) then no you have to do nothing.

If they won't correct it, you have to issue one to your parents and report it as the IRS will be looking for it regardless that you became the nominee, you just also create a negative amount to offset the 1099.

If ever audited, you will say I was just acting as agent for my aging parents and the money was theirs. 

Thinking of another thing you could do is deposit monies in a joint bank account with your parents and yours names...  The money goes in so they received it.  Any money that is used for rental is their rental expense then.  You could have a legal agent agreement whereby you get 15% of all rent (that is arms length) , this would then have you recording taxable income as self-employment and them being able to use it as a management fee). Or any gifting can be done from this same account , not as you as agent if you don't want to create taxable income. Just make sure, however you do it that if you decide to be their legal agent, you document it with legal agreements.