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.
**I don't work for TT. Just trying to help. All the best.
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