@OK_I wrote:
Thank you all for your valuable responses. Take home message - to get a consultation from a tax attorney.
Just for clarification, I do not have any intent to hide my abroad income from the IRS, because I do not receive any income from that property. Person that is renting this property gets an extra income so he can have a little bit better life and in return he is taking care for my property. Once again, the main question was - since I have never received any rental income from that property in past and do not plan to receive any rental or any other income in future, do I still need to report it to IRS, because someone else is renting it and getting income? Should I report their income as mine? If so, then may be it is better to tell that person to stop renting it because I might have a potential problems with IRS in future?
I don't think anyone has used the word "gift" yet, but I think here essentially is the concern of those of us who doubt the transaction:
If I arrange to have my paychecks deposited into my daughter's bank account, so "she can have a better life", then that is clearly still my taxable income, and the money is a gift to her. If I own stocks, and assign the dividends to be paid to my daughter's bank account, it's still my income. So then, why would the rental income be your relative's taxable income if the property is still owned by you? That's where the attorney has to get involved, to tell you whether or not the rental income is your income that you are giving to your relative, or somehow you have legally made it their income.
Now, here's something that would be completely legal and without question. You hire your relative to be the property manager. You report the income on your tax return, and you deduct your expenses. Paying a property manager is a perfectly valid expense, and if you pay the right amount, you would have no net profit and owe no tax. You relative would report taxable income from their job as property manager and pay whatever tax is required by the home country. The main differences between this method and the method of you reporting nothing and your relative reporting the rental profits as taxable income, would be (1) more paperwork for you, and (2) if wages are taxed at a different rate than rental income in the relative's home country.
(A third completely legal scenario of course would be for you to report the rental income, pay the tax, and then give your relative some money. A gift of money to your relative might not be taxed at all in their home country, but maybe their are political or financial reasons why it is better for your relative to earn the money and pay tax on it.)
Best of luck whatever you choose.
