How do I show income from a rental I do not own? Is it under the rental section or another area? Also what about rental expenses on that income?

[kimberlyrea2]

Additionally since this is my first year with that rental income my expenses on that income exceed the amount I made in rent.  Does the extra expenses carry over to next year?

[Critter]

It goes on the Sch E and it depends ... the loss may need to be carried forward.  Do NOT enter the property as an asset ... since you do not own the property you do not take depreciation. 

[JamesG1]

You do claim the income as rental income on Schedule E of the 1040.  

The rent payment that you make to your landlord and current operating expenses would be ordinary, necessary and deductible expenses.  See this help.

A rental loss is not so clear.

Rental income loss is a passive activity loss and passive activity rules are complicated.

You may be eligible for an exception to the passive activity loss rules.  See this help which explains:

• the $25,000 rental loss,
• the active participation rules, and
• the modified adjusted gross income limitations.

[Hal_Al]

What are the details of how and why you are renting out property you don't own?

[Carl]

For starters, those that have responded in this thread thus far are making assumptions. So their responses are not based on any facts, since no facts are as of yet, provided. Please explain how it is you are receiving rental income for property that you do not own. Perhaps you are a renter yourself, and you are just sub-letting one of the rooms in the house you are renting?

This matters because you can't depreciate property that you do not own, yet you still have to enter "something" into the assets/depreciation section. How you will deal with reporting this income depends on *your* specific and explicit situation. So please provide details and explain. That is the only way possible for you to be absolutely certain that the responses you get are "IN FACT" correct.

[kimberlyrea2]

Thank you all for the replies.  I appreciate the help.  Basically my step father who is of no legal relation to me has rental property.  He had a property that needed to be remodeled before it was suitable to rent.  He allowed me to repair it and get it ready to be rented with the agreement I would control that property going forward.  He is going to let me manage that property and retain any income from it.  I finished up the remodel in Sept 2019.  Rented it in Oct 2019 and it has remained rented since.  I have taken rent for Oct,Nov,Dec of 2019.  I know this is an uncommon situation.  At some point he is going to put the deed to the property over into my name but for now it is still currently owned by him.  So first, this is my first time filing taxes with rental income so that part is new to me.  Second, the expenses to remodel the property are over what I have made in the 3 months of rent for 2019.  Now, I will come out ahead with profit in 2020 and going forward.  It threw me off when I tried to put in my income for this under rental and the first question was "income on a property you own".  I could go ahead and click that I own it and proceed with the income amount and whatever questions after and I assume just skip any depreciation areas since I don't technically own it?  Also I wasn't sure how/where to put in my expenses which actually exceed the income from it on the first partial year.  Would that just zero out my income on it for 2019 and then the leftover expenses would apply to the income next year?  Again thank you for all the help and suggestions.  I appreciate it.

[Critter · Accepted solution]

Ok... you are really acting as the rental agent. 

The owner of the property needs to report the rental on the Sch E and report all the income and expenses plus take the depreciation on the property.  The improvements you paid for are HIS expense that probably need to be capitalized and depreciated.  If you paid them and did not get reimbursed yet then that is something you need to work out with him ... you cannot deduct these costs.  In action you technically  loaned him the money to fix the property even if you did the work yourself. 

Then he pays you a fee for your management of the property which he takes as an expense on the Sch E. 

Now you are in the rental BUSINESS and the income you earn needs to be reported on the Sch C where you can deduct any business expenses you incur. 

I Highly recommend you both  seek local professional assistance to get this situation handled properly on both your returns.  And you may need to  talk to an attorney to get this agreement in writing if needed. 

[kimberlyrea2]

Ok, so ideally this should go 1 of 2 ways from what I understand from @Critter 's comment.

Either my step father should put the deed to the property in my name which will simplify everything.  I can then fill out the taxes as the owner of the property, utilize the remodel expenses against the income from it and take the depreciation on the property all in the Sch E area.

OR

My step father should report the property as he normally does, claim the income, claim the expenses which would include the remodel expenses PLUS my "salary" as a rental agent which would be equal to the income from the property, and he would also take the depreciation on the property.  THEN I would file my income from my rental agent salary under the Self Employment section at turbo tax which is the Sch C area.  I could then input expenses on that income such as trash pickup, yard maintenance which I pay for out of the income on that property.  Does that sound correct?  I really never though of it in this way but it does make sense to me now that you brought it up in this way.

[KurtL1]

Yes, you are correct. However, property managers usually will deduct the expense amounts from the rent they collect for the owner before they send the funds to them. You would not deduct these expenses from your income. 

Expenses you would incur as a property manager would be supplies, vehicle expense on travel to the rental, postage, and depreciation on office equipment and computers you use. 

[kimberlyrea2]

@Critteror anyone else that can weigh in.  I got to thinking about my option 2 mentioned above where I am a "rental agent" receiving income for my services.  You said that would be entered under the Self Employment Sch C area since it was a "buisness" income.  Wouldn't I from that perspective just be an employee of my step father's rental business so he would need to provide me a W2 or 1099 for contracted work, something like that, and I would enter it in the same area with all my other normal income?  If that is the case wouldn't that get into other issues where as an employer he would have to be handling all of the social security and federal taxes etc on me as an employee?  OR would none of that be needed, I would just do as you mentioned the first time by putting my reported "income" into the Sch C area with associated expenses on my end?

[KurtL1]

As a rental agent you would not be an employee of your father, but an independent contractor. You would deduct your Management Fee from rental receipts before you submit them to your father. You would be the person to issue a Form 1099-MIsc to your father with the gross rental income in box 1.

If your father wanted to hire you as an employee to manage his rental properties, he would be required to obtain a EIN and issue you a W-2. He would also need to withhold taxes on your and make deposits of the withholding and his portion of the Social Security and Medicare.

[kimberlyrea2]

Thank you everyone for the help.  I also spoke with a local CPA today to get their opinion.  They recommended against going the full route of getting a 1099 as an independent contractor for my step dad saying it would end up costing me more due to having to pay both sides of the social security, etc.  They said I should just go on into the section for rental income (Sch E) to enter the income and expenses (not the remodel expenses) but skip the sections on assets and depreciation since I don't actually own the property.  That will allow me to report the income and expenses on that income for my taxes.

As for my step dad's point of view he could show the remodel expenses (we will work out the compensation for those costs), any depreciation, etc but just wouldn't show any income on that particular property.

Hopefully for our specific situation this will be sufficient.  Going forward though I think we need to work towards just having him sign the properties over to my name which will simply everything and I would be able to put in everything in the Sch E section like a normal property owner.

[Carl]

Either my step father should put the deed to the property in my name which will simplify everything.

It simplifies nothing. It is an absolute and provable fact that "YOU" did not own the property in 2019. Therefore you can't report anything concerning this property on SCH E on "your" tax return. Period.

My step father should report the property as he normally does, claim the income, claim the expenses which would include the remodel expenses PLUS my "salary" as a rental agent which would be equal to the income from the property, and he would also take the depreciation on the property.

There's really no "should" about it. Your step-dad as owner of the property doesn't have any other "legal" choice.

You said that would be entered under the Self Employment Sch C area since it was a "buisness" income. Wouldn't I from that perspective just be an employee of my step father's rental business so he would need to provide me a W2 or 1099 for contracted work, something like that, and I would enter it in the same area with all my other normal income?

When you take your car to the repair shop to have it fixed, do you issue the repairman a W-2 or 1099-MISC? Of course not. This is no different.

They recommended against going the full route of getting a 1099 as an independent contractor for my step dad saying it would end up costing me more due to having to pay both sides of the social security, etc.

So you have a CPA who is recommending you commit tax fraud (which is a federal crime)?  And you're actually considering that? For starters, there is no requirement for the owner of the property to issue 1099-MISC to anyone. But as a property manager that is required to report income/expenses on SCH C there is a requirement for you to issue a 1099-MSIC ***ONLY*** ***IF*** you paid your step dad more than $600 in 2019.

Based on what you're saying, *YOU* didn't pay your step-dad jack squat in 2019. You kept 100% of the rental income for "YOU" as your management fee. So there would be no requirement for you to issue a 1099-MISC. Your step-dad will claim that rental income as "his" income, and then in the expenses section turn right around and report it as a rental management expense that he paid to you as his property manager.

Then you report the income on SCH C of your tax return, and on the SCH C you'll basically indicate that you are in the property management business.

The absolute worst thing that can occur tax-wsie is for your step-dad to to a quit-claim deed and deed the property to you. If he does that, then it's considered a gift. Your step-dad is required to file IRS Form 709-Gift Tax Return with the IRS when/if he does that.

On top of that, it hurts you big-time in the long run. When your step-dad gifts you the property, he also gifts you his orriginal cost basis *and* all the prior depreciation already taken. So if/when you sell the property in the future, the tax liability you will incur will be a real killer.

You "REALLY" need to get rid of your current CPA. They are no trying to help you. They are only interested in what's in your wallet "right now".

[kimberlyrea2]

@Carlthank you for the detailed explanation.  Maybe I misspoke or didn't fully put down all of my thoughts as I was taking in all of this information from all of the various replies but I think we are good even according to your post.  Let me respond point by point.

1.  Sorry, what I meant by that was going forward we could work out the best way for him to get the properties into my name which would make it more simple for me to file everything in the future.  As for this year you are correct it wouldn't do anything and we aren't planning to do that with this property at this time.  I was just meaning going forward with other properties.  Of course the best way to do that we would have to determine and do more research on to find the optimal way to do that for our situation.

2.  I am not a tax expert obviously so when I said "should" that is my way of saying I think that is right but waiting on you all to confirm that for me.  So yes he would be filing as you say.

3.  I didn't understand how and who is supposed to provide those documents.  I have only ever gotten W2's or 1099s from any employers I have ever worked for before.  I may be wrong but I don't believe we have to get that complicated with it after looking over everything.  I would just simply fill out my income and expenses on that rental income in the Sch C area as a "property manager".  My step dad would show the income as you say and then turn around and report it as an expense as you say.

4.  I love the detailed breakdown here.  So yes according to that I wouldn't have to do the 1099 and just put in my part into the Sch C section.  Then my step dad does as you mention claiming the income then expensing it right back out.  Which is basically what the CPA explained to me to do as well.  He also didn't charge me anything for the discussion we had over all of this.  As far as moving the property deed over to me thanks for the info, and yes we will have to look into this in more detail to figure out the most optimal (legal) way to do this so I don't get killed as you say in taxes and fees, etc.  Maybe we go the route of Inheritance as opposed to the gift route? 

Again thank you all for the information/comments/and help.  I appreciate it!

[Carl]

Sounds like you got a handle on it now. One thing I can provide you a bit more information on, is concerning your acquisition of the property.

If the property is gifted to you, then as stated before you are also gifted the original cost basis and all prior depreciation taken.  Here's a sample scenario of how that can kill you when you sell the property in the future. My numbers are guestimates, but close enough to help you "see" this.

- Originally purchased by step-dad in 2000 for $50K with 40K allocated to the structure and $10K allocated to the land. So the $40K is what gets depreciated over 27.5 years.

Step-dad gifts you the property 2020 at which point the FMV of the property is $200K. But you don't get that cost basis since it's a gift. He has already taken $25K of depreciation over the prior 20 years he owned it.

When you enter this on your return, you have to reduce the cost bases of the structure ($40K) by the amount of depreciation already taken. So your cost on the entire property is now $25K with 10K allocated to the land and you will start depreciation all over again on $15K over the next 27.5 years.

In 2025 you have taken $5K of depreciation and you sell the property for $250,000. Your adjusted cost basis in the year of the sale is $25K minus the 5K of depreciation you already took, making your adjusted cost basis $20K. So with a sale price of $250,000 not only do you have a $230,000 taxable gain on the sale, that gain also gets included in your AGI and you will be in the highest tax bracket.

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The other option is that you purchase the property from your step dad at it's current FMV ($200K in my ficticious scenario) which means when you sell in 5 years for $250K you may have taken maybe $10K in depreciation. That makes your adjusted cost basis for the sale $190K giving you a $60K gain, which has a better chance of keeping you in a lower tax bracket. Of course, that depends on your other sources of income too. If your income would be say, $160K before taking the rental into account, then it really won't make that much of a difference to matter.

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The third option is that your step-dad leave it to you in his will and you inherit the property after he passes. But depending on his current age and health, that could be really long time. However, if you inherit property, your "cost basis" is the FMV of the property on the date of his passing (not the date you actually get legal ownership of it.) So if he passed away today, the FMV of the property in my ficticious scenario would be $200K and that's your cost basis "forever" so long as you own the property. So if after inheriting it you turned around an immediately sold it for $200K, every single penny of that $200K would be tax free income. You would only pay tax on any amount "over" $200K if you sold it for more than the cost basis established upon the passing of your step dad.

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The fourth option is an Seller financed sale. I myself am totally against seller financed sales of real estate, because in my limited experience with them (not my personal experience, but the experience of those I know who have done this) the foreclosure rate on a seller financed sale is 100%.  Generally, the probability of the buyer stopping payments in the first two years are above 90%. THe changes if the buyer stopping payments in the first 5 years are 100%. Payments stop for a number of reasons, the primary one being that the buyer loses their employment, and the 2nd most common reason being that the buyer dies, and the spouse or those who inherit the estate of the deceased doesn't have the means to continue payments.

However, a seller financed loan is an option that even though I"m biased against them, I don't see that as a valid reason to deny you or anyone the possibility for their personal consideration. With a seller financed loan it should still be handled by a real estate attorney to ensure all the paperwork is in order on the legal front, so that the buyer can claim all those expenses that go with home ownership - such as the mortgage interest deduction. This is something that I would not expect a CPA or tax preparer to kn ow that much about beyond the tax aspects. For the legal aspects you'd really need to seek out a real estate attorney.

Just be aware that even on a seller financed loan, if you default on the payments it "will" destroy your credit. But by the seller financing it at the current FMV they can choose to claim their taxable gain all at once (bad idea) or over time as they collect it, thus keeping them in the lower tax bracket area.

For the buyer, if you buy at the current FMV of the property ($200K in my fictitious secenario) you get what you paid for the property as your cost basis, and don't have to wait for your step-dad to die to get that cost basis upon inheritance.