Is this a rental property or a dependent situation?

[jerifeaster1]

I purchased the home that my MIL and her sister were renting when their landlord no longer wanted it. My brother in law sends me a check for some of the rent because his dogs live there. Both MIL and her sister live on SSI payments with no other income. I am trying to figure out how to handle this situation on my 2017 taxes. Do I treat it as a rental property? Do I consider my entire contribution as support and claim them as dependents?  Any insight or things I should consider?

[Critter]

This doesn't sound like a true for profit rental situation ... instead you have a second home that your family lives in and helps with the bills. 

As far as claiming them as dependents they would need to pass all the qualifying tests : 

 Who can I claim as my dependent?

You can claim a child, relative, friend, fiance (etc.) as a dependent on your 2017 taxes as long as they meet the following requirements:

Qualifying child

·         They are related to you.

·         They aren't claimed as a dependent by someone else.

·         They are a U.S. citizen, resident alien, national, or a Canadian or Mexican resident.

·         They aren’t filing a joint return with their spouse.

·         They are under the age of 19 (or 24 for full-time students).

o   No age limit for permanently and totally disabled children.

·         They live with you for more than half the year (exceptions apply).

Qualifying relative

·         They don't have to be related to you (despite the name).

·         They aren't claimed as a dependent by someone else.

·         They are a U.S. citizen, resident alien, national, or a Canadian or Mexican resident.

·         They aren’t filing a joint return with their spouse.

·         They lived with you the entire year.

·         They made less than $4,050 in 2017(not including SS benefits).

·         You provided more than half of their financial support. More info

When you add someone as a dependent, we'll ask a series of questions to make sure you can claim them.

Related Information:

·         Does a dependent have to live with me?

·         What does "financially support another person" mean?

·         Can I claim a newborn baby?

[Hal_Al]

A Qualifying Relative does have to be related to you or  live with you all year. Living in your 2nd home does not count as living with you. A Mother-in-law meets the relationship test, but an Aunt-in-law does not. However, if you file a joint return with your spouse, then you can claim your spouse's aunt.

Social security doesn't count as income, for the income test, but social security money she spends on her self does count as support not provided by you, for the support test. Money she puts into savings & investment does not count as support she spent on herself. Note that a parent (or parent-in-law) is closely related so there is no requirement that she live with you at any time, during the year. But if you provided a home it helps your support case. If no one person (or married couple) provides 50% of the support (for example your brother-in-law is  also sending support), then a "multiple support agreement” (IRS Form 2120) can be used, to allow you to claim the dependent. https://www.irs.gov/pub/irs-pdf/f2120.pdf

The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf The support value of a home is the fair market rental value, divided by the number of occupants.

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I agree that you do not have a rental situation and do need to report rental income. You do not need to report the income, regardless of whether the residents are your dependents or not. It is not an either/or situation. 

[marcjy1]

I have a similar situation, my niece who is on SSI rents a room from me in my home under a rental agreement that is with  Social Security as part of her SSI package.

I have filed as head of household with her as a qualifying relative dependent  In previous years prior to her being on SSI. 

 So, if I provide more than half her support  utilizing the IRS Worksheet for Determining Support in Publication 501, can I again file as head of household even though she also rents a room from me? Thank you.

[VictoriaD75]

It depends. To qualify for Head of Household filing status, the following must apply:

• The taxpayer must be unmarried as of December 31, 2019
• The taxpayer must have provided more than half the cost of keeping a home. This includes rent/mortgage, taxes, utilities, meals, etc.
• The home must have been the principal residence of a dependent child or other qualifying dependent relative

Guide to Filing Taxes as Head of Household

You must have provided more than half of her support. If the SSI pays her rent, that is considered part of her support. You would have to determine if you are still paying more than half of her total support. So, if most of their support comes from government assistance, you won’t be able to claim them as dependents.

She must also have gross income of less than $4,200 and lived with you for the entire year. If the SSI is tax exempt, it is not included in gross income.