My parents own a house, but I have paid all payments, taxes, etc and I rent the house out as if it is mine. I claim the income and pay taxes on it. Is that legal?

[jcalhoun1974]

My parents bought a house for me to use as a rental house, the mortgage is in my parents name, but I paid the down payment, mortgage payment, taxes and insurance on the house.  I also rent the house out to tenants.  I collect the rent, maintain the property and do everything as if it were my house.  We had not considered the end of year tax situation until today.  I planned to claim all the rental income on my taxes, my parents will not claim anything as far as taxes go.  A couple questions.

1. Is this arrangement ok, I don't want to get my parents into tax trouble.  I have read one recommendation for them to lease me the property for $1/month and allow me to sublease it.  What is the best option?

2. Does this break any IRS laws?

[xmasbaby0]

Only the person/people  whose name is on the deed and on the mortgage--the person legally obligated to pay for the house--is allowed to claim the mortgage interest and property tax on their tax return.

[macuser_22]

And they cannot claim it if they did not pay it.  If you paid their mortgage for them then that is a non deducible gift and if over $15,000 for the year to one person would require a form 709 gift tax return to be filed.

It sounds like you are managing the property for your parents so the rental income would be theirs to report.

I would suggest that you sit down with a tax professional (not a store front tax mill) but a professional that deals with real estate income and tax law.   $1.00 agreements can be looked upon as shams to avoid tax.   You need professional help.

[jcalhoun1974]

Great, thanks for the advice.  I didn't like the $1 agreement either, it seems pretty shady.  I'll talk to a professional and get it right!

[rainydaze]

Do you have an actual interest on the house?  Did they put you on the title even though you're not on the mortgage?

[jcalhoun1974]

Yes, I am on the title of the house.  The tax lawyer is saying that makes all the difference, and makes this legit.  Would you agree with that?

[Opus 17]

Well, you are a co-owner at least, which helps.  I'm not sure if that means you can report all the income and expenses or if you have to split it between the owners.  @Carl ??

[Carl]

I need more information first please.
 - In what tax year was the property purchased?
- In what tax year was the property converted from personal use, to residential rental real estate? (This is assuming it was not purchased as rental property to begin with, but was instead purchased using a "home loan" as opposed to an "investment loan")

[Opus 17]

 If you don’t have an ownership interest on the deed, then it sounds like you are a rental agent acting for your parents. Your parents need to report the income and pay the taxes. If they then give you the rest of the proceeds, that’s fine but you should not be reporting the income or deducting expenses. 

 There may be a rare exception if you have a “constructive ownership” interest even though it is not on paper.  But this is very tricky, and requires an analysis of the specific facts and circumstances of your case compared to different past Tax Court cases that have considered similar issues, and is far outside the ability of this forum to help you with. 

I agree that you should see a local professional.