Hi, I own and live in my own home with my husband in NC. I purchased a home with my son in VA, with the plan that he would live there full time. He lived elsewhere for the first 18 months from the purchase date of the home. We renovated, advertised and rented the home out at FMV during this period. My son did not pay for any expenses during this time or accept any of the rental income (he also did not contribute to the down payment of the loan etc.). He only provided his signature on the bank loan. He now lives in the home full time. Does my son have to amend his tax return for those two tax years to report in some way that the house was rented?
Thank you in advance!
KT
My son did not pay for any expenses during this time or accept any of the rental income
Then who did pay the expenses and receive the income? You? If so, then "you" have to report all the rental income/expenses on your tax return. If it's been for the last 18 months, that means "you" need to amend your 2020 tax return to show the 5-6 months of income received in 2020, plus depreciation and other expenses. You need to do this before you can even start your 2021 tax return so that your starting figures imported from the amended 2020 return will be correct.
Great to hear! I did not want him to have to claim anything he did not receive. Someone told us they thought he would have to simply because his name is on the loan. Thanks!
Someone told us they thought he would have to simply because his name is on the loan.
Not so. They who receive the money are required to report the income/expenses and take the depreciation. However, when the home is sold, you will have to reduce your share of the cost basis by the depreciation you took. If you do not take that depreciation as required by law, then you will still have to reduce your share of the cost basis by the depreciation you should have taken. So you lose either way.
One other things to clarify.
because his name is on the loan.
Whose name is on the loan doesn't matter when it comes to the rental income/expense stuff. It's the name(s) on the deed that matter.
Thank you for the additional information. My son's name is on the deed as well. Does this change the answer to my question?
My son's name is on the deed as well.
No it doesn't change anything for tax reporting on the rental income/expense front. if you are the one who received all the income, then you are the one who has to report it, and claim all of the depreciation.
Things can get tricky on the tax front in the future when the property is sold or otherwise disposed of. But you'll deal with that when the time comes.
The most important thing is that since you are reporting all rental income/expenses on your tax return, you *must* keep a record of the depreciation taken, because that will matter in the future when there's any type of an ownership change. That includes doing a quit claim on the deed to gift your half of ownership to your son.
Do you mean I lose in the fact that when and if he and I sell the home, I will lose being able to claim the depreciation amount that is amortized over the 15 year period?
He and I were considering renting it out when he upgrades (on his own) to a larger home, however, we may just sell it (purchase price 90K, current market estimated at ~140K).
I will lose being able to claim the depreciation amount that is amortized over the 15 year period?
Two things:
- No. When you sell the property, you are required to recapture the depreciation and pay taxes on it in the year of sale. That's basically decreasing your cost basis. Two things are likely/possible with that.
1- The recaptured depreciation is added to your AGI.
2- The recaptured depreciation has the potential to bump you into the next higher tax bracket.
- Next, residential rental property is not depreciated over 15 years. It gets depreciated over 27.5 years.