Do I need to report an income from a property rental overseas if property is operated by other non US person (a power of attorney) and all the income remains overseas?

[DoninGA]

If you are a US citizen or US resident alien then you are required to report all of your worldwide income on a federal tax return.

[OK_I]

Thank you for response. Let me rephrase. If I delegate all my rights on  property (beside the right to sell)  to other person and  that person decides to use this property for rental, do I,  as an owner,  still need to report his income as my income?

Thanks.

[DoninGA]

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@OK_I wrote:

Thank you for response. Let me rephrase. If I delegate all my rights on  property (beside the right to sell)  to other person and  that person decides to use this property for rental, do I,  as an owner,  still need to report his income as my income?

Thanks.

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Assuming that you will never have access to that rental income, my first response would be No you would not report that income.

However, let me ask a few other folks for their opinion - @Opus 17  @pk  @tagteam 

[Opus 17]

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@OK_I wrote:

Thank you for response. Let me rephrase. If I delegate all my rights on  property (beside the right to sell)  to other person and  that person decides to use this property for rental, do I,  as an owner,  still need to report his income as my income?

Thanks.

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I don't know how that would be treated under the law.  

From one point of view, the ability to sell a property is the quintessential condition of ownership.  For example, if my father gifts me his house but retains right of survivorship, that means I can't sell the home until after he dies.  From the IRS point of view, I don't actually own the home, and when he dies, I inherit a stepped up basis.  (If he gifted me the home in fee simple, then I am the owner because I could sell the home and force him to move, so that is treated as a gift with a gifted basis instead of stepped up basis.)

Now, that may seem to have little to do with rental property, but it seems to me that if you are the owner insofar as you are the only person who can sell the property, and you alone benefit from the sale of the property, then you haven't delegated anything that would be meaningful in a tax sense.  If and when you sell, you would certainly owe capital gains tax on the gain, and you would certainly owe depreciation recapture tax for depreciation that you took or could have taken while the property was a rental, even if you didn't report the income and actually take the depreciation.

Most of the time, a well managed rental shows little profit on paper anyway, and I don't see what you are trying to do by giving away the cash flow without selling the property now.  If you don't want to be burdened by it, just sell it.  I understand that many people are frightened or intimidated by income taxes but I can't understand giving up thousands of dollars to avoid a few forms, even if you have to pay an expert a portion of your profits to help you.  

I feel there is something else underlying the situation that you haven't explained.  I suspect that it is not possible to avoid the tax responsibility by "delegating" your rights in the property except for the right to sell, because the right to sell is the only right that matters (it's the right of ownership that all other rights depend on.)  But I suggest you get professional advice. 

[tagteam]

I will second the suggestion to seek professional advice, in the form of legal counsel most likely, since the property is located in a jurisdiction other than the U.S. (which could serve to exacerbate any other issues).

Regardless, a property owner (whether real estate or personal property) can "delegate" or "give away" any one of the rights from the bundle of rights incident to ownership.

How the IRS will view the arrangement will depend upon a number of factors but income-shifting does not tend to be viewed favorably in most circumstances.

[Critter]

If you have the right to the income the rental brings in, even if the net is a loss on the property after expenses, you are still required to report this on a schedule e on your us tax return. The fact that none of the money is brought back into the US is immaterial when it comes to taxes.

[Carl]

Where the "power" is really doesn't matter. Whose money is it? If the rental income is "your" money, then you are required by law to claim/report it on your U.S. tax return.

[Anonymous]

you own the property.  therefore I conclude, you must report all income and take a deduction for the fees the other keeps.  You would even have to file a 1099 to report that since he is a US citizen.    where you benefit and you must  - is by taking depreciation on the foreign property. it will have a 30 year life. depreciate straight line.  if you fail to take the depreciation you are entitled to, when you sell, the IRS would say you have taken the depreciation and must report the sale on that basis.  The rule is the larger of depreciation allowed or allowable. 

[pk]

@OK_I , having read through all the responses from @DoninGA , @Carl @tagteam , @Critter , While I generally agree  with the contentions and suggestions, I do not agree  that a Power of Attorney  is "useless".  My position is , assuming that you are not just trying to shift income stream from US taxation, but have valid /legal reason in the jurisdiction where the property is located  ( i.e. legal in that country )  for delegating your  rights ( except for  disposition i.e. ownership right) to another, it will be honored by the IRS -- absent a conflict with the tax treaty  with that country .  It really is no different  than   when one lets a friend/relative  the use of the property that you own under a PoA or similar written agreement, if he then chooses to rent the property out and collect rent.  You are not using the property as rental property and the income is not coming to you --- I am assuming here that  this is all legally documented and you are not deriving any benefit in any form.  Ditto for the case where I own blank land , gifts its use to a sharecropper  (and he pays me nothing).  

In all such cases the question is going to be motive-- why did you do it  , how did you do it  and did you receive  any benefits  from this  transaction.

Therefore , I agree with all respondents, that you should consult a tax attorney  both here  and in the country where the property is located so that you do not  run afoul of the laws in either jurisdiction.

pk

[OK_I]

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? 

[pk · Accepted solution]

@OK_I , if the simple situation is that you are renting out  your property, have another manage the property for you , then the easiest is to file a schedule-E recognizing  1. the rental status of the property; 2. show the gross income; 3. recognize the expenses  including the amount being paid to the "agent"; 4. recognize the depreciation. This will result in a loss for you  for the US return and typically you will be able to offset your ordinary income and therefore pay less in taxes . The other effect will be that your basis in the property when disposing , will be adjusted as follows -- reduced by the accumulated allowed depreciation and increased by cost of any and all improvements over the years .  Thus your gain at disposal will be affected  and additionally that portion of the gain that is due to the  accumulated  depreciation will be treated as ordinary  gain and  rest  as Capital gain.   In this simple  situation  you may or may not need  tax attorney consultation --a tax professional  may be sufficient or you can do it yourself.

Anything more I can help you with ?

[Opus 17]

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@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? 

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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. 

[tagteam]

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@Opus 17 wrote:
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.

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Corporations accomplish the nonrecognition of income (earned overseas) by establishing foreign subsidiaries and not repatriating funds to the U.S. (at least until recently). It would clearly be a bit more involved but the effect would be the same; the income from the rental would never be repatriated since it was essentially given away in the foreign country. 

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@Opus 17 wrote:
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. 

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That is primarily the scenario @pk suggested in her answer and is probably the safest, most logical and reasonable approach to this matter.