parental gifts and rent

[pickly2023]

Hello.  I am in the process of purchasing a second home in my hometown, and I am going to let my recently widowed mother reside there rent free.  We have very few reservations about this arrangement in light of our overall relationship.  We do have one potential issue, though.  My mom always had planned to share a little money with me over the rest of her life via substantial birthday and xmas gifts.  Are we creating a situation where she can never give me significant sums b/c they will be viewed as rent?

PS - an idea I'm considering is having us enter an agreement making clear that mom can stay in the house until her death without ever paying rent, as that truly is our intent; it seems as if such an agreement might be relevant if future gifts were argued to be rent.

[Critter-3]

I don't know what your hesitation is ...  you have a home that a family member will live in ... no rent is required. This is not reported on an income tax return even if they help to pay some of the holding costs or utilities.

Then if you get gifts from anyone in any amount this is not an income tax situation.  If the giver gives more than $16K per year to any one person then the giver needs to file a gift tax return.  

[NCperson]

clarification - for 2023, to avoid a reporting requirement, the gift limit is now $17,000 🙂 

[pickly2023]

Thank you so much.  My only hesitation is that, during an audit (or perhaps in some other context), the government might point to the gifts and say that they actually are rent disguised as gifts.  In other words, they might think we are trying to circumvent tax on rent and rent laws by setting the payments up to look like gifts.  That very much is not our intent, but I can see how someone might make the argument, especially if my mom wound up giving me, say, $10,000 every Christmas.  Do you see what I mean?  I probably am overthinking this, to be clear, but I just don't want any trouble.

[Critter-3]

Ok ... if the rent is less than the fair market going rate it is NOT a rental so you have nothing to worry about if she pays nothing or very little or only pays the utilities.

[pickly2023]

Thanks.  The gifts I have in mind -- say, $10,000 per year -- would come awfully close to the market rental value of the home (given the area where the home is).  That's part of my concern.  If mom were thinking of just giving me, say, $1,000 per year, I'd be less inclined to worry.   

[Critter-3]

You are really diving  into the deep end of the pool for absolutely no reason.  Family members can help each other out anytime they wish ... you do NOT have a rental situation of any kind. 

[pickly2023]

Thanks for your help, and I hope you are right.  I'm a cautious person and know someone who got burned in a similar scenario some years back.  I'm just hoping to get as many takes as possible.  I appreciate yours.  I'd love to hear from anyone else on this topic as well.

[NCperson]

@pickly2023 - let's go all the way back and define what is a rental and what is personal use of a home.  The IRS separates the world between the two - there is no overlap based on their definitions. 

here is the definition of a "personal use" and therefore anything else is rental use. 

Note that when ANYONE uses your home and pays less than the fair market price to live there, that is a personal use day and not a rental day. And as such, any income received from a personal use day is not reported as taxable income. 

As long as the sum of the gifts is less than the fair market rental of the home you are permitting your mother to reside in, there can't be an arguement.  It's not 'rent' to begin with. 

https://www.irs.gov/pub/irs-pdf/p527.pdf

page 18: 

What is a day of personal use? A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons.
1. You or any other person who owns an interest in it, unless you rent it to another
owner as their main home under a shared equity financing agreement (defined later).
However, see Days used as a main home before or after renting, later.
2. A member of your family or a member of the family of any other person who owns
an interest in it,unless the family member uses the dwelling unit as their main home
and pays a fair rental price. Family includes only your spouse, siblings, half siblings, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). 

3. Anyone under an arrangement that lets you use some other dwelling unit.
4. Anyone at less than a fair rental price

[pickly2023]

Thank you so much.  I follow and am happy that the law tracks commonsense a bit on this point.  I would welcome any further input, steers, or advice.  Thank you to both of the responders so far -- you've really helped me.

[TomD8]

As long as your mother's gifts to you in a single tax year do not exceed the annual federal gift tax exclusion (which is $17,000 for year 2023), then neither she nor you has to report those gifts on your tax returns.  In fact, the recipient of a gift never has to report the gift on their tax return.  (There are some exceptions for gifts from foreign sources.)

If your mother's total gifts to you in one year exceed the federal gift annual exclusion amount, then she must file a federal gift tax return, IRS Form 709.

[pickly2023]

Thank you.  Yes, I believe I understand the gift tax aspect, including the lifetime exclusion.  My question goes more to whether gifts might be misconstrued as undeclared rent under the circumstances.  Based on certain answers I've seen here, it seems unlikely that will be the case so long as the gifts are of a certain size.