Rental Income and and Property Taxes

[jart918]

Thanks all

[ThomasM125]

You should not report the rental income if you did not receive it. The individual who paid the mortgage is the only one that can claim that deduction. Since the property is being rented, the mortgage interest can only be deducted as a business expense on the rental schedule E.

[Carl]

His accountant told him he also could not claim the mortgage interest deduction because it came in her name and not his.

That is not "quite" the whole truth. The father has a demonstrated and provable vested interest in the property, and therefore can claim the mortgage interest if he actually paid it.  The IRS has one court case on this that I am personally aware of, which you can read at https://www.irs.gov/pub/irs-wd/01-0072.pdf. There are many more such cases which I'm only aware of through 3rd party sources. It all has to do with what the IRS terms "Equitable Ownership". If you do a google search on "IRS EQUITABLE OWNERSHIP" you'll find many cases on this - albeit not on any IRS website; but many cases still the same.

Bottom line is, the person who receives the rental income and pays the rental expenses is the one required to report it on SCH E on their personal tax return. (assuming this was not set up as a partnership, which would then require a 1065 partnership return to be filed.)

The person who pays the mortgage interest and property taxes only needs to meet two requirements to claim those expenses.

1) Must be legally obligated to pay it (which under equitable ownership in many cases, they could be "considered" legally obligated)

2) Must actually pay it.

The laws on this are significantly more complex, and I have barely scratched the surface. I would suggest you seek legal advice, as if your state taxes personal income it "will" have an impact on state requirements also, and one or both of you could very well be in violation of state tax laws for all we know.

[BillM223]

"I would suggest you seek legal advice, as if your state taxes personal income it "will" have an impact on state requirements also, and one or both of you could very well be in violation of state tax laws for all we know."

Carl has a good point here. 

I am not sure I have all the details, but it seems likely that what you are describing is the intention to commit tax fraud. You do not want to be on the wrong side of this. - " Would there be a problem if we do not report the rental income even though he said he will not report it either? "

Most tax issues can be handled by Enrolled Agents and CPAs. However, when it comes to instances of criminal activity, there is no client confidentiality between you and us Enrolled Agents and CPAs; that confidentiality can exist only between a real attorney who also knows about taxation (obviously, only a few attorneys specialize in tax).

You may find that you will need to file amended returns for the last several years. These amendments might well cause the IRS to contact your father-in-law - and I suspect at that point, you will need legal representation to try to resolve a situation that might be very unpleasant. 

Go get some qualified professional advice.

[Critter-3]

Seek professional assistance ASAP before you get in real trouble.  It may be wise to get off this property all together and especially the mortgage before he stops paying it or the RE taxes and you are left holding the bag.   The saying "no good deed goes unpunished" comes to mind along with "family, business and money don't mix".  

[Carl]

My saying is "friends, family and business do not mix." Mixing changes the entire dynamic of relationships. I would rather have Thanksgiving dinner with family, before eating with my business partner or banker.