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boomtown
Level 3

Rental Income for property you don't own

My father rents out a property that is owned free and clear under his trust (with only him as trustee).

 

In 2023 I think I should to divert 90% of the rental income to his daughter. Even though she's not a trustee, she is the one renting out the property and doing the activities. She won't get to take depreciation out as an expense... though maybe my father should take some percent of the income? He has done a few actions for the property.

 

The daughter will pay a little more in taxes but not much as the rental itself is barely profitable. Their living costs expenses are already intertwined so the destination of the income being changed doesn't cause any disagreement among the people.

 

Sharing this post as an invitation to criticize the strategy, or for others to search and fine. Some keywords: rental income, trust, don't own, maximum investment income

edit: pulled out the EITC component after replies, as it complicates the question

2 Best answer

Accepted Solutions
tagteam
Level 15

Rental Income for property you don't own

This does not sound good.

 

At best, it could be considered a step transaction (income passed from your father to his daughter for no apparent reason other than tax avoidance).

 

At worst, it is a willful attempt to evade or defeat tax in contravention of Section 7201 of the Code.

View solution in original post

tagteam
Level 15

Rental Income for property you don't own

The daughter may do the work of managing the rental, including paying the expenses out of the rental income, but your father is the owner of the property (assuming this is a grantor trust - he is the trustee and sole beneficiary).

 

Your father also has the option of either paying his daughter a management fee or simply gifting her some of the rental proceeds (after he reports that income, however).

View solution in original post

9 Replies
tagteam
Level 15

Rental Income for property you don't own

This does not sound good.

 

At best, it could be considered a step transaction (income passed from your father to his daughter for no apparent reason other than tax avoidance).

 

At worst, it is a willful attempt to evade or defeat tax in contravention of Section 7201 of the Code.

boomtown
Level 3

Rental Income for property you don't own

Thanks for the reply! I'll reconsider it, but if you'd answer one more question, I'd appreciate it, it is the situation that got me looking at this in the first place:

 

The daughter does the work of renting the place out, and the father takes no actions except a few times a year he has picked up the rent check. Isn't it actually incorrect for me to file the rental under his name, since it is the daughter doing the work? The income goes to a bank account just under his name, but she has a debit card for that account and uses it all the time both for rental expenses but also for things like family dinners. What would be the right way of handling the reporting?

tagteam
Level 15

Rental Income for property you don't own

The daughter may do the work of managing the rental, including paying the expenses out of the rental income, but your father is the owner of the property (assuming this is a grantor trust - he is the trustee and sole beneficiary).

 

Your father also has the option of either paying his daughter a management fee or simply gifting her some of the rental proceeds (after he reports that income, however).

boomtown
Level 3

Rental Income for property you don't own

Paying her as a "manager" might make the most sense, thanks! I edited the original question to address just earning rental income off of a property not owned, simpler question/answer

Carl
Level 15

Rental Income for property you don't own

Paying her as a "manager" might make the most sense,

Just to make you aware, even though it may not be an issue for you. In my state, anyone that manages property they don't own on behalf of another (the owner) is required to be licensed in the real estate profession. What specific type of license is required, I honestly can't say. But it may (or may not) be something you need to look into. I'm not privy enough on the laws for this even in my state, since I manage my own rental properties and always have.

 

 

tagteam
Level 15

Rental Income for property you don't own

You are not likely to run into a licensure issue with respect to a daughter and a rental property owned by her father.

 

As an aside, in Florida for example, property managers who hold themselves out as such for compensation need to have a valid real estate sales (or brokers) license.

TomD8
Level 15

Rental Income for property you don't own

Bottom line: regardless of how the money passes to the daughter (gift, salary, etc), the rental income must be reported on the property owner's tax return.  Income that is earned by one person cannot be assigned to another for federal income tax purposes.  What the property owner does with the income after reporting it is a separate issue.

https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-ques....

**Answers are correct to the best of my ability but do not constitute tax or legal advice.
EvSenter
Level 1

Rental Income for property you don't own

If father has this trust as a revocable living trust he can do anything he wants as far as I know. But logically he is going to pay tax on the income if it remains in the living trust. That might be OK, but I think he can give away something like $17K per year per child with no tax consequence to recipient or trustee. It might not be a bad idea to do what works logically. And if the recipient is going to get the property when father dies, she will get the property at the "stepped up" to current value price with no tax consequence if she sells it before it has any increase in value. That is such a good deal, why not suggest it?

tagteam
Level 15

Rental Income for property you don't own


@EvSenter wrote:

That is such a good deal, why not suggest it?


Gifting has already been suggested.

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