[Anonymous]

I swear I have seen, heard, and read info about this, but am finding very little now that I am looking it up, so I’m hoping some of you can point me in the right direction (next step is to call the IRS, but I’m hoping to find something before going that far!).

Situation:

Non-married couple bought house, but in order to get better financing, house was financed through grandparents of one member of couple

Couple has lived in said house since purchase

Mortgage payments (plus extra principal) have been made through grandparent’s bank account to ensure proper application to loan, so couple has written check to grandparents and grandparents have written check to mortgage

In grandparent’s mind, house belongs to grandchild & significant other; in the eyes of the law, I assume that the grandchild and significant other would be considered tenants and grandparents

Question:

Tax-wise, what implications does this have? Seems like I read somewhere (like exam prep materials or accounting courses or something like that) that in a situation like this, the grandparents have to pay taxes on imputed rental income equal to fair market value of the rent that was foregone, and that rental value then counts as a gift to the grandchild, so if it exceeds the gift threshold would require a gift tax return etc., but I can’t find anything about it from any authoritative sources now (irs.gov, or even something more reputable than a random person whining on their personal blog). I’ve also found things indicating that the grandkids would need to report income rather than a gift for the amount of free rent, though I don’t think that is right. So, any insight or info would be appreciated!

[mla1169]

I could be mistaken but where the grandchild is giving the mortgage payment to the grandparent to deposit and pay the mortgage payments, it would be treated as rental income (which happens to be equal to the amount of the mortgage payment) and wouldn't involve any other considerations. The rent forgone and imputed rent applies when the family member is living there without paying anything but it doesn't sound like that is the case.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Anonymous]

The amount being paid towards the mortgage is more than a fair rental value, though, since the grandchild is paying it off accelerated (pays about 2x the mortgage payment), so if all of that has to count as rental income to the grandparents, they're going to have a large rental income tax bill. I expect they'll have to pay some rental income tax (which they don't understand since they say “It's their house, we just got the financing”, but I'm working on explaining it to them 🙂 ), but to pay on the additional principal payments wouldn't really be right either. Best I can come up with is that the grandchild should consider part of their monthly payment as rent and part as a gift to their grandparents, or count the payment entirely as a gift to the grandparents and the grandparents are giving a gift of free housing and tax on fair value, but not sure which is right. If the grandparents will need to count everything paid as rent, then I'm going to advise the grandkids to just pay the minimum payment the next couple months so that the total for the year is a bit closer to fair rental value.

[LaxCPA]

Is the house currently in the grandparents name? After the mortgage is paid is the intention for the title of the house to be in the grandchild's name? If yes, I would look into setting up an installment sale between the grandparents and grandchild and there would not be any taxes on the principal because the selling price would equal to the purchase price. The grandparents would probably have to claim seller financed mortgage interest income but hopefully that would be offset by the interest paid to the bank if they itemize their deductions.

This is just a thought and I would do a lot more research before actually putting this on a tax return.

[rupert]

I think LaxCPA is on the right track. I'm also curious as to who is on the title of the property?

I do not see this as a rental arrangement.

FAR 90 Oct. 6, 2012
AUD 96 Dec. 8, 2012
REG 93 May 30, 2013
BEC 84 Aug. 31, 2013

NIU CPA Review Correspondence and Wiley Test Bank

[Anonymous]

Thanks for the feedback all. It's good to get some more perspectives and some more people to bounce the ideas off of.

Title is in grandparent's name. One complicating aspect is that the grandparents are also helping pay off the house (and they view that portion as a gift to the grandkids). The grandparents are paying more per month than the grandkids and plan to transfer title as soon as the house is paid off. I assume that if they did it as a installment sale, then the grandparents would be able to count just the part that remains on the “loan” to the grandkids as a gift at that time, which would likely get them below the threshhold for gift tax return (housing prices are low around here, so if both grandparents counted their gift allowances and gave it to the grandchild and significant other, that'd be enough total gift allowance to cover the investment that the grandparents have made).

What they really should've done is gotten their accountant's and/or lawyer's advice before entering this paperless agreement – I feel like any decision that's made now will be subject to scrutiny given that it's long after the fact and there wasn't a written agreement at the start. However, since I can't go back and change the past (and since they consider me an expert adviser since I'm a CPA, even though I work in industry), I'm trying to determine the best way to advise them at present.

[mla1169]

As a CPA who has never worked in tax myself, I would refer them to someone experienced in these types of transactions. Too much on the line to be googling and asking on a message board for guidance. I was asked to provide some estate tax advice to a family member who considered me an “expert advisor” and I explained that was not my area of expertise-financial statements and cost accounting are.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Anonymous]

Don't worry, I wouldn't make any final decisions based on a message board. 🙂 If I don't tell them to do something, they'll do nothing and play ignorance, so my goal is to find some authoritative information (the right keywords to search on irs.gov or something like that) to find a solid answer or at least enough to convince them of the need to pursue it further.

[Author]

Replies