Ask the taxgirl: Paying Rent to the Parents

Taxpayer asks:

Thanks for taking my question.

I moved back home last year after I lost my job. I’ve been paying my parents some rent but I can’t afford to pay the original amount that we agreed on. Can they take the difference between what I promised to pay and what I actually paid as a deduction?

I feel bad about the whole thing and I’m hoping that I can give them some good news.

Taxgirl says:

Ugh. You’re soooo not going to like my answer here.

If you’re not paying fair market value for the rent, your parents are not entitled to a loss for the difference.

And it gets worse. They should be reporting the rent that they do receive from you as income on their tax return. On the plus side, they may be able to deduct some of the expenses associated with the rental from the income. This last bit can be tricky because of the relationship between you and your parents and their actual personal use of the home: there’s a huge likelihood that, under the circumstances, no deductions would be allowed at all. Your parents will want to check with a tax pro with respect to their specific situation (the rules on this can be tricky).

And finally, that difference between what you actually paid and what you promise to pay? That’s a gift to you from your parents. And that brings in another whole host of issues.

Bottom line is that this arrangement may feel like a good idea but come April, it’s likely to cause more harm than good. Not only are you not paying what you promised, you’re adding to your parents’ tax headache.

I don’t know what you’re paying but I’m guessing if you’re paying something, you might be able to make rent with a roommate somewhere else. It seems like your parents aren’t amenable to you staying for free. Maybe your parents would consider loaning or giving you some cash to get back on your feet?

I know the market stinks. But my advice is to find a new place as quickly as possible. The tax consequences of your current situation are far from ideal and that can’t make for a comfortable stay.

Good luck and I hope you find a job soon!

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

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Comments

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  2. ThomasT

    The unpaid difference is a gift? Couldn’t they just revise the written agreement (if there is one) to a lower rent payment?

  3. Steve

    In this job market finding employment can take months or even years if you’re unlucky. It’s tough to pay the bills when no money’s coming in.

    If this is such a big issue that the person asking this question is looking high and low to find tax benefits for his/her parents, maybe focusing that energy on working out a deal with their parents regarding housework, yardwork and paying household bills could be a solution.

    Perhaps the parents are being tough on this because they don’t think “Taxpayer” is working hard enough to find a job. If that’s the case, focus all possible energy on finding a job, and maybe try to move in with a friend for now if it’s really uncomfortable with the ‘rents.

  4. Author
    Kelly

    Thomas T, actually it doesn’t really matter what the agreement is. The fair market value of the rent less the actual rent paid equals the gift. In this case, though, the assumption is that the price that the parents agreed to accept as rent was fair market.

  5. ThomasT

    Interesting. When I was a twentysomething working in a restaurant, and like several of my fellow servers, was living at home, we coined the term “emotional rent” to describe our non-cash, non-work “payments” to our parents. I don’t guess the IRS would have looked too kindly on any attempts to determine the fair market value of that emotional rent and count it against the gifted rent. I realize that I was quite lucky, as cash rent may reduce, but certainly not eliminate, your emotional rent rate when living at home.

    That said, I was living in my old bedroom with shared kitchen and bath privileges. I am quite sure that my mother (a CPA with a strong commitment to professional ethics) figured the fair market value of my room’s rent to be far below the $800/mo (to give $33.33/mo space for birthday, holiday and other gifts) that would have had significant tax implications. Unless one’s parents live in an Upper West Side condo, it seems likely, even today, that your room’s FMV is less than $833/mo.

  6. Kathleen A. Friedhoff

    This is a very interesting question because I had a couple consult with me recently of how to take advantage o f the first time homebuyers credit with a daughter in an out of state school. Their query was if they loaned their daughter money to get a mortgage on her first home as a college student, could she then qualify? And the answer was yes, the daughter could qualify. Except that is where, the taxpayers had plans of their own to have their daughter pay back the loan through her “rent”. Oh, and by the way the daughter would “rent” out some bedrooms to roommates to help pay for her “loan”. I quickly told them that in addition to losing some nice deductions in their “tax plan”, they would also be acquiring the property as a investment and that would negate any homebuyer credit. In addition, all rents would become income to the respective parties creating taxable events. Needless to say, “rent” is income anyway you slice it. Do you agree, Tax Girl?

  7. jpe

    Any gifted rent (diff between actual and FMV) will almost certainly fall under the $26k annual exclusion, so I wouldn’t sweat that. (a married couple can give 26k in ’09 and ’10 to anyone without having to pay gift tax; unless this is a penthouse or a warehouse or something, total rent won’t even hit the exclusion, let alone the FMV/actual difference)

  8. Author
    Kelly

    JPE, I agree. Although you never know the other issues involved. It’s possible, for example, if there are financial issues that parents may be helping out with student loans, car payments, etc. That could add up. So it’s always a good idea for the parents to consult with someone.

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