Does someone need to pay taxes on rent collected if it is passed between family?

Question

If woman A and woman B have an agreement that woman A will collect rent from a property woman A owns, and give $1,000 per month to woman B, is woman B required to pay income tax on this sum? Woman A and woman B are related. Also, woman B had help filling out her taxes from person C. She chose not to claim the amount, not knowing she had to. Is person C liable as well if they are not a trained professional but simply someone helping woman B out?

Answer 1

You can give up to $12,000 per year to any individual without federal gift tax. You can give more than that, but you would have to file a gift tax form and start using your lifetime exemption. That gift to Woman B is not income; therefore it is not taxable to her. The person that earned the income (woman A) has to declare that as rental income. Whether there would be any tax due, depends on a lot of factors you haven't laid out here.

Answer 2

Yes.  It's taxable income.

If woman C is the tax preparer, and if she knows about the money, and has informed woman B that it is taxable - her options would be to prepare the return fraudulently (not a good idea), or refuse to prepare the return.  She's obligated to prepare a honest return, and her signature at the bottom of the form attests to her swearing that the return is true to the best of her knowledge.

But since you say C is not a professional - than most likely it's this version:

If woman C is just giving woman B advice, then there's nothing she can do to prevent woman B from not including the income on her return.  B will be liable for the tax on it regardless.  If the IRS finds out about it later, it'll just cost her more later, as the tax will include interest and penalties.

Answer 3

If there's no written, signed agreement re the $1000,sounds like the $1000 per month given to the mom is a gift from the daughter and not taxable to mom.  The daughter would of course owe tax on the rent she collects.

Verbal agreements can be legal, but are pretty close to impossible to prove.  And the daughter would have a hard time claiming it was NOT an enforceable agreement so she doesn't have to continue to pay, but it WAS an enforceable agreement so her payments to mom where part of the purchase price of the house.  Hard to have it both ways.

Woman C isn't legally responsible for any of this.

Answer 4

For the gift question, read IRS publication 950.  (This is clearly homework, so I'm only going to show you where the answer is.)

As for the tax return, the internal revenue code makes the taxpayer liable for reporting his/her income, not the tax preparer.  

Additional info.

So, now you've changed the story.  While you attempted to "simplify the facts."  You still really haven't given enough information.

Either B has a "right" to the money or she doesn't.  This depends on state law as well as the facts and circumstances.

If B has no right to the money, then A is making gifts to B and can stop at any time.  As a gift, B has no income and A has no deduction.

If B does have a legal right to the money it could potentially be either as further payments on an installment sale or rental income (again, see state law).  If it's an installment sale, then A can deduct the portion that represents interest (and B would report the interest income and any part of the capital gain not already recognized on the original sale).  If it's rental income, then A can take a deduction for it and B would recognize the same amount as income.

Answer 5

I agree with the prior answer that your scenario is kind of confusing. If the daughter owns the property and the mother no longer has any interest in the property, then the money paid to the mother is not rent.

Answer 6

Since the daugher owns the property, the mother is not receiving rent.  From your information, it appears the daughter is gifting this amount to her mother.  

The mother owes no tax on the gift.  However, if the property is rented, and the daughter receives rent from the property, she needs to report the rental income on her tax return even though she gave it to her mother.

The person who assisted the mother on her taxes has no liability regardless.

Answer 7

The income is taxable and women C could be held liable if A and B were held criminally liable for fraud (which is not likely to happen).

Answer 8

Too complex

If some one received rent, that is income and that is reportable.  If some one merely collects rent for some one else and keeps no part of it herself, she is not receiving reportable income, but she is acting as an agent of the owner.  The owner of a property generating rental income files a Schedule E and offsets her rental income by expenses on the home such as real estate taxes, depreciation, repairs, etc.  

An amended return can be filed for the last 3 years that she didn not file this rental income.  

And rent is NOT a Gift!

See a tax professional ASAP.

Answer 9

Your question is unclear.  If 'A' is collecting rents on property she owns, why is she giving this money to 'B'?  What service is 'B' providing to 'A'?

If 'B' is providing a service (such as property management for example) then this is taxable income to 'B'.  If 'C' is preparing 'B's taxes, 'C' should know this although 'B' is the one liable for the tax.

If 'B' is not providing any service to 'A' and this is a bona fide gift, then no taxes are due from anyone as it is at the $12k annual Gift Tax limit for reporting purposes.  A Gift Tax return would be due if it was $12,001 but not at $12,000 per year.

Edit:  Your "clarification" only muddies the water further.  Please explain exactly what is going on here.  Details count; simplification will lead to WRONG answers.  

What are the legal obligations of the parties?  

Who owns the home according to the deed?  

Was it actually sold and did title change hands according to the name currently on the deed?  

When did this happen?  

What was the fair market value and did the buyer pay full FMV?  

Who lives in the home now?

What do the WRITTEN contracts say?  (Any real estate agreement must be in WRITING unless it is a lease for one year or less.  Anything else not in writing does not exist regardless of any verbal agreements to the contrary.)