So, Mrs. H and I rent a house that belongs to a relative on her mother’s side. Mrs. H’s mother is about to come into some money and intends to buy our house and then put it in our name (collecting rent on a rental property would cause her headaches when it comes to her public entitlements) but continue to collect rent from us. Yes, the whole thing is a legal fiction to protect her Medicare and Social Security benefits and please, let’s not get into that. It will be ours when she dies, her house will go to Mrs. H’s brother, I suppose there will be a big family meeting where we settle up the accounts, but the gist of the situation is that she’s leaving us the house but putting it in our name before she dies.
I looked up inheritance law and it seems that in Missouri and 45 other states, there’s no inheritance tax on a house* (*OK, so the appreciation is taxed, but that’s a conversation to be had decades from now). But here’s the thing: we’re not actually inheriting it in the strictest sense. It’s just being given to us (at least, on paper).
Will he have an income tax liability here or is it still considered an inheritance?
I think (not being a lawyer or tax expert) that this is a really messed up idea.
I believe the house will be considered a gift, at its current market value. Subtract $10K of that amount (maybe, not sure), and you will be taxed on the rest as income in the year it is given.
You will be paying money to your mother-in-law, on which she ought to pay taxes (at least, you might be able to deduct $10K per year of that as a gift). If she declares it on her taxes, then it defeats the purpose of doing it by alerting the feds to her additional income. If she doesn’t declare it on her taxes, she will live in fear of the IRS. That is nothing to sneeze at.
Who is going to pay the property taxes and home-owners insurance? It will all be in your name, so it will be your responsibility.
The fact that you would have inherited the house when she dies is irrelevant. You are being given the house now, period. All the under-the-table rent payments in the world don’t change that fact.
I think that’s wrong. In the US, recipients of gifts don’t owe taxes on them. And I believe, even the giver only owes to the extent that the total amount given exceeds the lifetime estate tax minimum (which is in the millions).
(Though the government is wise to attempts to give away assets while still receiving Social Security and Medicare, so consult an attorney about that bit.)
I don’t know if this is the same thing, but I have read of cases where parents have gifted (or sold for a nominal amount) their house to a son or daughter on the understanding that they will live out their lives in the property. The intention being to avoid taxes and benefit penalties.
A couple of years down the line the new owners decide that they want possession and the old folk have no legal leg to stand on.
Do you know if her name is going to stay on the deed along with yours? Will you be joint owners (all 3 names), or will she do a quit-claim deed where she puts the house only in your names?
This is not an inheritance. It is a gift. No different than if she gave you a big pile of cash. It would be like her giving you $100k and then you giving her back $1000/mo. I’m not sure if the “rent” can really be considered as rent because of the weird situation about who is on the deed. If she’s not on the deed, then it doesn’t seem like she can say that it’s rent.
If this is a scheme to avoid Medicare or SS limits, she should be very careful. There may be look-back periods where they consider the value of the money and where it went. If they examine her accounts and ask where this “rent” money in her bank account is coming from, there may be complications if it’s not a real landlord-tenant situation. From what you’re describing, she’s essentially giving you $$$$$ all at once and you’re giving her back $/mo. The county records would show that she bought the house and then deeded it over to you. It’s going to be very easy to figure out what’s going on.
If this is an inheritance, there may be ways for the executor to give her share to Mrs. H. That would be much cleaner. You could then have an informal agreement to give her $/mo that wouldn’t raise as many flags.
This is a gift. Sorta kinda, yeah, but since you are not paying her for the house, it is a gift. You will not have to pay any Federal taxes.
You Mother should probably file a Gift Tax return, but honestly, unless her estate is very large (Over $12MM), no one will likely care.
Note that you should not be under any legal requirement to make those payments. They would be “gifts” back to her. You and you wife can each give $17K without running afoul of any Gift taxes. I assume the rent will be less than that?
However,
should be incorrect, It will be your when she puts the house in your name. If your family wants to call that an “advance inheritance” well, fine, but that’s’ not how it goes legally.
How I would structure the deal is that she buys the house, and then you buy it from her at the same price, for which you will pay her $1,000 a month. If you go this route, she will be required to impute interest if she doesn’t require at least a certain rate, called the Applicable Federal Rate. Right now on a long-term loan (lasting at least 10 years) compounded monthly she would have to recognize 4.11% interest income on the outstanding loan, so she might as well go ahead and have you sign a promissory note with that rate. You would then work out an amortization schedule with that rate, the amount that she paid for the property (that she’s loaning you to buy it from her) and that monthly payment to determine when the payment stops.
Because she is requiring payment in return for the house, I don’t see how it’s anything other than a sale, and she’s going to have to recognize income if she’s ever going to receive more money for the house than what she paid for it. If it’s going to be put in your name, then I don’t see why the payments shouldn’t be for buying the property. If needed, you can put some clause in the sales contract that gives her the right to live there if she wants, and then at the end of the sales contract, you can negotiate to buy her out of that part of the contract for so much per month. In that case it would end up being income to her, but not rental income - just additional income.
She’s not going to get out of this without recognizing income or committing tax fraud and likely benefits fraud given the story you gave. As a CPA, I absolutely cannot give advice in which she does the latter. In the sale I’m proposing, she will recognize no capital gain and some amount of interest income that will dwindle over time. The house transfer and the payments cannot be taken as gifts because there absolutely will not be one without the other. While it might not be an entirely arm’s-length transaction, it’s definitely a quid pro quo and not “detached and disinterested generosity” as is required for a gift.
Secondly, my mother wanted to give me her house before she died. We consulted an attorney who advised that, for tax reasons he didn’t explain in detail or I have just forgotten, that she change her will to leave me the house on her death. I’m also in Missouri and this was within the last 5 years so the laws are probably the same.
Thirdly, (and here I’m speculating) putting the house into a trust may give all the protection her Social Security and Medicare need. An attorney will know that for sure.
Finally, talk to a lawyer (I may have said that already). It’s the best way to get the best information. It’ll cost more than asking a bunch of anonymous folks on the internet, but it’ll keep you out of court – which will cost even more.
All parties are in Missouri? Just checking, no need to account for community property rules, then.
Regarding you and your wife: correct, recipients never pay taxes on purchases.
Regarding MIL: she may have to file a gift tax form, which will likely cost her $0 because she’s probably under the lifetime exclusion, but needs the filing. I can’t comment on how the paper trail affects benefits.
Regarding other relative: they may owe taxes on the sale, if the difference in sale price to cost basis is > $250k single/$500k joint.
ALSO: look into the step up in basis rules. When you inherit a house from someone who dies, generally the new cost basis is the value at the time they die. If they sell you a house while they are still living, this may not be the case.
If you all decide that you will pay some nominal “rent” that is below market value, then generally MIL cannot treat it as a rental and therefore cannot deduct the cost of maintenance, etc. Sounds like she is okay with this, she doesn’t want it on the books. Are you responsible then?
You will also need to do lots of legal stuff about whether it is held in trust etc. And that is indeed in your name, and not partially in BIL’s.
I’m not trying to get into it, really, but are you using “Social Security and Medicare” as shorthand for something else, like SSI disability and Medicaid? Because Social Security benefits aren’t means-tested, and income is only relevant to Medicare in that you pay a higher rate for Parts B and D if your income is over $97,000 a year. I guess I’m wondering if she thinks the rental income would be more of a problem than it would actually be.
I was wondering the same thing. I’m on SS and Medicare, and as far as they know they have no window into my bank balance. (Not that they wouldn’t know it if they needed it.*) Income is significant for both.
The online directions for applying talk about having your marriage license handy. Not needed for us - they knew all about it. They practically commented on the menu at our reception.
Social Security and Medicare have nothing to do with giving away assets. Gazilliionaires can use Medicare, and Social Security is based on what you earned during your working years; it is NOT means-tested (though some of the benefit may be subject to income taxes). You can give away anything you like while collecting SS and using Medicare.
Where it’s a problem is if you’re recieiving MedicAID benefits - e.g. help with nursing home expenses. Anything you’ve given away in the previous 5 years prior to requesting that help will impede your ability to receive the help; I don’t recall any of the details, but it’s pretty iffy.
If MIL buys the house and deeds it to you and your wife, I’m pretty sure that would be covered under the gift tax situation (as someone else noted). She would need to file a gift tax form the year she does so, but no taxes are owned unless the value exceeds some lifetime max.
As far as her “collecting rent”: That wouldn’t even be rent, for tax purposes, since she wouldn’t own the property at that point. It would simply be her receiving an income stream from you. You would actually be under no legal obligation whatsoever to continue paying her that (though it’d be a shitty thing to do, stopping those payments).
It would get dodgy if she needs to go into Medicaid assisted living at some point. They might look back at the house transfer (if it’s within 5 years), OR they might look at the income stream you’re paying her, consider that as income rendering her ineligible. And of course the house she’s leaving to the other relative would be subject to Medicaid grabbing the asset once she no longer lives in it.
I would not recommend proceeding with any of this until you (and wife, and MIL) have met with someone who knows a whole lot more about gifts and Medicaid eligiblity.
Another option, that I think another poster suggested, would be for her to buy the house, place ownership of it in a trust that transfers ownership to you on MIL’s death, and for the trust to rent it to you.
IANAL but, this is the way. Consult a lawyer in your area. Living trusts are how wealthy families protect both their assets and their ability to socialize any catastrophic long-term needs.
