Questions about taxes regarding a life estate property of my wife's father's house

[cpallen]

Question 1: Should we claim the rent income of my wife's father's house now that we are renting out the house?
Question 2: Can we depreciate the house based on the fair market value when we placed the property in service as a rental. Since we don't know the original cost or any increases can we just use the FMV when we placed into service as a rental?

My wife's father, who has been single since 1963 bought a house in 1968. Not sure of the purchase price but I believe it was about $6,000.
In 1990 my wife's father gave the property to his daughter (my wife) and transferred the deed in her name with a life estate provision for him allowing him to live in the house until he dies. I don't believe anything was mentioned specifically about renting the house on the deed.
My father-in -law lived in the house until 2008 when he was placed in assisted living because he developed dementia and could no longer live alone.
In 2010 we began to rent the house because we did not want to sell the house until his death. We rent the house to his nephew for $400.00 per month including utilities which covers the taxes and utility bills.
In 2010 we reported the income and wrote off expenses on our taxes which showed a small net loss. We did not report depreciation for 2010 however I was told that I should depreciated the house because when my father-in-law dies and we sell the house we will have to recapture any allowable depreciation even if we don't depreciated now that the property is in service as a rental property.

I called the IRS and they said I should first clarify the legal provisions of the life estate to determine if we should be claiming the rental income or should it be claimed by my father-in-law. We do not complete a tax return for him since his only source of income is social security which most is paid to the assisted living via the Wisconsin Medical Assistance program.
We have other rental property. So should we continue to claim the property and report rental income/expenses and depreciation the same as our other rental property?

The IRS also said we need to determine the adjusted basis of the property to determine the allowable depreciation. My wife is the POA for health and finances. It is impossible to know the costs since 1968 to determine the adjusted cost basis.
The main events regarding the property is as follows:
• 1968. Father purchased for $6,000. We have no information regarding increases or decreases through 2008.
• 1990 - Father gave property to daughter transferring the deed with life estate. Real estate value of property based on real estate taxes was 39,000.
• 2008 Began renting property- Real estate value of property based on taxes was 48,000. We completed several improvement in 2011.

 

[army judge]

Is it worth all that trouble?

It wasn't to us.

We own several homes, and inherited a couple more.

Rather than helping a greedy government take more of our money, and complicate our lives, we allow relatives to live in the home.

We only ask that they in turn care for the property, pay the annual taxes (directly to the county), and make sure they cover their property with renter's insurance. It also provides limited liability coverage.

Our benefit is fewer complications at tax time, and no unnecessary, chump change income.

Your question is so personal and complex, I suggest you use an online tax service and see a qualified tax preparer or CPA.

Don't risk an audit using FREE advice.

 

[disagreeable]

If dad had a life estate and is in assisted living, with the costs being born by the government, which you were not clear on, the rental income should be going to the assisted living place and declared as income by dad. Since dad would also be responsible for maintaining the property and paying taxes, these would be deductible from the rental income. As AJ stated, redefining the rent as the nephew maintaining the residence, by contributing $400 toward taxes and utilities, eliminates the bookkeeping nightmare.

 

[cpallen]

thanks. Yes the dad is receiving government assistance but he is paying his social security to the assisted living. We have his nephew living for only 400.00 per month to not make money but occupy the house until the dad passes. Since the rent income is less than the expenses assisted living would not be receiving any additional money. We agree we should redefine the nephew as not renting but living for free and contributing 400.00 a month towards taxes and utilities. The nephew does not report any homestead (renters) tax relief so it should be acceptable. This would avoid a tax and accounting mess. thank you.

 

[army judge]

Well, he isn't in the home for free. That complicates things, too.
He's there as a caretaker.
He contributes to the upkeep and care of the home in sweat equity.
Don't collect any money.
Rather, he also pays taxes direct to the tax authority and insurance to the insurer, which is much less than $1,600 a year on a property you described.

He could just put the money into a savings account monthly. That way it's there at tax time. You'd be wise not to comingle it with your monies.

Social security and Medicare won't allow the home to be sold. In fact, of dad passes, they'll come after the home. Greedy darn government.



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