My husband and I have an LLC that recently bought a fixer-upper house in another city and now rents it to our daughter (not our dependent). We don't charge her market rental rates, partly because the house was in bad shape and she is providing the labor for making improvements (painting, fixing up the yard, etc.). The rental rates in her city are way high, so even as the condition of the house improves we don't plan to ever charge her market rates.

The LLC (that would be us) has chosen to charge low rent. However, a friend thought perhaps the IRS would consider this reduction to be "income" to her. I don't quite see how that could be since there wasn't already a set rental rate for the house and we're not giving her money to pay part of her rent to someone else. If anything, I think it might be considered a "gift" but the total amount would be less than the Annual Exclusion.

Any ideas? Thanks.

Barter is taxable income. I see what you are doing as barter- as part of the rent she is providing services.

Adam
Accountant Wilmignton NC

I can see how it might be considered barter income for each of us since this is the corresponding option that involves actual money:

We hire her to do that work and pay her for it. Then she turns around and uses that money to pay part of her rent. In that case, the payment from the LLC to her is miscellaneous income for her and a business expense for the LLC since we're paying for labor to make the improvements to the rental property. Her rent payment from her to the LLC is income for the LLC and a personal expense for her.

However, I think it's just a gift if you look at it this way:

We charge her lower than market rental rates simply because we want to give her a chance to build up some savings (we definitely want this to happen!). She does painting, etc., because she wants the place she lives in to be nicer. If she waited for us to do the work (we would do all the work ourselves instead of hiring a handyperson), she would have to wait quite a while because we can't be there very often to do that work.

This is more like giving her money from our personal funds (not from the LCC's assets) to help pay her rent if she were renting from someone else. Since the annual exclusion on gifts is more than the amount she is not paying, there isn't a tax liability.

Any comments on this approach to considering tax liability or not?

Perhaps we should actually give her a check from our personal checking account each month (a gift), so she can pay a "market rate rent" amount to the LLC. Any thoughts on that idea?

I mentioned to my husband the idea of actually giving a "gift to her" and having her "pay market rate rent to LLC". He pointed out that it's not a good idea unless we really need to do it that way since that would increase the profit for the LLC, and that's a tax liability for us at the end of the year. And, of course, the increase in the profit for the LLC would just be the money we took out of our personal account as a gift to her. That means we would be paying taxes on our own money, which we already paid taxes on when we earned it.

The cost approach is considered reliable when used on newer structures, but the method tends to become less reliable for older properties. The cost approach is often the only reliable approach when dealing with special use properties (e.g. -- public assembly, marinas).
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Earl Nunes