DEAR BOB: I own a beach condo, which I rented out last summer through a rental agency. This summer I want to use it as my second home, but periodically allow family and close friends to use it at a reduced rental rate to help with expenses. Am I required to pay tax on that rental income? –Alice H.
DEAR ALICE: If you rented your beach condo for more than 14 days in 2005, you are required to report that rental income and deduct applicable expenses on Schedule E of your 2005 income tax returns. However, if the rental days were less than 14, you can keep the rent money and Uncle Sam doesn’t care.
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The same rule applies in the summer of 2006 when you plan to spend more personal time enjoying your beach condo. If you rent it for more than 14 days, the rental income must be reported on Schedule E of your tax returns where you can also deduct applicable expenses, such as part of your mortgage interest, property tax, insurance, utilities, repairs, and other operating expenses.
However, if your personal use days exceed 14, or 10 percent of the rental days, then any tax loss in this tax category cannot be used to offset your other ordinary taxable income. For full details, please consult your tax adviser.
BE CAREFUL ABOUT BUYING HOUSE FOR SON AND HIS WIFE
DEAR BOB: We want to buy our son a house for all cash. We suggested buying it in our names to avoid paying a gift tax so our son will receive a stepped-up basis when he inherits it (we are 78 and 80). But our daughter-in-law suggests putting the house in their names now so they can use the equity. She says we would still not have to pay a gift tax. What is the best way to handle this? –Barbara G.
DEAR BARBARA: From your description, it sounds like your daughter-in-law wants to grab on to your very generous gift and let you worry about paying the gift tax, if there is any.
However, if you have given away less than $1 million each, there won’t be any gift tax to pay, although you will have to fill out a gift tax return if you title the house in your son’s name.
How is their marriage? Maybe the daughter-in-law is thinking of a divorce? Just asking.
Frankly, I prefer your idea of buying a house and letting your son and daughter-in-law live in it for a few years. You can specify in your will it goes to them after you both die. Meanwhile, you keep control just in case there is a divorce lurking.
DOES BANKRUPTCY PREVENT HOME SALE?
DEAR BOB: If a home seller has filed Chapter 13 bankruptcy reorganization, can the seller sell the house without court approval? –Jaime T.
DEAR JAIME: I am not a bankruptcy attorney. But my one very limited experience in this area required approval of the U.S. Bankruptcy Court judge for the sale of the debtor’s home.
I am not aware of any title insurance company that will insure such a title transfer without the Bankruptcy Court judge’s approval.
Everything worked out very well in my one experience because the home sale provided enough cash for the debtors to pay all their debts in full and they even had several thousand dollars left for a down payment to buy another house.
The new Robert Bruss special report, “Foreclosure and Distress Property Profit Secrets,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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