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My wife gifted her rental summer home to her youngest son. It turns out that the official date was December 28th, 2012, but this was not official to us until months after the fact because ,when we checked the ownership online, we got my wife as the owner. In the meantime, my wife paid insurance, taxes, utilities, and other expenses on the cottage.

When the ownership of the property became official to us, the son took over paying the expenses, but is my wife allowed to take what she paid as a business expense even though she didn't own the business?

I have tried to Google this topic for an answer and haven't succeeded. I suspect the answer is no, but you never should speculate on taxes. I presume there are several on this board who know the answer.

brucedoe
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My wife gifted her rental summer home to her youngest son. It turns out that the official date was December 28th, 2012, but this was not official to us until months after the fact because ,when we checked the ownership online, we got my wife as the owner. In the meantime, my wife paid insurance, taxes, utilities, and other expenses on the cottage.

When the ownership of the property became official to us, the son took over paying the expenses, but is my wife allowed to take what she paid as a business expense even though she didn't own the business?


A couple of things are missing from your narrative.

1. What do you mean by "It turns out" that the transfer date was 12/28? The property transferred itself? Why didn't she know when the property was transferred?

2.Why did your wife continue to make payments regarding a property that she had deeded to her son?

Phil
Rule Your Retirement Home Fool
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My wife gifted her rental summer home to her youngest son. It turns out that the official date was December 28th, 2012, but this was not official to us until months after the fact because ,when we checked the ownership online, we got my wife as the owner. In the meantime, my wife paid insurance, taxes, utilities, and other expenses on the cottage.

When the ownership of the property became official to us, the son took over paying the expenses, but is my wife allowed to take what she paid as a business expense even though she didn't own the business?

================================
I'm not sure I understand your use of the phrase "this was not official to us."

What really happened on 12/28/12? Is that when your wife signed the deed and gave it to the son? And if so, was the deed recorded shortly thereafter? Was a transfer tax filing (or waiver, for related parties) involved? If so, that would have been done when the deed was recorded, normally.

Were you just going by the fact that the city/county was slow in updating their website? Even though, knowing full well that you had disposed of the property?

Nope. I don't see a tax deduction there. If the expenditures in question exceeded $14,000 she might even have a reportable gift this year.

Bill
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Marti

As is my experience with lawyers, we had a hard time connecting with the lawyer, and we were never sent anything that said the property had been transferred. When we did connect with the lawyer, she said that she had never received the assessment for the property. We had trouble connecting with the assessor as he was in Florida. As an aside, he assessed the property as worth much more than the tax assessment. So the IRS gift form (910?) was corrected and resubmitted (I guess), but the filing date of the gift of December 28, 2012, remained the same on the paperwork we finally received.

But the fact was that my wife was still listed on the county records we could find online as being the owner until about a month ago.

An added complication was that we moved from our home on February 11 (which was separate from the cottage business) so there was a period of preparing to move, selling assets and paying for the new place, then moving, followed by moving in. The cottage expenses were automatically taken from the property checking account.

The son finally hired his own lawyer who managed to get the property ownership changed on the county register. (He also dissolved the LLC at the son's request.)

I guess the generic question is, if you pay expenses on business property you don't own, can you take those expenses as a business tax deduction?

By the way, changing things with financial institutions is a nightmare, even your address. For example, I have power of attorney over my wife's accounts with Schwab (who has had a stroke), but was told I didn't have the right to change my wife's address though I could do trading and sign checks on the Schwab One account. On an insurance policy, I changed the address for our claims but still got mail transferred from the old address. It turns out that I also had to change the address with the policy department separately. And on and on. Of course, if I was a Pakistani, I wouldn't have all these problems of wealth.

brucedoe
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Bill

If the expenditures in question exceeded $14,000 she might even have a reportable gift this year. An interesting idea to count the expenditures as a gift..

brucedoe
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The son finally hired his own lawyer who managed to get the property ownership changed on the county register. (He also dissolved the LLC at the son's request.)

More complications. What's up with an LLC? Did the LLC own the property?

--Peter
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Peter

Did the LLC own the property?

Yes. Technically, the gift was of a company and not a property. Our lawyer thought that having the property in an LLC would be one line of protection in case some renter got hurt and sued. We also had a ballon (umbrella) policy because you can be sued anyway. One year we did have a lady who broke her ankle but never even approached us as it was taken care of my her health and backup insurance.

brucedoe
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Did the LLC own the property?

Yes. Technically, the gift was of a company and not a property.


OK. Now things are starting to come together in my mind.

When you wife made a gift of the LLC to your son (it was your son, wasn't it?), that did not affect the property records with the county. The ownership of the property never changed. The LLC owned the property throughout this whole process.

It's kind of like Ford Motor Company stock. Ford owns lots of real estate. There is no need to change the real estate records with the county every time someone buys or sells a share of Ford stock. Ford owns the real estate no matter who owns Ford.

So there is no reason to even look at the county records. The LLC owned the property before the gift, and the LLC continued to own the property after the gift.

It appears that after you made the gift of the LLC, your son chose to dissolve the LLC and transfer the property into his name. That is when the county recorder will have something to record.

Now let's apply this information to your question regarding expenses.

Who owned the bank account where the expenses were paid from? It should be the LLC. So when the LLC was transferred to your son, he effectively got control of both the real estate and the bank account. Therefore any expenses paid out of that account after the gift of the LLC would be his expenses to deduct and not yours. Ditto for any rental income deposited into that account.

This leaves a couple of open questions in my mind.

Assuming the LLC owned the bank account, did you include the bank balance as part of the value of the gift on your gift tax return? If not, an amendment might be in order.

Still assuming the LLC owned the bank account, did your wife take money out of that account after the gift? That would be a gift from you son back to your wife. And if large enough, he might need to file a gift tax return.

Did the LLC own anything else? How about any money your property manager might have been holding?

--Peter
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Peter

A very nice discussion. First I should say that my wife and I have both been married before so the children (two sons) are hers. We both have our own money. I considered the cottage to be my wife's play toy as every year she made improvements. So long as she was paying for these, partly though rentals, and I didn't have to pony up, everything was fine. I considered my wife to be a very capable person who looked after herself for some years before I came along.

The LLC owned by wife only has the rental cottage, and I technically had nothing to do with it; however, since she had a stroke, I have done my best to take care of things. Even though it was my wife's LLC, as spouse, I may have some obligation. I signed a document releasing any claim I may have had on the LLC as spouse.

Actually the business checking account supposedly used to pay the LLC expenses was a remainder from before the LLC was formed and was never put into the LLC. I was not a co-owner of this checking account. It did not have sufficient funds to pay most expenses, so I paid them out of her personal checking account on which I am a co-owner so I could write checks on it.* For completeness, I have my own checking account on which she is a co-owner.

When it became clear what the ownership situation was, I closed the business checking account (there are days when I can get her to sign her name) and poured the remaining funds (less than $1,000) into her checking account. Since then all payments have been from her checking account. It is too long ago for me to explain why my wife and I are co-owners on each others checking accounts, but I'm sure it was something she wanted to do.

My wife and I both have been married before so we are keeping our financial matters pretty separate, because she has two surviving children and I have none but do have a niece and two nephews. Her family was concerned that in case of their mother's death before mine, everything of hers would pass to my relatives. I have no interest in that as, though they are pleasant enough, they never visit us (my niece once in 25 years, my nephews never though they all take elegant vacations.) whereas we have visited them several times. Don't get me wrong, my relatives are pleasant enough. They just don't have any interest in us. Well, my oldest nephew has published my two novellas, which is quite a bit.

At my wife's request, I have included in my trust that my 3 relatives and their children (4) should each get 3% each of what is left, if anything, in my trust with the rest going to my wife's family. It is my wife's family that look after us, particularly her younger son but both sons, and I think it is fitting that they should get whatever is left. All my wife's grandchildren visit us (along with four great grandchildren).

* My wife used to keep records of how much was "loaned" from her checking account to the business checking account and how it was paid back. These were no interest loans. I discontinued this procedure.

brucedoe
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First I should say that my wife and I have both been married before so the children (two sons) are hers.

Sorry about the error in my memory. Feel free to correct all of the pronouns in my earlier post accordingly.

the business checking account supposedly used to pay the LLC expenses was a remainder from before the LLC was formed and was never put into the LLC

OK. So it was your wife's account and not the LLC's. In that case, I'd probably split the advice from earlier in the thread. Any expenses that related to the time she owned the LLC would be properly deducted on her (or your joint) tax return. The rest of the payments I'd consider to be a gift to her son. Depending on the amount and timing of those gift payments, she might need to amend the previous gift tax return and/or file a gift tax return for this year.

--Peter
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Peter

The amount that would be considered gifts is below the annual allowance so I will just go with the gift. I don't begrudge that son anything. He has been an angel to us anytime we needed someone for help. He was always there.

When I started this thread, I didn't know how complicated it was going to become and thought I was asking a simple question. I do appreciate the time you and others spent on me.

brucedoe
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Where did the rent go? To your son or wife?

I didn't see it mentioned anywhere. Maybe it wasn't rented during that time.

Jean
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I don't think online records are reliable way of tracking property deeds.

Sometimes, registrars are far behind recording transfers. When I bought my house, my recollection is that the transfer didn't get recorded until 366 days later.
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The rent went to my wife which reduced the gift somewhat. Only 18 days were rented this summer. Renters were promised the cottage would have air conditioning, but when the son decided to sell the cottage, he cancelled putting in the air conditioner so we lost two months of rent when prospective renters withdrew.

brucedoe
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