No. of Recommendations: 1
You may want to post this on the Tax Strategies board. It sounds like you have some problems. The $40,000 sounds like a gift, so it would be tax free to them. Personally, I wouldn't have given them the money without some sort of agreement for them to at least help pay the taxes. If you had put the house in their name, then you certainly would have run into gift tax issues as well. It is also possible that you will have to recapture depreciation, even though you did not charge rent and probably did not claim any depreciation during the time they were living there.

I find it reprehensible that your kids could be angry at you for giving them $40,000 as well as a free place to live for 5 years. Did they pay for anything while they were living there? I'll bet you paid all the property taxes as well. To my way of thinking, it sounds like you have already given them their inheritance.

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