I am a US resident and my parents are nonresident foreigners. They own a property located in the United States (United States situs) in which they let me live for free. I understand this probably constitute a gift, and foreign gift needs to be reported when above the thresh-hold, but not taxed. The fair market value of the rent is about 40,000/year
I have also read that, the transfer of tangible properties situated in the US is taxable. So my question is that, does this free rent count as the transfer of tangible properties, since the house is located in the United States? This is what reads from the IRS website:
Nonresidents, non-U.S. citizens must file Form 709 if they:
... Make a gift of a present interest of a U.S. situs tangible asset that exceeds the annual exclusion amount...
Based on just those facts, it doesn't sound like there has been any kind of transfer. If there was a lease in this picture, then perhaps, but there is no mention of a lease.
As far as the fair market value of the rent being $40,000 per year, how did you figure that out? Did they give you a three (3) bedroom with a (2) bathroom apartment in Astoria? Did they give you a true (1) bedroom apartment in SoHo or the Financial District? (i.e., $3,333.33 per month).
Or, are you just "living with" your parents? You have to see what square footage you actually have control over exclusively. In other words, can your parents kick you out at any moment? If they can, then you don't really have exclusive control over any square footage. What you have is a revocable "license" (i.e., permission) to be there, which they can take away at any moment.
For as long as your parents are the owners of the property (as opposed to some family limited partnership or LLC), they are free to use the property as they wish, and there is no "income" to be recognized by "eating your own harvest."
Now, you're correct, that "permission to live" in a space "saves your rent expenses" each month, which leaves extra money in your pocket. But, you can't exactly transfer this flimsy right to anyone else. You also cannot enforce this right as a practical matter. It is nothing more than a revocable license and permission to be on the property.
For that reason, the "valuation" of those legal rights (compared to a month-to-month tenancy or lease for a term of years) is substantially low. How low? Well, put a "value" on the right to occupy a space for an unknown (not "indefinite") period of time, and not knowing with any degree of reasonable certainty (as a legal matter) whether you will continue to have that right the next day, the next hour, or even the next minute. How do you value something like that?
So, as a practical matter, filing Form 709 is probably not even required, because the value of such an item is certainly below the $14,000 per year annual gift tax exclusion ($28,000 for married couples).
Again, however, if the parents gave the child a "lease" or accepted "below fair-market-value rent" (i.e., creating a month-to-month tenancy), the analysis would be completely different.
If you're anxious about it, go speak to a local CPA or tax attorney. It's such a quick question, I doubt anyone would even charge you anything for taking the time to answer it.
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Not to be crass, but only a gift is a gift. The IRS has definitions of what constitutes a gift, and if your parents are on the deed (or on the mortgage), and you are not, and, as my colleague says, they can kick you out at any time, then it is likely not a gift.
I'm also going to point out that if you are saving $40k a year in rent, you should be able to afford one consultation with a CPA or a tax attorney, so I am going to recommend that you sit down and evaluate your tax consequences with a full evaluation, rather than on a free board. It is worth your time to get your taxes right.
And normally, it would be your PARENTS that would bear responsibility on taxes for a gift as well.
I have added a link to the 709 instructions below, in the hopes that you may find some help there as well.
This does not constitute legal advice or the engagement of my services as an attorney.
I disagree wit the other answers, particularly the "kick you out at any time" portion. Even if your parents don't charge you rent you are almost certainly a tenant if you live in their house for any significant length of time. This means you have a legally enforceable right to occupy the house until they evict you or you willingly move out. I would say that the gift in this case would be the transfer from your parents to you of your right to occupy the property. The fair market value of rent for the space you actually occupy constitutes a gift to you.
I'm not sure what the reporting requirements are for your parents in this case, but I would lean towards them being required to file a return. It wouldn't hurt to talk to an attorney who can research this situation in more depth. They'd be able to fully inform you of the reporting obligations and assist you in valuing the gift as there may be some restrictions in your arrangement that wouldn't be present in a typical lease.
The above is not legal advice and does not create an attorney-client relationship. Please seek local counsel.
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