Legal / possible to shift rental income to another person via a lease to said person + said person subleasing units?

2 Replies

Hi everyone!

I have an odd ball situation / question about if a particular method to minimize my tax liabilities on the rental income from a multi-family home purchase is legal, as follows:

Assumption: The 2nd party is pretty much at the bottom tier of the income bracket, while I'm at a much higher rate.

1. I purchase a multi-family home.
2. I lease all of the units in the home to a 2nd party, at free / near-free rates
3. Set up the 2nd party to sublease / re-lease out the units
4. New renters would pay the 2nd party directly, into a separate account dedicated for just this.
5. 2nd party will pay the income taxes. IRS is happy (?)

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In short, I'm hoping to "shift" the reportable income over to a 2nd party. (They're someone I trust - not worried about the money aspect.) Would this be a legal / allowed method to minimize taxes, as long as taxes are indeed being paid?

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I'm open to suggestions / criticisms / feedback - thanks all!

I met some investors a while back that had created a LLC, and had ownership interest divided up evenly in a past partership, but they then shift around what percentages of which parties get income, depreciation, etc.

Example:

Partner 1 - 33% ownership, claims 80% depreciation, gets 20% distribution of profits

Partner 2 - 33% ownership, claims 0% depreciation, gets 50% distribution of profits

Partner 3 - 33% ownership, claims 20% depreciation, gets 30% distribution of profits

I think it's all just in the operating agreement how distributions and other things get divided up. You would probably want to consult a professional accountant / lawyer to figure out the details of executing this strategy.

In step #2 -- if you do not charge market rent, you are going to be deemed to have gifted the rental amount to the 2nd party and you will be required to pay gift taxes on that amount.