In this situation, $60,250 has been collected in rents over a 12-year period ($38,000 net), yet I cannot tell who, if anyone has a reporting or tax liability for the rents collected, or when their liability, if any, was incurred? Have the actions of any of the parties, caused them to incur a tax liability or duty to report income for the rents paid? If so, who. And when was their duty incurred?
It is taken for granted that Trusted Services Homecare is liable to timely report and pay tax on all the payments that it received for providing yard care and maintenance services at Owner Gone’s property.
It is also understood that Owner Gone would have been
liable for taxes due on the accumulated rental income -if he had ever become aware of those rents and been given access to them.
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The American Story of 'Owner Gone'
1. Owner Gone is a homeowner in a typical, but cooperative American neighborhood. Owner Gone left his home on a trip approximately 14 years ago. He has not yet returned. A group of neighboring property owners have each participated to some degree in maintaining Owner Gone’s property, or in preserving the rents that have been paid during his absence. None of the neighbors have been able to communicate with Owner Gone during the 14 years since he first left. Two skip tracing services and a private investigator were hired but have been unable to locate either Owner Gone or his next of kin.
2. Next-door Neighbor mowed Owner Gone’s lawn for two years. Other-side Neighbor has collected Owner Gone’s mail (kept it in a basket near the entrance door), removed garbage from the property, cleaned gutters and performed a variety of other home maintenance chores. Both Next-door Neighbor, and Other-side Neighbor donated their time and efforts. They had always liked Owner Gone.
3. Two years after Owner Gone left town, the nearby home of Mother-of-Two burned down. Mother-of-Two is a single woman with two teenage daughters. Next-door Neighbor saw an opportunity to get out of his self-imposed commitment to mow Owner Gone’s lawn. Next-door Neighbor convinced, the rest of the neighborhood that Mother-of-Two and her kids should occupy Owner Gone’s home -at least until she recovered financially from the fire and loss of her own home. It was common knowledge in the neighborhood that the key to Owner Gone’s home was under the front door matt.
4. Mother-of-Two is employed. She was grateful to have a home and insisted on paying rent. All neighbors who have done anything in regard to Owner Gone’s home agreed that whether or not rent was paid, and the amount of the rent, if any, would be a matter between Owner Gone and Mother-of-Two. From the day Mother-of-Two moved in to Owner Gone’s home, Mother-of-Two has paid rent by placing $500 in cash on the 1st of each month into a jar kept in a kitchen cupboard of Owner Gone’s home.
5. When Mother-of-Two and her daughters moved into Owner Gone’s home, Next-Door Neighbor stopped mowing Owner Gone’s lawn. At that time, Assertive-Neighbor knew that Mother-of-Two did not have a lawn mower. So, Assertive Neighbor decided on her own initiative to hire Trusted Services Homecare to mow Owner Gone’s lawn and to perform other chores necessary for the preservation of Owner Gone’s home. Assertive Neighbor then summarily decided that Trusted Services Homecare should be paid from the rent money that Mother-of-Two was depositing into the kitchen cupboard rent jar. Mother-of-Two expressed that she was neither for nor against this idea. Trusted Services Homecare has continuously provided lawn mowing and basic home maintenance services at the property of Owner Gone, ever since being hired by Assertive-Neighbor -twelve years ago.
6. Shortly after, Assertive-Neighbor, engaged Trusted Services Homecare, she became frustrated with Mother-of-Two and ceased having any further involvement with Trusted Services Homecare or with the property of Owner Gone.
7. At this point, none of the neighbors were directing the work of Trusted Services. Trusted Services Homecare used its own professional judgement to decide what work was reasonably necessary to maintain Owner Gone’s home. At no time has Mother-of-Two requested any of the services provided by Trusted Services Homecare. Mother-of-Two has refused to use any of the rent money she deposited into the jar in the kitchen cupboard at. Mother-of-two refused to pay Trusted Services for the maintenance work it did.
8. Next-Door-Neighbor stepped up to receive and to pay the billing invoices from Trusted Services. Next-Door-Neighbor, personally put the bills from Trusted Services into the jar in the kitchen of Owner Gone’s home and took out cash sufficient to pay Trusted Services Homecare. Mother-of-Two, acquiesced to the will of her neighbors. Eventually, Trusted Services began placing its own bill for services in the jar in the kitchen cupboard. Trusted-Services also began to collect its own payments from the cash available in the jar. When necessary, Trusted Services Homecare would use the key under the matt, to enter the home.
9. Just over three years after Owner Gone left his home, a notice was received of pending Property Tax Foreclosure against Owner Gone. Those neighbors involved with Owner Gone’s home could not come to agreement as to who, if anyone, should pay the past due property taxes. Most neighbors decided to just let the county foreclose. Eventually, Concerned-Neighbor, with the acquiescence of Mother-of-Two, went into the home, removed $2200 from the rent jar kept in the kitchen cupboard and paid the past due property taxes owed by Owner Gone. The property tax foreclosure action against Owner-Gone was then dropped.
10. Approximately two years after first occupying Owner Gone’s home, Mother-of-Two remarried and prepared to move to the home of her new husband, along with her youngest daughter. This left the question of what to do with the remaining rents that had accumulated in the jar in the kitchen. Attorney Neighbor informed Mother-of-Two that all rents accumulated at Owner Gone’s property while he was gone would be recognized as the legal property of Owner Gone under state law. Mother-of-Two left the accumulated rents in the jar in the kitchen cupboard. She wrote a heartfelt thank you letter to Owner Gone and placed it in the rent jar.
11. Concerned-Neighbor decided it was time to remove the accumulated rents (approximately $6650) from the again vacant home. Concerned-Neighbor opened a bank account in his own name to keep safe the rents belonging to Owner Gone (the Safe-Keeping-Bank-Account). In order to enable oversight of the account, Concerned Neighbor convinced Next-Door-Neighbor and Other-Side-Neighbor to also each become signatories on the account.
12. Mother-of-Two’s older daughter, Daughter Occupant (who was by then an adult), requested to continue occupying Owner Gone’s home, by herself. Daughter Occupant wanted to receive financial assistance from a housing program that required a written rental agreement before providing assistance. Daughter Occupant sought a written rental agreement. None of the neighbors were willing to provide a written agreement regarding Owner Gone’s home. Owner Gone was still absent.
13. Just before Mother-of-Two moved to her new home, Attorney Neighbor informed Mother-of-Two that her occupancy of Owner Gone’s home for over two years created a tenancy which is protected under the law. Attorney Neighbor asserted that, while Mother-of-Two had absolutely no claim to title regarding Owner Gone’s property, her occupancy of the home did give her a legally cognizable beneficial interest to occupy the home. Attorney Neighbor, therefore, counseled that state law recognized Mother-of-Two could pass her beneficial interest (her tenancy) to whomever she chooses.
14. Mother-of-Two, decided to pass her tenancy on to her daughter and prepared a written agreement for Daughter Occupant. The agreement stated that on date X, Mother-of-Two agreed to grant all her beneficial interest in the use of Owner Gone’s home to Daughter Occupant, provided that Daughter Occupant must continue depositing $500 per month into the Safe-Keeping-Bank-Account previously opened by Concerned Neighbor. Mother-of-Two sought to ensure that Owner Gone’s interest in the home would continue to be protected. The rental agreement between Mother-of-Two and Daughter Occupant regarding the home of Owner Gone, was accepted by the Housing Program. Daughter-Occupant became the sole tenant.
16. Shortly after Daughter Occupant assumed her tenancy in Owner Gone’s home, Next-Door Neighbor passed away. Next-Door-Neighbor’s widow was then made a signatory to the Safe-Keeping- Bank-Account. At that time, Trusted Services Homecare was also made a signatory on the Safe-Keeping-Bank-Account. This was done in order to facilitate payment for the services it rendered. Trusted Services provided Daughter-Occupant a bill for its services, then Trusted Services paid itself by signing a check drawn on the Safe-Keeping-Bank-Account. Since Daughter-Occupant wouldn’t spend any of Owner Gone’s money, even to pay the property taxes, the owner of Trusted Services Homecare decided he would pay the annual property taxes due on Owner Gone’s home, from funds in the Safe-Keeping-Bank-Account.
17. Both Concerned-Neighbor (who initially opened the Safe-Keeping-Bank-Account) and Other-side Neighbor moved to another state. They therefore removed themselves from being signatories on the Safe-Keeping-Bank-Account. The remaining signatories on the bank account were the widow of Next-door Neighbor and the owner of Trusted Services Homecare.
16. Daughter-Occupant, set up a monthly automatic deposit of her rent payments directly into the Safe-Keeping-Bank-Account each month. Trusted Services Homecare has continued to faithfully provided yard care and necessary maintenance for Owner Gone’s home. Trusted Services Homecare pays Owner Gone’s annual property tax bill, issues a monthly bill for its own services and then pays itself, from checks drawn on the Safe-Keeping-Bank-Account that the owner of Trusted Services is a signatory on.
18. Eventually, CPA Neighbor advised all parties that since rents were being paid, the rental income must be reported, and taxes must be paid on the rental income kept in the Safe-Keeping-Bank-Account. This frightened Next-door Neighbor’s widow, who intended merely to help save Owner Gone’s homejjj. She clearly did not want any tax liability. Next-door Neighbor’s widow promptly removed herself as a signatory on the Safe-Keeping-Bank-Account and ceased any further involvement with Owner Gone’s home.
19. The comment of CPA Neighbor, and the action of Next-door Neighbor’s Widow’s frightened the owner of Trusted Services Homecare who then attempted to remove himself from being a signatory on the Safe-Keeping-Bank-Account. However, the bank informed the owner of Trusted Services Homecare, that he was the last remaining signatory on the account, thus removing himself required closing the account. The owner of Trusted-Services Homecare declined to close the Safe-Keeping-Bank-Account. He did not want to take responsibility for Owner Gone’s money.
20. Daughter-Occupant, wanted to help the owner of Trusted Services Homecare, so she agreed to become the sole signatory on the Safe-Keeping-Bank-Account that her rent was being paid into. The owner of Trusted Services Homecare was successfully removed from the account. Daughter-Occupant has taken no other actions in regard to the Safe-Keeping-Bank Account. She has never withdrawn funds, nor has she ever made a deposit. Her $500 per month rent payments are direct deposited by her rent assistance program. Daughter-Occupant does provide regular reports and updates to the rental assistance program staff, as required.
21. Trusted Services Homecare continued to provide yard care and home maintenance services at the home of Owner Gone. After being removed as a signatory on the account, the owner of Trusted Services continued to sign the checks, drawn on the Safe-Keeping-Bank-Account, as payment for its services and to pay Owner Gone’s property taxes. The check books had been issued to him when he was a signatory on the account. No one noticed that the owner of Trusted Services Homecare was no longer a signatory. No complaints were ever made about Trusted Services.
22. Recently a sketchy investor named Money-for-Nothing heard about this situation. Investor, Money-for-Nothing discovered that the Bank holding the mortgage on Owner Gone’s property had chosen not to foreclose because of problems in obtaining a required “Certificate of Water Availability”. Some years back, the property had been required to connect to the city’s water service. Owner Gone had not done so. The city had a lien for the connection assessment, plus fines and years of accumulated interest. Owner Gone’s current right to continue using the water well serving his home would not survive a transfer of ownership.
23. Money-for-nothing informed the city he could finally get Owner Gone’s property connected to City water as required, provided the City would waive all the fines and interest due on the city’s utility lien. The City agreed. Money-for-Nothing then bought an assignment of the Bank’s mortgage for pennies on the dollar. He promptly filed an action to foreclose the old mortgage, and sent notice to the home of Owner Gone that he was foreclosing.
24. Daughter-Occupant became distressed. She sought to prevent Money-for-Nothing from “stealing” Owner Gone’s home. Attorney Neighbor, advised the neighborhood that under state law only Owner Gone had standing to fight Money-for-Nothing’s foreclosure action. Owner gone was still absent. However, Attorney Neighbor opined that Daughter-Occupant could claim title to the property under the State laws of adverse possession.
23. With Attorney Neighbor’s help, Daughter-Occupant, filed suit to Quiet Title in her name under the laws of adverse possession. After a hearing, the Court awarded Owner Gone’s home to Daughter-Occupant. The Court informed Money-for-Nothing that Daughter Occupant’s long possessory interest in the home was superior to his claim in equity, that as the new owner of the property, Daughter Occupant did have standing to plead the Statute of Limitations, that the mortgage Money-for-Nothing had bought was beyond the Statute of Limitations, and the Judge then ordered Money-for-Nothing to pay Daughter Occupant’s attorney fees, since she was the prevailing party. As a final matter the judge declared that, as the owner of the property, Daughter Occupant was entitled to all the “rents” kept in the Safe-Keeping-Bank-Account (by then $38,000).
24. The neighborhood had party to celebrate. Daughter Occupant continues to live in Owner Gone’s former home and she continues to reserve the Safe-Keeping-Bank-Account for Owner Gone’s eventual return. To this day she hasn’t spent a dime.
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My purpose in this tale is to identify accurately which of the actions described, if any, incurs a duty to report income or pay tax, by who, and when. The situation described is a composite from situations that I’ve encountered while involved with abandoned real estate. In this post I have intentionally separated each act that is normally done by me. In addition, the essential steps of my process for renting and maintaining real estate that has been abandoned by its owner, have each been assigned to a separate person. I seek to be clear on what act, or what combination of actions create a tax liability or an income reporting duty.
Naturally, my ultimate goal is to structure the process of renting abandoned real estate so that both tax liability and income reporting requirements may be either avoided completely or at least delayed to a time entirely of my choosing. Those who are unfamiliar with the legal concept of intentional owner abandonment, will likely question the morality of renting real estate one does not own or have permission to use. Those questions are of course fundamental, but are best addressed in a separate post. Here my focus will be on identifying the tax related duty of the parties -if any.
In a separate post, I have been told with considerable emphasis, that my activities related to abandoned real estate create an unequivocal tax liability for me. See: https://www.biggerpockets.com/forums/51/topics/743817-unusual-tax-question-is-this-money-for-nothing-is-it-tax-free The idea that I would incur a tax liability for rents that I have not spent, and which, as a matter of law, are not mine, or for properties that I do not own, was a foreign to me. However, the tax professionals on the BP forums (and all other commenters) have accurately pointed out that in regard to the abandoned properties I’m working, I’ve been the acting landlord. I am the one who is collecting the rents. And the rents are accruing in accounts held in my name. The professionals are therefore unanimously certain, that I have a current duty to report and pay taxes on rents that are not (yet) mine, -essentially because I caused and collected the rents and may one day acquire the right to spend them. If that is true, it’s time to change my system.
Of course, I understand that the IRS defines rent as income. I also understand and acknowledge the general IRS authority declaring that income is taxable and must be reported. The question for me is, which act(s) incur tax or reporting liability, for whom, and when?
