Author Topic: Sublet: recommended tax pro in Seattle?  (Read 965 times)

opnfld

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Sublet: recommended tax pro in Seattle?
« on: October 29, 2015, 12:34:00 PM »
Can anyone recommend a tax professional in or near Seattle to consult on the following scenario?

DW and I enjoy a low interest loan from her parents on our current home.  This arrangement is not documented.  We're relocating in 2016 and would like to keep the house as a rental.  FIL approves but doesn't want to be bothered by tenants, so we will manage the property.  He's about to start RMDs and is interested in keeping his tax burden low, so we will collect the rent, pay the "mortgage", and retain the substantial difference.  We don't technically own the property so it seems like a sublet.  How do we handle this from a tax perspective? Wife is self-employed; can we simply collect the rent as income and record the "mortgage" payments as deductible expense on her Schedule C?  What are the other considerations?

Cathy

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Re: Sublet: recommended tax pro in Seattle?
« Reply #1 on: October 29, 2015, 09:18:41 PM »
I don't have any recommendations of professionals in or near Seattle.

However, you may be operating under some misconceptions about real property law, so I will provide some general information on that topic. The person who holds legal title to the property is not necessarily the "real" (equitable) owner of the property. It is also possible that the legal title holder is merely a trustee, holding title for the benefit of another. An express trust over real property can generally only arise from a written agreement, but that rule does not apply to resulting or constructive trusts. Those can arise with no written documentation.

In Washington (unlike some other states), "[w]hen the person asserting the [resulting] trust has paid the consideration for the property, a presumption arises that a trust exists in that person's favor, absent evidence of a contrary intent". Engel v. Breske, 37 Wn App 526, 529 (WA Ct App 1984) (citation omitted). Unlike an express trust, a resulting trust can only arise at the time the property is purchased (or not at all). Subsequent developments after the initial purchase cannot create a resulting trust over the property. Diel v. Beekman, 7 Wn App 139, 145-46 (WA Ct App 1972). If your parents bought the property with the intent that it would be yours, a resulting trust may have arisen in your favour. On the other hand, if the parents bought the property for some other reason and then eventually allowed you to start living in it, a resulting trust cannot have arisen.

However, even if a resulting trust did not arise at purchase, there could still be a constructive trust over the property in your favour if the person holding legal title "would be unjustly enriched if he were permitted to retain it". Proctor v. Forsythe, 4 Wn App 238, 242 (WA Ct App 1971). This could possibly occur, for example, if you had an understanding with your parents that your payments toward the property were building equity in the home, subject to various conditions and exceptions.

If either a resulting or constructive trust exists over the property in your favour, you are basically the "real owner" of the property for almost all interesting purposes. However, to be clear, I express no view on whether such a trust has arisen on your facts, because there is not enough information in your post to say. I just wanted to clear up the misconception that legal title to the property definitively controls whose property it "really" is.
« Last Edit: October 29, 2015, 09:29:45 PM by Cathy »

opnfld

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Re: Sublet: recommended tax pro in Seattle?
« Reply #2 on: November 02, 2015, 10:53:52 AM »
Hi Cathy.  Interesting information.  Thanks for providing it.  I don't anticipate any conflicts with the in-laws about ownership; my questions are mostly tax-related.  But I'll include this in the conversation with a tax pro when I find one.