Question: Are there any restrictions on renting a house to a relative? I want to buy my mother's home, then rent it back to her. This would provide her with a monthly income from the mortgage payments, free her from house worries and provide me with a tax shelter. Can I do this without creating problems with the IRS?
Answer: If this question sounds vaguely familiar to long-time readers of this column, that's because it first appeared here in June 1981.
At that time I said that this was a gray area with some uncertainties.
The IRS, believing that the law required it, wanted to impose restrictions on the deductions allowed on property rented to relatives. But Congress put a hold on the proposed rules to give them a chance to take another look.
Well, the lawmakers have now taken that look. They decided that the law was not intended to be as restrictive as the IRS interpreted it to be. So they passed new legislation, which the president signed Dec. 29.
The effect of the new law is to treat property rented to relatives just the same as property rented to nonrelatives, subject only to two conditions.
First, the rental property must be the relative's principal residence. And the rental agreement must qualify as an "arm's length" transaction. In particular, the rental amount charged should be the fair market value.
If the circumstances fit the requirements, you can deduct all qualifying expenses including depreciation, even if the total exceeds the rental income and shelters other income from tax.
In the same legislation, Congress modified a couple of other situations that have caused some problems. One has to do with an office in the home for work that was not your principal occupation.
The IRS had taken the position that a deduction was not authorized for an office at home unless it was related to your main job.
Now you can claim expenses of a home office used for supplemental or part-time work, as long as the office is the principal place of business for the work for which you claim the deduction, even if it's your secondary occupation.
In another change, the IRS will be required to follow less restrictive rules on personal use of rental property like a vacation home.
The basic rule is that you can't claim full expense deductions if you use the property personally for more than 15 days in the year or more than 10 percent of the number of days the property was rented (whichever is greater).
If you spent time at the property to make repairs, you were not required to count that time against the personal-use allowance. But if you took members of your family along, this did count as personal use unless they all pitched in and worked on the property too.
Now this rule has been relaxed. If the primary purpose of your visit to the property is maintenance, members of your family can accompany you and use the facilities for pleasure without disqualifying the deduction.
These new rules apply to tax year 1981 as well as future years. In fact, if you had followed the more restrictive rules in earlier years, you can now file amended returns for 1978, 1979 and 1980 and claim a refund.
Question: As a federal retiree with income from civil service retirement, interest and dividends, am I eligible for an IRA (1) if I receive income from part-time employment, and (2) if I don't have such income?
Answer: (1) Yes. (2) No. Income from a retirement plan--either an employer-sponsored plan (like civil service retirement) or your own (a Keogh or IRA)--does not qualify as "earned income," nor does interest or dividends.
But the receipt of such income does not disqualify you if in addition you have earned income such as from a part-time job after retirement.
You are then eligible to deposit into an IRA up to $2,000 a year--but not more than the total amount of earned income. The limitation to 15 percent of earnings that had been in effect was removed as of Jan. 1, 1982.