Inheriting a Chicago home and in turn re-gifting it to a family member sounds like a straightforward endeavor, but beware—there’s serious red tape involved.
Here’s a scenario: your sibling just graduated college, can’t find a job and is down on her luck, so you decide to let her to live in your inherited home rent-free. That’s awesome. But even if the mortgage is paid off, there are plenty of fees that you’ll have to consider for this to work. What about taxes, mortgage insurance, utilities and other maintenance and upkeep costs?
We know you’re doing someone a favor, but don’t neglect to take a full inventory of costs—you need this to be a sustainable arrangement.
One curious reality to note is this: you may let your sibling hang here rent-free, but the IRS has other ideas. Legally, your tenant has agreed to cover all costs (other than actual rent), and the Internal Revenue Service will label their minimal monetary contributions as taxable rental income. It seems the “tax man” always has a view slightly different than our own.
As superfluous and unnecessary as this may seem, it’s imperative that your family member (or anyone else living on your property) sign a lease with all customary terms and conditions. Consult a Chicago real estate agent to find out if you need to obtain a rental license, and then run your plan by a financial advisor to find the best course of action. While any income you receive from this arrangement will certainly be taxed, you should be in a position to depreciate the property.
In the interest of playing it safe, you should also invest in hazard insurance. Life’s a mess, and you never what could go wrong—it’s always best to be protected. You should also consider adding your name to the home’s title so you can hold the property in its entirety, should any unforeseen circumstances arise in the future.
In closing, we’d like to share an interesting legal caveat that adds a little certainty to this kind of agreement. You can gift up to $13,000 a year to an individual, tax-free. If you’re married your spouse can do the same.
The implication here is that regardless of what dollar amount your sibling pays on the home each year, they can pay you back with the $13,000 gift that you gave them and this will truly constitute a rent-free living situation. The money will still have to be “declared,” as the IRS no longer considers this your money, but it simplifies your arrangement.
So there’s your answer: Yes, it’s technically possible to live rent-free on someone else’s inherited property, whether it’s a Chicago condo, bungalow or townhome. Just make sure to cover your bases, financially and legally, then you can help cover your friends and family.