Rent-Free Living – Gift Tax Implications

Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts is an information return which must be filed by individuals to report certain transactions with foreign trusts and recipient of certain foreign gifts. Gifts or bequests from a nonresident alien individual or foreign estate with an aggregate value of more than $100,000 and gifts from foreign corporations or partnerships valued at more than $15,601 (in 2015) must be reported on Form 3520.  Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return is required to be filed by a U.S. taxpayer donor of a gift when that gift exceeds the annual exclusion amount of $14,000 (in 2015).

One form of gift people often overlook is the ability to live in a property rent free due to the generosity of a family member.  While not covered in guidance published by the IRS, this concept has been explored and somewhat fleshed out by the courts.  In Dickman v. Commissioner, 465 U.S. 330 (1984), the Supreme Court ruled that where a parent grants a child rent-free, indefinite use of commercial property which has a reasonable rental, there is a clear transfer of a valuable property right.  That measurable economic value associated with the use of the property transferred must be reported on a gift tax return.  In Dickman, the Court made broad statements that suggested gift tax statutes apply to all situations where one person allows another person use of property without compensation, specifically stating that “[t]he right to the use of $100,000 without charge is a valuable interest in the money lent, as much so as the rent-free use of property consisting of land and buildings.”  465 U.S. 337.  Support for this concept also appears in a Wineman v. Commissioner, T.C. Memo. ¶ 2000-193 (2000), where the court found that a taxpayer renting ranch property to her children at below-market rate constituted a reportable gift.

While the IRS may not have provided guidance on this specific issue, the case law is clear that when a taxpayer provides another individual with the use of residential or commercial property for free or below market rent, the difference between the fair market rent and the amount paid may be reportable as a gift, on Form 709 for U.S. domiciliary donee’s and Form 3520 by U.S. donee recipients of these gifts from non-U.S. persons.