IRS Section 131 adult foster care exemption?
The Guardian of an 81 year old ward with dementia has "rented" the ward's home to her caretaker for a nominal amount and has arranged a placement by an agency for developmentally delayed adults of the 81 year old into the ward's own home which is now apparently the "home" of the caregiver so the caretaker can qualify for IRS Section 131 tax exemption. The Guardian asserts but has not provided documentation that the ward would be paying the same amount of money for care regardless of the existence of a Section 131 tax benefit to the caregiver.
Does the Ward get any benefit from renting her home to the caregiver so the caregiver can get a tax deduction by claiming the caregiver has brought the Ward into the caregiver's home?
Is this arrangement legal and proper under IRS rules where the caretaker rents the home from the Ward which home is actually owned by the elderly Ward?
The Guardian has established monthly rent at $250 which is about $750 less than fair market rent for the area.
The elderly Ward is the title owner of the house. The Guardian has rented it to the caretaker so it can be considered the caretaker's home to qualify for the Section 131 exemption.
The Guardian is paying for caretaker services from the Ward's funds at $73K p.a. and sending them to the state authorized placement agency which keeps some for itself and sends the rest $53K p.a. to the caretaker for her tax-exempt fees.
- MathewLv 71 decade agoFavorite Answer
One step at a time.
The Ward rents her home to the caregiver. This creates a taxable event for the Ward (it is not stated but assumed that the Ward owns the house). For this to be a legal transaction the rent must be at least the fair market value of other rents in a similar neighborhood. And you have the issue of this arrangement not being a business relationship but rather for the purpose of tax avoidance. For the sake of discussion the FMV rent was $1,000. The Ward would not have $12,000 annual income (minus expenses). That could pose a problem for the Ward.
Generally, payments you receive from the state or other eligible entity for providing care in your home to a foster person are considered support for that person.
Section 131 (ii) states;
provided in the home of the foster care provider, and
(B) are designated by the payor as compensation described in subparagraph (A).
Sub-paragraph (A) basically state that the payments were intended to be support.
This poses the question of the caregiver maintaining the home as if were really hers and does she have a license to provide care at that location.
It would appear to me that these two problems alone would make this plan more trouble than it is worth. It is not clear who the payor may be but if it were a state agency they may have a couple of issues with this arrangement.
Based on the additional information I believe the caregiver is an employee of the Ward or the agency providing the funds and Section 131 does not apply. However my guess is that who ever is paying, the caregiver, is not reporting the income in any manner (W-2 or 1099 MISC). If the payor is treating this as support of the Ward (section 131) the likelihood of the IRS discovering the issue is slim. But should a bank robber steal 53k from a bank each year for 5 years and gets caught in the sixth years he still owes income tax on the proceeds. The fact that he got away with it for awhile does not relieve his tax liability.
- troLv 71 decade ago
renting the residence for less than the market value disallows all expenses of the rental income, which the homeowner would have to report
and the renter(also the caregiver) is likely not paying the cost of the maintenance of the residence as a renter, therefore, the caregiver would not be allowed to claim the Section 131--it is not the caregiver's home, the caregiver is not maintaining the home(only renting a portion)
the guardian is wrong in allowing the caregiver to claim this as his home(only a portion of it is his home)