We bought a rental property this year so I'm figuring out taxes.

Friends who do this say they report paying their kids up to the roughly $13K limit that a dependent can have untaxed income.

I'm not going to brazenly report money falsely, we did pay our kids to do some cleaning, yard work, etc. and I do plan to deduct those expenses. But people are telling me that rental and farm business people "do this all the time" to save on taxes and it's "totally legit" to report up to the limit.

However, in experimenting with how this would impact our taxes, I've added "outside labor" under "misc expenses" in Turbotax, and it has zero impact. I put in a small number, then a huge number... and it's not changing a thing.

This is the first year of this rental business so we are already showing a very small loss on this business in the first year, due to all the startup costs. Is that the reason? Am I capped at showing 0 income? Did I find a glitch in Turbotax? Am I entering this in the wrong spot?

I'm intersted in help with the tax reporting issue, but also advise for how to use this potential tax break legally.

Not sure about the TurboTax part, but if you're employing your kids, won't you have to pay OASDI/Medicare taxes for the employer/employee? Also you'll have to fill out a W2 for them. I think people do this as a way to get money into their kids Roth IRA at an early age.

I'm reading that you don't have to fill out a W2 as long as you keep payments under the limit. However, if they have other jobs, their total income would have to be below.

I figured out the issue... rental losses can only offset passive income, not earned income. So there is no use in doing this this year. With startup costs, we already show a loss, but in future years, I can do it and cover some of the rental income to lower our tax liability on that property.

Bluecat_Aggie94 said:

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We bought a rental property this year so I'm figuring out taxes.

Friends who do this say they report paying their kids up to the roughly $13K limit that a dependent can have untaxed income.

I'm not going to brazenly report money falsely, we did pay our kids to do some cleaning, yard work, etc. and I do plan to deduct those expenses. But people are telling me that rental and farm business people "do this all the time" to save on taxes and it's "totally legit" to report up to the limit.

However, in experimenting with how this would impact our taxes, I've added "outside labor" under "misc expenses" in Turbotax, and it has zero impact. I put in a small number, then a huge number... and it's not changing a thing.

This is the first year of this rental business so we are already showing a very small loss on this business in the first year, due to all the startup costs. Is that the reason? Am I capped at showing 0 income? Did I find a glitch in Turbotax? Am I entering this in the wrong spot?

I'm intersted in help with the tax reporting issue, but also advise for how to use this potential tax break legally.

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MIght be a good idea to pay a tax preparer a couple hundred bucks to sit down and explain some things to you about this rather than do what friends do, or say they do. Likely they are not well versed on the topic. Those paying the $13k per kid are likely paying well beyond what the services provided are worth (particularly for a rental property) and would not fly under audit. Additionally, they would be held to be employees, requiring you to do the quarterly filings with the IRS and Texas Workforce Commission, as well as the year end payroll reporting. They are not independent contractors and, if treated as such, they would owe self-employment tax, even if they owed no income tax.

You call it a rental business but I am assuming you are reporting this on Schedule E. I am not familiar with Turbotax but you need to check whatever box indicates that you actively participate so that it gets treated as rental real estate with active participation and you get losses up to $25,000. Otherwise, it will show up as an "other passive activity" with no loss allowed. Even then, if your income is high enough, the $25,000 gets phased out, partly or in full, depending on your income.

When we got into the rental business was about the time we started paying for professional help on taxes. Just saying.

so you don't think reporting $500/hr for your kids' labors is a wise idea?

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You call it a rental business but I am assuming you are reporting this on Schedule E. I am not familiar with Turbotax but you need to check whatever box indicates that you actively participate so that it gets treated as rental real estate with active participation and you get losses up to $25,000. Otherwise, it will show up as an "other passive activity" with no loss allowed. Even then, if your income is high enough, the $25,000 gets phased out, partly or in full, depending on your income.

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There are more criteria to be able to take those losses up to $25,000, and we do not qualify.

Bluecat_Aggie94 said:

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I figured out the issue... rental losses can only offset passive income, not earned income. So there is no use in doing this this year. With startup costs, we already show a loss, but in future years, I can do it and cover some of the rental income to lower our tax liability on that property.

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This is the correct answer on why it doesnt change anything.

As far as your strategy as a whole, it is ok to pay your kids. However, the pay needs to be reasonable for the work they are doing and their age. And yes, they actually have to work for you.

All too often you see people on the socials saying "pay your babies", and with 99% of businesses, its just not reasonable. But teenagers - heck yeah, put those fools to work!

I've got three teens, and we paid them reasonable rates for cleaning and yard work, and that's what I had already entered. I'll let "everyone else" worry about audits.

Bluecat_Aggie94 said:

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I'm reading that you don't have to fill out a W2 as long as you keep payments under the limit. However, if they have other jobs, their total income would have to be below.

I figured out the issue... rental losses can only offset passive income, not earned income. So there is no use in doing this this year. With startup costs, we already show a loss, but in future years, I can do it and cover some of the rental income to lower our tax liability on that property.

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Rental losses can offset earned income provided you meet the participation requirement and your income is below the threshold for allowing losses.