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In order to live near my son’s family we sold our house and built a house on their property next to their house. I handled the construction and paid for nearly all of the costs. The cost of the house was a gift to my son, so he owns the house. They have also requested that we give them money on an ongoing basis equal to about two thirds of what the house would rent for. They do not want this money to be considered as rent, but as ‘cost sharing’ for living there. Is it legally proper for them not to treat the money we give them as rent and not declare it as rental income for tax purposes?

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Please use a qualified attorney to answer this for you. And how is it cost sharing for you to pay what is essentially rent for a house you’ve already gifted to your son? That smells
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This is a question for an elder lawyer/estate planner or tax planner, since your state may have differing laws and we don't know all possible important other details. I personally would not risk crowd-sourcing an answer on a forum of strangers where there is no accountability. Consulting with a professional is worth the investment and peace of mind.
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How they report or don't report the money you give them is their affair, not yours. You wouldn't get in any trouble no matter what they do.

I just find it a tad nervy that they ask for rent for a property you paid to build then gifted to them. (Now THAT might have some interesting tax implications.) Talk to an estate planning attorney to figure out what you SHOULD have done and if anything is a problem now.
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I more than agree with all who suggest that you (and perhaps even your son) attend an attorney to draw up papers involving all of this. That this was not sorted BEFORE you built at your cost upon property that is not your, is not a good thing. Do what you can now to rectify the resulting confusion.
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