Etydhv

My close friend has just moved into an apartment with me and due to some circumstances he would like to pay me the rent money for a year upfront. The total amount will be about $11k total, and we as roommates pay our rent to the government (U.S.) online each month. I know there are limits on transactions that amount over $10k and I just have a couple questions:

1). If he gives me the amount in multiple increments so that no one transaction is over $9999, will the IRS care?

2). Are there any taxes or legal issues I should be aware of?

3). Lastly, this one isn't as important, but if I placed that money in security to get some interest would that change anything above?

Any insights into these or anything else I should be aware of would be greatly appreciated, thanks!

Short answer: you're ok, just deposit it all at once and keep records.

Long answer: the $10k rule is just what triggers an automatic bank report to the feds. Structuring the deposits into smaller amounts will be more trouble than it's worth, and could trigger the very audit you are trying to avoid! Since this amount is legitimate, don't worry about it.

Basically, your friend is paying back his share of the rent by giving you $10k. In arrears or in advance does not matter much as long as there is a clear explanation and paper trail. In the rare event that your taxes are audited by the IRS, you'll have to be able to explain why this $10k deposit is not income. As long as you have a rental agreement and your friend would attest that this money is him paying you back his share of the rent, you are fine.

Best would be if your friend writes you a check. Depositing that much cash is a red flag, does have reporting requirements, and the IRS may end up questioning the source of so much cash.

If you earn any interest in the meantime, that is a separate issue and would be just be taxed as interest income.

Transactions over $10,000 are only reported if they are cash. A personal or business check or a bank wire, for instance, originates in the banking system and is not cash. The banking system can provide a check or money order that is equal to cash but those things are only considered cash if they are less than $10,000 ! Then several money orders that add up to $10,000 or more is a transaction that is reported.

https://www.irs.gov/publications/p1544

A roommate receiving rent in advance is probably an implied contract that could be heard by a civil court. I would put the funds in a high-yield bank savings account.

If you're dealing with cash, do it in one deposit. Yes, your bank will generate some paperwork to let the government know about the transaction and that will potentially make the IRS more interested in auditing you down the road. But breaking up a large transaction into smaller transactions in order to avoid the bank generating that paperwork is a felony called structuring that could lead the government to confiscate all the money in the account. If you're making an electronic transfer, this is much less of an issue (though banks always have the option of making a suspicious activity report to the government if they see abnormal activity on an account).

To protect both of you, I'd put together a simple contract outlining what you're doing. State that Friend is giving you $11,000 today to be applied to the monthly rent from Time A to Time B in the amount of X/ month. That gives you documentation should the IRS or someone else inquire about where that money came from so that it's clear that you're not evading taxes.

If you're going to hold the money in an interest bearing account, do you intend to keep the interest or do you intend to pass that along to your friend? Either way, you'd want to specify that in the contract you put together in the previous paragraph. If you intend to keep the interest and pay the taxes, that's easy enough. If you want the interest to go to your friend, that's going to complicate things since the bank is going to generate paperwork for the IRS saying that the interest went to you. Assuming that you're getting something like 1% interest on the money so maybe $50 for the year (since you're spending down the balance every month), it's probably not worth the time and effort to fix the IRS paperwork. You could simply agree to write your friend a check for the interest minus the taxes you paid on that interest at your marginal tax rate. That would be income to your friend that he should technically declare and pay taxes on again (though it's incredibly unlikely that anyone in that situation would actually do so).

Separate from the financial arrangements, though, think carefully about whether this is really a wise thing for you to do. Mixing money and friendships in general is fraught with peril. What happens if 6 months in your friend says he wants some of his money to pay for something like car repairs? Are you going to give it to him, potentially leaving him short of rent at the end of the lease? Are you going to give him a loan from his own money that he has to pay back? Are you going to be responsible for figuring out whether he has relapsed and is really using the money to buy alcohol? Separately from that, if your friend is concerned enough about relapse that he doesn't trust himself to manage his money, do you really want to risk being stuck living with a roommate that has relapsed six months into your lease? If he's at a point where he's worried that he'd blow all his savings, he's probably at a point where he would be a really, really terrible roommate. Are you sure that you want to sign up to deal with that should it happen?

Do one transaction, and if they ask, explain it: there is nothing wrong with this. Do not split the transaction into multiples to avoid the reporting threshold; that's structuring even if what you're concealing is legal!

You aren't taxed on money you're holding for him.

If he moves out before the full year is up, you must be prepared to refund the unused portion of the money within I believe 15 days. (even if there's a lease, if he follows the procedure to break the lease, you have to give it back).

You are a trustee of this money, meaning you are responsible for it. You CAN invest the money any way you please, and you keep all the gains, but you eat all the losses!! If you lose money on the investment, you have to pay his rent or refund out of your own pocket. No excuses. This thing is called "leveraged investing".