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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!

yoozer8
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Asleepace
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    On 1, there is no limit on transactions over 10k, the bank just has to report them to the IRS if they are deposited as cash. You can receive a wire transfer/check over that no problem. However, you absolutely should not "structure" the transaction in such a way that it happens multiple times to avoid the 10k reporting limit if you handle it in cash, because that is a felony even if the reason for the transaction is legimitate! See: https://en.wikipedia.org/wiki/Structuring – BrianH May 13 '19 at 20:26
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    he would like to pay me the rent money for a year upfront why? – quid May 13 '19 at 20:53
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    @quid I also am concerned about unnamed 'circumstances'; understanding why someone acts oddly with money can be important. It may be as simple as that the roommate doesn't trust himself with the money, but that raises other issues to consider before cohabitating. – Grade 'Eh' Bacon May 13 '19 at 20:55
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    Thanks for replies guys! @quid without going into too much detail he has a drinking problem and he’s sober now but fears if he relapses he would spend what’s left of his money and not have enough for rent. – Asleepace May 13 '19 at 20:56
  • @BrianH would it be better to get the lunpsunp upfront and declare to IRS definitely don’t want to get a felony? – Asleepace May 13 '19 at 20:58
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    If it 11k total, you can deposit 5k in your bank and deposit the rest in a month. You will be fine as long it is not huge sums of money broken down to small amounts. For example, someone who tries to break down 500k in 9k pieces would definitely be in trouble. – Hustlepreneur May 13 '19 at 22:28
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    The financial ramifications have been better addressed by others. But really, you are moved in with someone who sounds like he's planning on drinking himself into a stupor some time soon? What's your exit plan?? –  May 14 '19 at 00:29
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    @GeorgeM well this friend is essentially family and I trust in him, this is temporary for about a year until he joins the military. The flat is 4bdr and the other roommates and I made have communicated with him that he'll have to leave if he starts drinking again, although in this scenario at least rent is covered. – Asleepace May 14 '19 at 00:39
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    @GeorgeM He doesn't plan that. But someone in this condition, considering himself not so stable, can be expected to drift into that behaviour. – glglgl May 14 '19 at 10:33
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    Perhaps you should assist in directing him to some professional help for his problem even if he's not currently involved in it since he seems to acknowledge that he has one. It would be beneficial to everyone involved and give him a greater chance at having a more successful life. – topshot May 14 '19 at 12:02
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    @Asleepace: sounds like your friend is taking a really sensible and responsible precaution by entrusting his rent money to you. Good on him for dealing with his condition so well, and good on you for being there to help him. – Paul D. Waite May 14 '19 at 13:25
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    @quid I've paid for rent and utilities in huge chunks (without having substance abuse problems) before. It gives a peace of mind that expenses have been taken care of in advanced. Some landlords even offer a discount if paying upfront. An old roommate got $50/mo off of rent by paying for a year upfront. – Lux Claridge May 14 '19 at 15:06
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    @LuxClaridge, prepaying can make sense, but that's not what's happening here. This is handing money to a friend to pay the rent as it's due. – quid May 14 '19 at 15:29
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    @topshot he's been sober for about 4 months now and he is currently involved in a program with a sponsor so he's getting the help he needs, this is more of a precautionary measure mention by other people. – Asleepace May 14 '19 at 18:21
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    @quid Since the friend has the money now, he could talk to the landlord about prepaying and getting a break. Although if this is government housing, that option might not be available. – Barmar May 14 '19 at 19:08
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    BTW, since when does the US federal government rent out apartments? – Barmar May 14 '19 at 19:09
  • @Bamar it's a trust owned by the federal government. – Asleepace May 14 '19 at 19:11
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    I'm proud of your friend. He knows his weakness, and it's little different from a person deep in debt hiding or cutting up their credit cards. – RonJohn May 15 '19 at 05:10
  • @Asleepace If you have some provision for kicking him out will he expect the remaining rent to be returned? – le3th4x0rbot May 15 '19 at 21:51
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    @trognanders that agreement is more between him and the other roommates, but ya I would return the money. – Asleepace May 15 '19 at 22:38
  • @Asleepace The potential need for immediate repayment of the entire amount is an important detail. Just prepaying the rent is not an option then. Are your roommates aware that evicting your friend will raise the rent for everyone, or will they expect you to pay the difference? – le3th4x0rbot May 15 '19 at 23:19
  • @trognanders ya we've had to deal with similar situations in the past and everyone knows the risks involved. – Asleepace May 16 '19 at 00:58
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    A lot of people are wary about the US$10k cash reporting limits. The real limits may be 9.9k to catch the unwary. In any event I would strongly suggest you take only 9k from your friend in advance and entrust him to pay the first 2 months rent himself. – KalleMP May 16 '19 at 05:14
  • @KalleMP ya actually that's a really good idea thanks! – Asleepace May 16 '19 at 18:18

6 Answers6

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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.

Rocky
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    "Since this amount is legitimate, don't worry about it." Civil forfeiture is a thing, and I could understand how some people may want to avoid raising any flags even if everything is legitimate. With CF, the onus is to prove the money is legitimate. Giving a years worth of rent is unusual. All this is understandable. Not saying they should structure, just giving maybe a touch of context to why someone would think they would want to. – Gregory Currie May 14 '19 at 03:52
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    It's my understanding that transactions (in the US) over $10K are perfectly legal, but structuring is clearly defined in the law as being illegal. But I am not a lawyer. (Civil asset forfeiture infuriates me, which is why I did some reading on this). – donjuedo May 14 '19 at 11:54
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    RE: "Best would be if your friend writes you a check." I would agree here, and while a little thing and surely not 100% legally binding, if he writes 'Rent for June 2019 to May 2020' in the Memo, that will only support the reason for the transaction. As the others have said, even if audited, this is all for legal purposes, so there is nothing to worry about. – R. Hamilton May 14 '19 at 13:53
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    @GregoryCurrie Civil Forfeiture could come into it certainly, but it could come into literally anything you own, under any conditions, without warning, so it shouldn't really be a concern. – David Rice May 14 '19 at 14:35
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    @DavidRice I think there is a special category of concern with civil forfeiture when dealing with cash. There have been a few cases in the U.S. of people moving with large amounts of cash (>= $10k), for legitimate purposes, being seized in roadside stops because that amount of cash is, itself, supposedly suspicious "enough". But this shouldn't be a cash transaction between the OP and friend anyways, so I agree that it shouldn't be too worrying here. – Upper_Case May 14 '19 at 15:51
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    @Upper_Case One of my friends is a public defender. She had a client arrested and charged with prostitution because she had $20 on her, which was seen as "consistent with prostitution" and was confiscated. The amount doesn't matter too much. – David Rice May 14 '19 at 16:11
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    @DavidRice I'm not suggesting that civil forfeiture can only come into play with large sums, just that it may be more likely to come up with a large sum (and more damaging if it does). A duffel bag filled with $10,000 is more suspicious that a $20 in your pocket, even if a motivated police officer can jam you up over either. – Upper_Case May 14 '19 at 16:21
  • @DavidRice I'm guessing that she was actually a prostitute and known to the police, though that doesn't excuse having laws that give that much discretion to the police. Sad. – Spehro Pefhany May 15 '19 at 10:01
  • Another benefit of depositing a check from your roommate is you can have him write on the memo line of the check, "Rent for [startdate] to [enddate]". Scan/photograph the check for your records (the bank will do likewise), and it'll be its own evidence to the IRS (and the federal gov) what it is for. DO NOT try to break the amount into smaller deposits. The bank will detect what you are doing and report it to the government. There's nothing illegal about depositing large amounts. It's a VERY different situation to intentionally try to hide from the government what you are depositing. – Jamin Grey May 15 '19 at 23:09
  • @JaminGrey unless you have multiple bank accounts. Then "detecting what you are doing" gets to be more difficult. Many banks in the US offer promotions for people to open up accounts and park money for some time. This could be a good opportunity. – iheanyi May 21 '19 at 01:46
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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".

Harper - Reinstate Monica
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    a safe way to collect interest on this money is a treasury note, the gains are small but is is guaranteed to give you the upfront money back at the end of the term, which can be 1 year or less – Reed May 14 '19 at 13:40
  • @Reed right that's what I was thinking, since I already have that much money and then some on hand might as well put the excess to work. – Asleepace May 14 '19 at 18:16
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    @Reed but OP needs 1/12th of the money every month. KISS and just put it in the bank. – RonJohn May 15 '19 at 05:01
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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?

Justin Cave
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    Awesome thanks for in depth answer, yes I think writing a simple contract is great idea and I am definitely aware of the risks involved with this friend, however he is essentially family and I am willing to take a slight risk with helping him out. – Asleepace May 13 '19 at 23:05
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    That's right, get it in writing! – Astor Florida May 14 '19 at 10:32
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    Absolutely, positively definitely get it in writing!! Make it strict about ONLY being for rent, and that he ONLY gets it back if he moves out. Even put in the contract that you're going to open a separate bank account, mention the name of the bank and promise that you'll show him monthly bank statements, and proof that the money went for the rent. This seems like being over the top, but it's the only way to eliminate ambiguity, doubt and mistrust while retaining the friendship. – RonJohn May 15 '19 at 05:07
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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.

S Spring
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If he were your child, you would just open an account "in trust for (his name)" with you as signatory. Banks do this all the time and exchange listed companies issue shares all the time (probably bonds too, but there's no reason for individuals to buy corporate bonds). You don't even need to do any paperwork.

But he's not your child. That means to establish a trust in his name, with you as sole trustee, you have to visit a lawyer. When you explain the situation (probably a half hour meeting, but maybe an hour), they'll draw up a standard trust agreement (no bells and whistles, no tax dodges) so you can do this in an ironclad no risk way. Between $500 and $1,000. Is it worth that for one year? Or is it better to just deal in checks and leave a clear audit trail.

The reason for writing contracts is to try to think ahead of time about the issues that might come up and deal with them before hand. How should the money be invested? For maximum profit or for maximum safety? Who shoulders the risk of loss and gets the gains? (Obviously the same person.)

sighthoundman
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  • Out of all the comments and answers trying to find ways around the problem, I'm surprised this is the only mention of the direct, by the book way to do what the OP is asking for: friend "owns" the account but the OP is the only one who can transact on it. No issues with taxes, who owns interest, etc. Gets my upvote! – dwizum May 15 '19 at 13:13
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I think the best thing would be for your friend to make a bank account in his own name, to be reported to the IRS as his. Interest earned is also his. He puts all the money in this account.

He then tells the bank that you are allowed to transfer money out of this account on his behalf.

Also in this case you should write up how things are supposed to work. Basically that you are allowed to take money from this account only for the payment of rent. The bank might want a copy, the IRS might want a copy.

This solution is most transparent for audits. It is also cleanest in case something unexpected happens. You should always plan for the unexpected.

Stig Hemmer
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