Dear Quentin,

My wife and I are both in our mid-70s and are unlikely to downsize from our present home, which has three bedrooms and offers single-floor living. The home also includes a 540-square-foot guest suite on a second level above our garage area, with a separate entrance. 

I have told my wife that at some point, we might consider working out an arrangement with a student or individual willing to trade living space for some agreed-upon house cleaning work.  

How practical are such arrangements, and would we run afoul of tax and related issues that pose potential liability? I would like to learn about pitfalls, and even become more educated so I can ask intelligent questions of an attorney if the idea merits consideration. 

Exploring Options

Dear Exploring,

It would typically be a smart idea to rent out the unused apartment over your garage, given that you don’t have any plans or need to downsize. But think twice if you don’t need the money. If you took the route you suggest, you would likely have to declare your arrangement to the Internal Revenue Service.

The IRS refers to such arrangements as “bartering for goods and services.” That is, there is an exchange of goods and services (apartment and housekeeping duties, in this case) but they have a fair market value. Your tenant/housekeeper would get a plum deal. 

“You must include in gross income in the year of receipt the fair market value of goods or services received from bartering,” according to the IRS. “Usually there’s no exchange of cash. An example of bartering is a plumber exchanging plumbing services for the dental services of a dentist.”

You can read more about that here.

However, I have concerns. Firstly, you will end up choosing someone (and vice versa) who needs somewhere to live rather than someone who actually wants to become your housekeeper. Secondly, if it doesn’t work out, they are still living above your garage.

It is an unnecessary blurring of boundaries and responsibilities. If you want to put your flat to use, I suggest renting it out to someone with a lease and avoiding any casual arrangements that could leave you exposed legally if, say, that person had an accident on your property.

Tread carefully.

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