The Caton Law Firm PLLC
206 S. Tennessee, PO Box 387 McKinney, TX 75070 - Phone.972.562.0777 - Fax.972.562.0780










Personal Attention to Individual Needs

RULES AFFECTING RENTAL INCOME

A.  Statement of the Issue. Rental income is most commonly a concern when an exempt residence is being rented for cash. This issue presents concern in two ways:

  1. For a single person, to whom such income is attributed, this is the greatest concern because attributed rent can result in disqualification. When an at-home spouse has title to the house, and the rents come in the name of the at-home spouse, this does not disqualify the patient, because Texas does not consider the income of the at-home spouse for purposes of eligibility… the at-home spouse could theoretically have unlimited income. However, if the at-home spouse is receiving income diversion from the patient in order to raise the income of the at-home spouse to the spousal allowance, this does become a factor. If the rents are income to the at-home spouse, then less income can be diverted from the patient.
  2. When there is an at-home spouse who rents the home while temporarily living elsewhere, there is some concern that the rental arrangement will be treated as an abandonment of the homestead, thus causing the house to lose its exempt status.

In your case you want to address both problems—you want to avoid countable income to the at-home spouse, so as to maximize the income diversion, and you also want to assure that the homestead status is maintained.

B.  The Law.

  1. Abandonment of Homestead. In Texas it is very difficult to be deemed to have abandoned a homestead. Intent to return is the primary consideration. Temporarily renting out the home while away does not cause it to loose its homestead status. Keep in mind that we often have unmarried clients on Medicaid, and the homestead is maintained as long as the intent to return is maintained. I have never seen a Department representative suggest abandonment of the homestead, even when the home is “temporarily” rented for upwards of ten years while the patient is in care. I see no reason why the rules would be applied any differently for the at-home spouse.
  2. Countable Income. In general, countable rental income is gross income received, less actual expenses such as (but not limited to) property taxes, utilities, maintenance, repairs and advertising. A new internal Medicaid rule adds the following regulations, however:
    • Expenses are deducted only when paid, regardless of when they are incurred.
    • Payments made to a client's agent under a power of attorney are deemed received by the client. Payments to other "responsible parties" who provide a statement that they are not making the payments available to the client are not treated as received by the client, if they made the rental agreement with the tenant; but a referral may be made to Adult Protective Services (for possible criminal referral).
    • Mortgage payments made by a tenant to the mortgage company are treated as countable income to the client; but if the residence is vacant and someone other than the client pays the mortgage, those payments are not treated as income

The full text of this important rule, which became effective July 1, 1997, is reproduced at the end of this memo.

C.  Practical Experience. In the past, it has worked well to rent the residence to a tenant who agrees to pay all taxes, insurance, maintenance, repairs and other expenses in lieu of rent. The expenses exactly offset the payments made, so there is no net income to be counted; and the residence is maintained at no net expense to the client. Because the total is usually less than fair market value of the rent, this is also a good deal for the tenant, who usually is a family member. This appears to still to be viable under the new rules, so long as a mortgage payment is not being made. Some DHS representatives have suggested that it is necessary for payment of the expenses to go from the tenant to the client, then from the client to the provider (taxing district, insurance company, etc.). However, because such a policy would serve only to increase the paperwork for the DHS worker and the client, and because it has never been imposed on a client of mine in practice, I question whether this is truly policy of the agency. In the past, the “tenant” has simply paid the expenses directly, and we have not had any problems. The Department simply treats the transaction as if the spouse (or single patient) received the income and then paid the expenses for the month. The only way you run into a problem here is if you do collect rent each month, sufficient to cover taxes and insurance each year, and then you pay these expenses all at once… you may have deemed income during the year, and then be unable to offset more than a single months rent at the time of the payment. Thus, rents and expenses should be coordinated. Having the tenant pay directly, especially if you are dealing with a family member who can be trusted to save up during the year and pay the taxes and insurance when due, is the best solution.

If there is a mortgage payment to be made and the residence is occupied, there is a potential problem – mortgage payments are not listed as an acceptable expense in the rules, and in fact are deemed income if paid by the tenant directly. However, an interpretation sometimes given by some DHS representatives is that they will consider the payment of interest as an expense, therefore only the principal portion of the mortgage payment will be deemed income to the spouse, and that if a non-occupant pays the principal part of the mortgage for the spouse, rather than the tenant, there will be no income. Of course, if it is a small mortgage, or if you are in the last years of the mortgage, the payment may be mostly principal. You may lease to a grandchild for expenses only, but the parent of the grandchild (your child) may not want to pay the principal part of the mortgage.

Luckily, the DHS has tended to liberally interpret the rules. One such interpretation (extrapolated from bullet point 3 of the new rule) is that in a sublease arrangement, where the middleman makes the mortgage payment, the “tenant” {the actual occupant under a sublease that the owner was not a party to} is not making it (avoiding the first part of that bullet point). The second part of that third bullet point might seem troublesome at first (when the house is vacant… and someone other than the owner is making the payment), because when it is rented out, it is not really vacant… but the rules are intended to deal with rental income, so DHS representatives have in the past treated that provision as meaning that vacant refers to the owners only, assuming the rule to be in the context of a rental arrangement (because the patient or spouse is not living there), and thus when the owners are not in the house, but a tenant/sublessor who is also not in the house makes the payment, is not an occupant making the payment. This is not written anywhere, but it is nonetheless an oral tradition, which has reportedly been applied by the Department for several years, so that the person paying the mortgage may be the technical tenant (without any attribution of income), so long as he or she subleases to someone else who will actually occupy the residence; and the sublessor can even make a profit that will not count as income to, or a transfer by the owner. This seems to be a stretch on the part of the Department to make practical sense out of what are actually some poorly drafted and unworkable federal rules.

D.  Suggestions. The law in this area is cryptic and often interpreted for convenience. There are no clear written guidelines to my knowledge. Given the practical experience of the  past, I suggest the following:

  1. If the spouse will not be able to live in the house, outline the reasons why for future reference, just in case the question ever arises…for example, she is afraid to live alone or can’t maintain the house alone or medically needs others to be near by, or simply needs to be closer to the nursing home… The reasons why a patient is not at home are clearly medical.
  2. Outline the reasons why the house needs to be rented during this “temporary” absence… For example, avoiding vandals, avoiding multiple sets of housing expenses, the house will deteriorate if not maintained with normal maintenance and utility control.
  3. Enter into a lease agreement with a child. Provide in the agreement that the child will pay the expenses of maintaining the home, including utilities, repairs, taxes and insurance as due. These will be paid as they fall due, and will be automatically paid in the months in which they occur… if income is attributed, expenses will automatically offset that income.
  4. Do not specifically say in the agreement that the child must service the entire mortgage, but let the child voluntarily pay the mortgage. The child to whom you lease the house should not occupy the house. The lease should be a month to month lease only… after all, you may return any time. If the child is also your agent under a power of attorney, specifically provide that the child, in exercising his or her rights as a tenant under the lease, is acting in his or her own behalf and not as your agent. In an abundance of caution, consider naming a child who is not currently your agent, or the spouse of a child, as the technical tenant, who when then sublet to a third party.
  5. The child can then sublet to another family member or a third party. Under the most recent practices of the Department in this area, the child can even make a profit without any income or inferred transfer being attributed to you.

Excerpt from 1997 Rules

40 T.A.C. §455(e)(4):
(4) rents. Net rental income (gross rent less expenses incurred in the production/collection of income) is used in budgeting. Expenses are deducted from the month in which they were paid, regardless of when they were incurred. Rental deposits are not considered to be income while subject to return to the tenant; they become income to the landlord at the time of use.
(A) Rental income paid to a third party.
(i) If the rental agreement is between the responsible party and the tenant, and the responsible party provides a statement to the effect that he does not and will not make the payments available to the client, the rental payments are not considered to be the client's income. However, if the responsible party is the client's guardian/power of attorney (POA), the payments are countable income to the client, unless extenuating circumstances indicate otherwise.
(ii) If the rental agreement is between the client and the tenant, the payments are income to the client, regardless of whether the responsible party is making them available.
(B) Mortgage payments made by third party.
(i) If the client's homestead is vacant and a third party is making the client's mortgage payments using his (the third party's) own funds, these payments are not income to the client.
(ii) If the client's home is rented and the lease agreement specifies that the tenant pays the client's mortgage company in lieu of rent, these payments are countable income to the client and are treated as rental income.
(iii) If the client's home is rented and there is no lease agreement, voluntary payments of the client's mortgage by the tenant directly to the mortgage company are considered to be a "gift" to the client and are countable income.
(C) Prorating rental expenses.
(i) In multiple family residences, if the units in the building are of approximately equal size, prorate allowable expenses based on the number of units designated for rent compared to the total number of units. If the units are not of approximately equal size, prorate allowable expenses based on the number of rooms in the rental units compared to the total number of rooms in the building. (The rooms do not have to be occupied.)
(ii) For rooms in a single residence, prorate allowable expenses based on the number of rooms designated for rent compared to the number of rooms in the house. Do not count bathrooms as rooms; basements/attics are counted only if they have been converted to living spaces.
(iii) For land rental, prorate expenses based on the percentage of total acres for rent. There are various types of land rental, including hunting/fishing leases, pasture leases, sharecropping, and other farm income not derived from self-employment.