So, the day has finally come to find out how much your rental property income will affect your child support payments. It won’t surprise you that many states consider that pretty money a significant component when calculating these payments.
As with any financial analysis, it’s essential to understand how to break down the numbers, especially with regard to child support. In most cases, the parent’s income is calculated in its entirety. You will need to provide proof of all your finances. For rental property owners, the court will pay particular attention to your total net rental income.
So, how is rental income calculated, and how does it play into child support payments? We’ll walk you through how to figure out your rental income so that you can prepare yourself somewhat for the road ahead.
What counts towards child support payments
The main factor that is calculated in child support payments is a parent’s income – the total amount of any salary or wages. This salary includes both taxable and non-taxable income.
The formula for calculating child support payments varies depending on your state. When determining gross income, several factors other than salary may come into play. These factors may include:
- rental income
- business income
- work bonus
- pension
- Investment
One thing to note is that many states allow deductions from gross income for the following things:
- property taxes
- Union dues
In addition to monetary obligations, some states also factor in the following:
- how much time the child spends with each parent
- health insurance costs
- age of child
- childcare costs
How to Calculate Rental Income for Child Support
If you’re wondering how to calculate total rental income for child support purposes, payments are based on a number of factors, but in a nutshell, here are the top three steps you should take.
determine gross income
First, how much cash is coming into the rental property? Let’s use $1,000 of rent per month as an example. At the end of the year, we have a total of $12,000 in gross rental income. We’ll remember this number as we move on to the next step.
factor in deductible expenses
Yes, you can factor expenses into the equation. To make things simple, let’s consider the following expenses:
- rental property tax: $500
- Repair and Maintenance Cost: $1,000
- Utilities: $1,200
- Property Management Fee: $2,500
In this case, the total allowable expense is $5,200. However, there are still some property-related expenses that you can deduct from your gross income, such as taxes and interest on your mortgage. We hold on to that $5,200 as we move to the next level.
Calculate Net Rental Income
You want to subtract total allowable expenses from gross rental income to determine your net rental income. Based on the examples above, we’ll use $12,000 of gross rental income minus $5,200 of total allowable expenses, which would equal $6,800 in net rental income. Therefore, $6,800 will be used in the calculation to determine the child support amount.
Remember that child support amounts will vary depending on your state. It is always a good idea to consult with a family law attorney or child support professional for guidance on how to correctly calculate rental income and child support payments.
Check Your Local and State Laws
Child support will be calculated differently depending on the state you live in. Often, states will provide child support calculators, which are a great starting tool for those desperately looking for an estimate; However, these calculators don’t delve into the nitty gritty of finance because they don’t factor in your specific circumstances. When looking into your local and state laws, here are some formulas or models you can look at:
income share model
Forty-one states use the income share model. So, think of the model the financial life a child would have if the parents lived together. For this, you will use the earnings of both the parents.
Melson Formula
Three states use this model: Delaware, Hawaii, and Montana. Think of it as a more extreme version of the income shares model. This formula includes additional factors and expenses, many of which are designed to consider a parent’s financial needs.
percentage of income model
Last but not least, six states (Alaska, Mississippi, Nevada, North Dakota, Texas, and Wisconsin) use the percentage of income model. It is a flat or adjusted percentage of the non-custodial parent’s income.
Rental Income and Child Support Payments FAQ
Here are the top questions people have when calculating rental income and child support payments.
Does child support count as rental income?
depends on. This is an ongoing debate among landlords because the child support recipient is at risk of non-payment – this happens very rarely.
If you’re a landlord and are considering counting child support as income, you’ll want to look at things like court orders and payments received. When it comes down to it, let’s say that child support income is less reliable than you initially thought, and you decide to evict a tenant and collect the balance owed. Will the state allow you to garnish the amount as ordinary income?
Since the Internal Revenue Service (IRS) does not consider child support taxable income, I would not consider it in calculating rent unless you have a HUD-specific home.
According to hud.gov, “[rental property] Owners must calculate court-awarded alimony or child support amounts unless the applicant can prove that payments are not being made and that they have taken all reasonable legal action to collect the amounts due, including payment applicable This includes filing with the appropriate courts or agencies responsible for ,
So, does child support count as income for rent? It depends on the situation and, if not necessary, on the risk the landlord is willing to take.
What income is counted for child support?
The income that counts toward child support may exceed your salary. In some cases, gross income may also include recurring capital gains or unrealized income, winnings from a day of gambling, rental income, and sometimes interest earned on retirement accounts. Usually, any additional income outside the salary is considered.
Sometimes if your rental properties are owned by C-corporations or S-corporations, the court may also rule that the retained earnings are subject to child support calculations. If, for any reason, you disagree with the court’s order, perhaps because you feel the source of income should not have been included, you may elect to go to the Court of Appeal to review the record. Review is to see whether there was a mistake of law and whether that mistake affected the overall outcome of the case by the trial court.
Is money from rental property considered income?
Sure, but only the net income from the rental property. so what does that mean? The term “rental income” does not mean that you are excluded from the total amount of incoming rent payments. You can deduct allowable property expenses from that amount, which will help you calculate your net rental income.
This is because “cash flow” is the amount that is derived from the rent being paid minus the interest portion of mortgage payments, property taxes, insurance and maintenance costs. Not everything you consider an expense is awarded by the court.
For example, in the Colorado Court of Appeals case, “the trial court found that the principal portion of the mortgage payment did not qualify as an ordinary and necessary expense for purposes of calculating child support.”
it’s all in numbers
According to the Census Bureau, “parents who received regular child support payments received a monthly average of $604 and a monthly average of $396 in 2017.” Although there has not been an average increase year-on-year, the number seems to be rising steadily.
If you own a rental property and are going your separate ways with your spouse, for whatever reason, make sure you really look at all the numbers, especially your total allowable expenses. Those expenses are important in determining your total rental income and the amount counted in child support payments.
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Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
