Person A rents out part of his house to Person B. Person A ownes the property. Person B, who pays significantly less than market value for rent, has his own bedroom and Person A and B share the bathroom, living, basement, etc. Person A, who is good friends with Person B, does not claim the rent on any income taxes.
Person B is having a great deal of financial trouble and is going to try and file for bankruptcy. However, in order to meet the "requirements", Person B wants to start paying Person A market value for rent, or about three times as much as they are currently paying. Person A wants to help, but is afraid of any tax penalties.
1) Should any amount of rent be declared on income tax? Should Person A claim the smaller amount of rent as income?
2) If Person B files for bankruptcy and declares his rent, will he have to list who he pays rent to? Bottom line, if he declares his rent, will it send up a red flad to the IRS to look at Person A?
3) Is there anything else to know about taxes in terms of renters (in this case, roommates)?