Unusual Tax Question Is this money for nothing? Is it Tax Free?

[Davido Davido]

I intend to borrow money from segregated rental income accounts that I have established for multiple parcels of apparently abandoned real estate that I control, but do not own. Does anyone know, of a law (State or Federal) that requires me to report, pay taxes on, or limit how long I may borrow these funds?

For a number of years, I’ve been in possession of and have been renting multiple vacant and apparently abandoned parcels of real property, both improved and unimproved. These properties where identified from their County’s list of parcels that are delinquent in paying their property taxes. (WA is a tax deed state in which counties file Property Tax Foreclosure actions after a property is 3 years delinquent). Each property was vacant and unmaintained, no one had paid the property taxes for at least 2.5 years, and the owner of record either could not be located with considerable effort or was found to be deceased. Upon compiling abundant evidence that the owners appeared to have abandoned these properties, I caused the properties to be cleaned up, rented them, and have since managed them almost as though they were my own.

Despite being in possession, I have no ownership interest in any of the properties. (Under the trespass law in my State (WA), an owner’s abandonment of real estate is a recognized defense to a charge of Trespass) https://app.leg.wa.gov/RCW/default.aspx?cite=9A.52.090. All rental agreements that I’ve made with the tenants of these apparently abandoned properties are month to month, and state clearly who the owner of record is, that the owner is currently absent for an unspecified length of time, and that the rental agreement may be terminated by me or the owner, if the owner returns.

Up to this point, the rents paid by tenants on these properties have gone into segregated accounts (not mixed with my own money). Where improvements were necessary in order to create a legally rentable space, tenants were offered discounted rent in exchange for making the necessary improvements. The tenants provided all needed labor, and the required materials were purchased slowly from the discounted rent paid by the tenant. Once a property was made minimally livable, any rents collected were deposited into the segregated accounts. After a property is livable (fully enclosed, power available, safe water, heated, etc.) all rents collected have been used only as necessary for property maintenance and to pay property taxes.

This has been a long process, the rents are generally low and the segregated accounts grow slowly, but growth is accelerating and now the total in all the segregated rental income accounts that I’ve set up is approaching mid five figures. Over the last five years no one has appeared to contest my possession of a property. They appear to be truly abandoned (WA law requires 10 years to adverse possess without color of title https://app.leg.wa.gov/rcw/default.aspx?cite=4.16.020). Since, WA law also has a six year statute of limitations to claim past due rent https://app.leg.wa.gov/RCW/default.aspx?cite=4.16.040 , I expect to soon have increased flexibility to use the money in the segregated rental income accounts that I’ve set up and control. For example, I could invest the funds in a loan to myself.

Does anyone know whether I am required to report a loan to anyone if I borrow money from one or more of these segregated accounts? And, if I never attempt to gain title to these properties (so that the properties and rents are never officially recognized as mine), does the money that I borrow ever become income to me -even when no one is likely to ever require me to pay it back? Do I need to ever pay Federal Income taxes on the money I spend from such a loan?