Co-owners of an investment property: Who gets the tax deductions?

[Thurgood]

What is the name of your state? Georgia

I'm considering partnering with a friend to purchase a home that will be used as rental property. All costs associated with the property will be split evenly. As long as it's possible to do so, both names will be on the deed and the mortgage. All money collected on the property will be split evenly

My question - in this scenario, who gets to claim the tax deductions? In addition, assuming a postive cash flow, how do we report rental income?

Is there some way that each one can report half the rental income and take half the deduction? Or does one of us report all income and take all deductions?

Thanks in advance for your help

[irsos]

Originally Posted by Thurgood

What is the name of your state? Georgia

I'm considering partnering with a friend to purchase a home that will be used as rental property. All costs associated with the property will be split evenly. As long as it's possible to do so, both names will be on the deed and the mortgage. All money collected on the property will be split evenly

My question - in this scenario, who gets to claim the tax deductions? In addition, assuming a postive cash flow, how do we report rental income?

Is there some way that each one can report half the rental income and take half the deduction? Or does one of us report all income and take all deductions?

Thanks in advance for your help

A partnership reports income and expenses using Form 1065. Each partner receives a K-1 which allocates income and expenses to each partner per the partnership agreement. The partnership is not a taxable entity - taxes are handled at the partner level using the K-1. I suggest you spend time with a tax professional. A partnership is not the only entity that can be used and you may want to learn about the pros and cons of each form of organization.

[abezon]

If you consider this to be co-ownership, then each person declares 1/2 the income & half the joint expenses, and 100% of any expenses they incurred separately, such as mileage to visit the house or to Home Depot for parts. Each owner would have options regarding depreciation. For example, if one owner is in a low tax bracket, she might choose 40-year depreciation, since that will result in less gain & tax upon sale of the rental. She might choose to capitalize certain expenses. All income & expenses are declared on Schedule E, page 1.

If this is a partnership, then the partnership files its own tax return (Form 1065) and declares all partnership income & expenses. (And makes all elections for the property.) The partnership return generates Schedules K1 for each partner, which reports net rental income/loss on Schedule E page 2. If the written partnership agreement requires partners to pay certain expenses out of pocket without reimbursement (such as mileage), partners can deduct their required expenses on Schedule E, page 2.

Option 1 is cheaper because you don't have to prepare & file a partnership return, but it can be difficult to get all necessary information exchanged, especially when the disorganized partner has a key piece of info & the organized partner can't file without it.

Whichever form you pick for tax purposes, make sure you have a written partnership/co-ownership agreement that specifies ownership, who keeps records, when information has to be exchanged, how decisions are made, what happens if there's a disagreement, what happens if there's a need for more money, whether there will be a reserve account for repairs, how to sell the place, how person A can get out of the rental business (sell to anyone, sell only to B, both have to sell, B gets to veto potential new owner, etc).

Also be sure someone does some research on your local landlord tenant laws & what the tenants' rights are, because violating the residential landlord tenant act can be hugely expensive for landlords who decide to comply with 'what they think the law ought to be' or what the law was in Texas. I believe we have a landlord tenant forum that should give you an overview of the potential issues. The 4 T's: "taxes, toilets, trash, & tenants" or as I says it, "tenants, tenants, tenants, & tenants."

[Thurgood]

Thanks to both of you for your informative responses. I've got a lot to learn. My wife and I watch those home investor shows and we're both baffled at the number of people who buy first and ask questions later.

Sounds like it's time to go pay a pro for pro advice.