Patrnership Ending & Dividing ...

[Brad A]

What is the name of your state? California

My brother & I started a partnership 10 years ago
where he put up the down payments on 2 rental houses
and I managed them. The houses were kept
in his name so that 100% of depreciation would
go to him. I leased them back from him yearly (which
he reported on a Sched E) and I then rented to my tenants
(which I reported on a Sched C).

At the end, we split the houses; he kept one and I
reimbursed him for the down payment on the other
(which took the form of my being a nominee for part
of the gain on the house he kept and sold). He's going
to deed the remaining house over to me.

How do I report this to the IRS ?
What will be my basis ?
Where/How do I report the nominee $'s ?
I have a much larger loss from a different,
failed business on the same return, so there
shouldn't be any tax implications.
Any other suggestions on structuring this ?
I intend to have the house end up in an LLC
that I control.

Thanks in advance,
-brad a.What is the name of your state?

[LdiJ]

Originally Posted by Brad A

What is the name of your state? California

My brother & I started a partnership 10 years ago
where he put up the down payments on 2 rental houses
and I managed them. The houses were kept
in his name so that 100% of depreciation would
go to him. I leased them back from him yearly (which
he reported on a Sched E) and I then rented to my tenants
(which I reported on a Sched C).

Where did the partnership come into play? Or was the partnership an informal one?
Did you ever file partnership returns?

At the end, we split the houses; he kept one and I
reimbursed him for the down payment on the other
(which took the form of my being a nominee for part
of the gain on the house he kept and sold). He's going
to deed the remaining house over to me.

Explain this part more clearly....use actual figures.

How do I report this to the IRS ?
What will be my basis ?
Where/How do I report the nominee $'s ?
I have a much larger loss from a different,
failed business on the same return, so there
shouldn't be any tax implications.
Any other suggestions on structuring this ?
I intend to have the house end up in an LLC
that I control.

I forsee some potential problems if a formal partnership was never in effect and if the houses weren't contributed to the partnership. It would appear that your brother has gifted you the house, unless you officially purchased it from him by financing it into your own name.

[Brad A]

>Where did the partnership come into play? Or was the partnership an informal one?
>Did you ever file partnership returns?

It was somewhat informal, although the yearly leases were in writing
and I maintained all the books for his tax filings. My side of the agreement
(the master & sub-leases being reported on my Sched C) even passed muster
with the IRS during an audit of my return in 2002. However, no partnership
returns were filed.

>Explain this part more clearly....use actual figures.

OK, I simplified things for the question. There were actually 6 properties involved.
At the end, he sold 3 for a net gain to him of $350K and I was nominee for
and additional $50K of his gain. I was actually on title to 2 of the properties
one of which he sold and the other was one of the ones I kept. For the remaining
2 of the properties that I kept, he was the only one on the recorded title to them.
At the time, the properties probably had an average value of $150K to $175K ea.

>I forsee some potential problems if a formal partnership was never in effect and if the
>houses weren't contributed to the partnership. It would appear that your brother has
>gifted you the house, unless you officially purchased it from him by financing it into your
>own name

The one I kept where I was on title should not be a problem as it was reconveyed
to my name and its equity balanced my equity in the other one in my name that
was sold. Kind of a perfect exchange where no money was involved, only reconveyance
of deeds.

I suppose the $50K of gain that shows on my return but that he kept could represent
my purchase of his equity in the remaining 2 properties. I'll have to check how much
equity is on our books.

However, if they do end up looking like gifts, what are the tax implications for him & me ?
Even after the $50K gain, I've still got a little over $200K of writeoff from my other
business to offset things on my side.

Thanks again,
-brad a.

[LdiJ]

On the two properties that were in his name, that you kept, did you also refinance the mortgages into your own name?

If so, that would effectively make them a purchase and should avoid the "gift" problem

However if they were classified as gifts or partial gifts, then there would be no tax implication for you....the implication would be for your brother. He would have to file a gift tax return (since the value of his equity was more than 12,000)...however, unless he has already reached his lifetime exclusion for gifting, there would be no actual tax due.