Can multiple partners use depreciation to offset active income?

Question

If my brother and I hypothetically invested in an income producing property together, would only one of us be able to claim material participation in order to allow us to use bonus depreciation to offset our active income? we are both RE professionals as defined by IRS. If so, what would be the requirements that we would both need to fulfill in order to do this legally? I’m afraid that if one of us were able to meet the requirements, it would eliminate the other to be able to fulfill the requirement.

Donald F. · Answer

@David M. Thanks for trying to help. I think you need to understand bonus depreciation to know what I am trying to ask though. With bonus depreciation I’m able to accelerate a bunch of depreciation to the first year.. the accelerated depreciation would create a paper loss for the property for that first year. Typically you can only use passive losses to offset passive income. However, if you are a real estate professional and meet the material participation requirement, you can use the passive loss and use it to offset your active income. The material participation requirement is very strict, so I’m looking to understand if it’s even possible (and if so, how?) to have multiple partners use that against their active income. If it’s possible to have multiple partners meet the material participation requirement, it seems very tough. Yes, meeting with CPA about this — figured I’d ask if anyone knew the answer in the meantime though.

David M. · Answer

@Donald F.Oh, I'm used to hearing about it as accelerated depreciation where you commission the study...Again, if you meet the Real Estate professional requirements (at least 750 hours and more than half you hours is from real estate) of course you can use passive losses to offset active income. Lots of people/investors want to do that. Usually, its the REP requirements, not the material participation requirement that trip people up. Yes I'm aware of them.Still, my layman's advice still stands. I don't see why not. For a silly example, what if the partnership agreement states that all the partners have to be involved and they all "run the business." So, all would have put in the 750 hours, make the decisions, etc... Then, on their personal 1040 if audited/asked, they can legally say that they meet the requirements for being a Real Estate Professional (according to the IRS definitions). Otherwise, if the responsibilities are parceled out, they would need to individually show they had sufficient participation, etc. Well, good luck with your meeting. Maybe because I'm too close to this I don't see the real issue, or is there one aspect of the requirements that are concerned.Good luck.

David M. · Answer

@Donald F.I tried to answer that.Yes...A "regular" partnership doesn't actually "pay tax," its a pass through entity. Its files a return, 1065 I think??, but each partner should get a K-1 which tells each partner how to report/allocate the profit/losses on their personal 1040.If you are saying that if you take $100, for example, of depreciation can EACH partner use it on their 1040? Of course not. (in re-reading post, not sure what is "bonus" depreciation). Consult a professional. the "bottom line" profit/loss will be reported to each of you in accordance with your partership agreement, ie 50/50 split, 70/30, whatever. If accounting works out to $100 of passive income and you have a 50/50 split, each of you will report $50 of passive income.Now, let me point out that your question is potentially contradictory in it of itself. If you have an income producing property, how are you expecting to take a deduction on your return? Or, are you asking about the circumustance where the property is cash flowing but on your return its negative because of the depreciation? If so, what I said above applies. the depreciation "deduction" has nothing to do with your tax status as material participant or active Real Estate Professional. Does that help?

Donald F. · Answer

@David M. Yes but my question is whether or not it’s possible to have multiple GP’s qualify to use that depreciation to offset ACTIVE income

David M. · Answer

@Donald F.Unless you two create some sort of very special configutation, you will each have your own tax returns. The proceeds from partnership will flow to your individual tax returns. As such, whatever you do or don't deduct will be dependent on your individual tax returns.