investment property tax reporting with multiple partners

Member since 2021 · 16 posts · 6 votes

Kind of want to see if this is possible or absolutely not (I'm thinking not but just curious what others think). So my parents are doing a 1031 on their old property to buya new one. My brother and I would like to be co-owners to the new property but our contribution to the purchase of the new home is by way of investment loan, so let's say my parent's home sells for 500k and they want to go in on a $1M piece of property. We'll finance the other $500k. So it's 50/25/25. Whatever rent income/expense we receive/incur, is it split the same % as well? Is there a way where there is flexibility to the % allocation of income/expense? I didn't think so but I thought I'd ask. And are there any expenses that go on my itemized deductions?

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AJ WongBusiness Member

Real Estate Broker · Oregon & California Coast · Member since 2022 · 822 posts · 695 votes

Quote from @Mary Chen:

HI Mary. This is a good model but doesn't account for a return of the $500k your parents will contribute..For example if the property generates $10k per month with $6k in PITI & operating expenses the proposed return for your parents would be: $2k and $1k for each of the minority partners. Excellent deal for the minority partners (zero cash contribution) but a low ROI even accounting for tax savings of $24k/yr on a $500k cash investment. A way to account for the additional borrowing (or in this case effectively a cash gift towards down payment) is to attribute an interest rate to the $500k (or even an interest free loan over 30 years). At 0% interest...$500k/360 months is $1388. In our previous example of $4k net monthly income the disbursement would be as follows:

$4,000 Net income

$1388 principal loan repayment to majority partner

$1305 (50% of $2612) to majority partner

$652 (25% of $1305) to each minority partner

As your parents, they might not require or care about the same rate of return, or a return at all (except the equity position) especially if they're planning on utilizing the property for personal time. Sounds like a great idea and your method is definitely more efficient. Check in with @Joseph Chiofalo for help with structuring and investment loan solutions. We've worked together closely for 20+ years and he's very experienced with coordinated 1031X transactions. Good luck!

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AJ WongBusiness Member
Real Estate Broker · Oregon & California Coast · Member since 2022 · 822 posts · 695 votes
2y
Quote from @Mary Chen:

Kind of want to see if this is possible or absolutely not (I'm thinking not but just curious what others think). So my parents are doing a 1031 on their old property to buya new one. My brother and I would like to be co-owners to the new property but our contribution to the purchase of the new home is by way of investment loan, so let's say my parent's home sells for 500k and they want to go in on a $1M piece of property. We'll finance the other $500k. So it's 50/25/25. Whatever rent income/expense we receive/incur, is it split the same % as well? Is there a way where there is flexibility to the % allocation of income/expense? I didn't think so but I thought I'd ask. And are there any expenses that go on my itemized deductions?

HI Mary. This is a good model but doesn't account for a return of the $500k your parents will contribute..For example if the property generates $10k per month with $6k in PITI & operating expenses the proposed return for your parents would be: $2k and $1k for each of the minority partners. Excellent deal for the minority partners (zero cash contribution) but a low ROI even accounting for tax savings of $24k/yr on a $500k cash investment. A way to account for the additional borrowing (or in this case effectively a cash gift towards down payment) is to attribute an interest rate to the $500k (or even an interest free loan over 30 years). At 0% interest...$500k/360 months is $1388. In our previous example of $4k net monthly income the disbursement would be as follows:

$4,000 Net income

$1388 principal loan repayment to majority partner

$1305 (50% of $2612) to majority partner

$652 (25% of $1305) to each minority partner

As your parents, they might not require or care about the same rate of return, or a return at all (except the equity position) especially if they're planning on utilizing the property for personal time. Sounds like a great idea and your method is definitely more efficient. Check in with @Joseph Chiofalo for help with structuring and investment loan solutions. We've worked together closely for 20+ years and he's very experienced with coordinated 1031X transactions. Good luck!

541-800-0455
Sesemi | STR Brokers powered by Fathom Realty 516 Reviews
Website View Page
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Joel BongcoBusiness Member
Investor · Honolulu HI & Los Angeles, CA · Member since 2018 · 369 posts · 176 votes
2y
Quote from @Mary Chen:

Kind of want to see if this is possible or absolutely not (I'm thinking not but just curious what others think). So my parents are doing a 1031 on their old property to buya new one. My brother and I would like to be co-owners to the new property but our contribution to the purchase of the new home is by way of investment loan, so let's say my parent's home sells for 500k and they want to go in on a $1M piece of property. We'll finance the other $500k. So it's 50/25/25. Whatever rent income/expense we receive/incur, is it split the same % as well? Is there a way where there is flexibility to the % allocation of income/expense? I didn't think so but I thought I'd ask. And are there any expenses that go on my itemized deductions?

Aloha Mary, if you need local tax assistance, Gorden from Tax Services of Hawaii is a great resource.
[email protected]808-427-2444
Inspired Life Investments LLC.
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Account Closed
Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
2y
Quote from @Mary Chen:

Kind of want to see if this is possible or absolutely not (I'm thinking not but just curious what others think). So my parents are doing a 1031 on their old property to buya new one. My brother and I would like to be co-owners to the new property but our contribution to the purchase of the new home is by way of investment loan, so let's say my parent's home sells for 500k and they want to go in on a $1M piece of property. We'll finance the other $500k. So it's 50/25/25. Whatever rent income/expense we receive/incur, is it split the same % as well? Is there a way where there is flexibility to the % allocation of income/expense? I didn't think so but I thought I'd ask. And are there any expenses that go on my itemized deductions?

Hello Mary, without knowing much more you could structure a simple partnership or hold this property in an LLC which can be divided up as you see fit. The profits and expenses can flow "pro rata" if you set this up properly
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
2y
It would be possible if you buy the acquired property as Tenants in Common
[email protected]917-280-8544
Basit Siddiqi CPA4.979 Reviews
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Joseph Chiofalo
Banker · Henderson, NV · Member since 2023 · 316 posts · 73 votes
2y
Hi Mary,
Do your parents have a new property in mind that their interested in purchasing?
Would they be using the new home as a primary residence or secondary / investment property?
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