investment property tax reporting with multiple partners

[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?

[AJ Wong]

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!