Overland Park, KS · Member since 2013 · 55 posts · 12 votes
Rentals that are in my name only, Schedule E deductions are pretty straight forward. Here is a more unclear scenario in a family partnership:
Rental property investment loan purchased with the mortgage in fathers name. After closing, myself and brother (his children) are quitclaimed and added as joint tenants (lender is fine with this). In that case, we are equal 1/3 owners of the property, but only 1 is the mortgage guarantor.
I assume the rental income is split 1/3rd on Schedule E taxes. Can the expenses (including interest,taxes) be split equally 1/3rd as well? Or does something different need to be done since only 1 person is on the mortgage?
Bonus points-- What if it's quitclaimed to an LLC we set up instead of personal names? The LLC would still operate as 1/3rd ownership each. The mortgage is also still in father's name. Does that change the taxation and deductions any different than the above scenario, in our own names?
Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
9y
You could split the income and expenses 1/3 each but another issue I want to point out is that when your father added you and your brother to the deed, he made a gift. Since you and your brother are entitled to 1/3 of the profits on said property, this is a complete gift and your father needs to file a gift tax return, Form 709. Most likely your father would not owe any gift tax, assuming he hasn't used his lifetime exemption (indexed for inflation, currently around 5.5 million).
Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
9y
And yes, the property can be quitclaimed to an LLC whereby all profits are split between the 3 of you. The LLC would then deduct the mortgage interest, and the loan would only be recourse to your dad (reported on his K-1). Keep in mind, you may trigger the due on sale clause.
I recommend you get with a CPA to help you structure everything correctly.
Overland Park, KS · Member since 2013 · 55 posts · 12 votes
9y
@Lance Lvovsky Thanks for the response. I left it out of the original text for simplicity sake, but after closing my brother and I are each 'buying' 1/3 of the cash to close, that way all 3 parties are equal 1/3 owner of the rental. The lender is aware of this and said it's fine, to just quitclaim to all 3 names afterwards, or quitclaim to an LLC. But went about it this way because I am closing on other properties in my own name right now so we used just the father's financials to qualify for this particular one, and the mortgage market does not allow lending directly to an LLC anymore.
Simply put, our goal for tax reporting is to divide all rental income for this one property equally in to thirds, and to do the same for all expenses (mortgage interest, taxes, insurance, repairs, etc.). From your above statements, it sounds like this is acceptable and conforms to IRS tax code?
I had read some articles online that even in joint tenancy, where multiple people own and are on title of a property, only the individual(s) legally obligated to the debt (i.e. named on the mortgage note) can deduct the mortgage related expenses (interest). I have not been able to find this clearly spelled out in the tax code, however.