50/50 rental - late filing. partnership? Schedule E?

Question

Hi everyone, new here, looks like a great resource to the avoid the mistakes I'm dealing with now...

In late 2008 My father and I purchased a property 50/50 down payment initially(we're both on the title), since then I pay the expenses, he does the labor/managing (I'm overseas). It was owner carried so no bank mortgage. It was "put in service" 2009 and till now neither of us have claimed anything on it for taxes. I hadn't filed my 2009 or 2010 taxes yet and am working on that now, while his make no mention of the house.

It's apparent now the partnership was a mistake. We can't claim his labor, so he works for free and I'll probably have to start supporting my parents soon anyways as their retired and social security isn't enough. The house is now underwater and rent about covers expenses, so we have little to no cash value.

I don't know what to do with this thing tax wise. I was thinking we would both need to claim half the values on schedule E part I (he'd have to amend his 2009 and 2010 returns) but maybe we have to deal with a 1065? Can I just have him do a quitclaim to me and claim the whole thing on my Schedule E? My father would gladly sign his (now worthless) half over.

where do I go from here?

Thanks,

Jeff

Steven Hamilton II · Answer

Hello Jeff,

I'll start from the beginning.

First you do NOT have to file a 1065. You both may just claim 50% of income and expenses (no matter who paid them).

Here is the IRS example:

"Roger owns one-half undivided interest in a rental house. last year he paid $968 for necessary repairs on the property. Roger can deduct $484 (50% x $968) as a rental expense. He is entitled to reimbursement for the remaining half from the co-owner."

Get those tax returns filed ASAP. You must fix it going back; however, you may fix it going forward.

You could pay him for labor and deduct it as an expense.(must give him a 1099 if you pay him over $600.

He does have to amend his tax returns. And must report the sale when you transfer it; which may cause a nice loss for him.

Just post here if you have any questions.

Steven Hamilton II · Answer

That is correct that it is not required; however, it is definitely recommended as further back up to support your expenses in event of an IRS audit. The IRS loves when you issue 1099s.

-Steven the Tax Guy.

Jeff Thompson · Answer

I'm seeing the 1099-misc requirement for rentals was repealed back in April, I think you may be mixing the co-owned passive rental and a full partnership. The Schedule E instructions for part I  states "Do not deduct the value of your own labor or amounts paid for capital investments".

I'm going to assume the 1099-misc stuff is moving towards a full on partnership and that isn't where I want to go. It's about even in his labor and my paying for expenses anyways, so I'll just treat it like a normal rental I own, just half the numbers, and when I buy him out I'll account for any difference in investment then.

Good points on the "paper losses", I'll just file it as it should be and not try to 'tweak it' for extra losses.

I see the path forward, Thank you.
-Jeff

Steven Hamilton II · Answer

Jeff,

Allow me to clarify. If the rental activity pays ANYONE over $600 you MUST by law issue them a 1099-misc. As is right now if you pay him $700 during 2011 to do work on the rental and manage it. Your EIN number will issue a 1099-Misc to him showing $700 in Box 7 non-employee income. On your 1040 Sch E you will deduct $350 in labor. And on his 1040 Sch E he will deduct $350 in labor.

The same goes for if you pay your mother $650. On your 1040 Sch E you will deduct $325 in accounting fees. And on his 1040 Sch E he will deduct $325 in accounting fees.

As far as showing a heavy "paper loss" You may not want to do this for several reasons.
1. If you want to get a mortgage you will want to show as high of an income as possible; however, it is illegal to negate expenses).
2. You should not spend $100 to save $25 on your tax bill.

Your activity (should grab an EIN number for it. Form SS-4 can be completed online.)

-Steven the Tax Guy

Your guide to tax law, rules, and regulations.

Jeff Thompson · Answer

I'm still not totally understanding the 1099 for the labor part. Do you mean I pay him and file the 1099 but can't claim it as an expense on the Schedule E? I believe if anything I've paid more in expenses than his labor, but just clarifying.

What about my mom? She's the one keeping the books, can I claim bookkeeping fee's for her? I imagine I'd need to cut checks and have receipts in case an audit came.

Someday I imagine I'll have a profit, I'd like to maximize my (paper) losses now...

Steven Hamilton II · Answer

Jeff,

What I meant by that was that you need to have your father amend his return. And you need to file your returns.

You can write a check; however, you will have to issue a 1099 for the labor.
Otherwise, sounds right.

Once it is transferred then you can pay him and just have to cut a check.

Ot

Jeff Thompson · Answer

Hi Steve, Thanks for helping me out! It's great to know I don't have to deal with the 1065 junk!

"You must fix it going back; however, you may fix it going forward." - I'm not sure what you mean by that.

Here's my understanding of how this is suppose to work, correct me if I'm wrong:

Up till we transfer his half to me our Schedule E's will both show half of everything and be essentially identical.

While we are partners, neither of us can deduct our labor as an expense on the schedule E, but if contributions  get uneven a check should be written from one partner to the other to even it out, but that's not reported anywhere.

When He transfers his half I can pay him managing fee's and labor cost for his repairs and deduct them. I'm guessing from that time forward I'd list the whole expenses on my schedule E and do another 4562 for the other half of the house.

Sound right?

50/50 rental - late filing. partnership? Schedule E?

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