How do I claim this property we bought?

Question

Some history: My brother and I purchased a home in a closed bid tax sale, and we've been working to get it rented.  We bought it in August 2012 and have been making repairs and funding it on our own.  We each have full time jobs, and have always filed basic tax returns.  I have always done my own taxes, and now I'm not sure how to file this property we bought.  It is both of our names, so should it go on his or my taxes? would it benefit him more than me since he has two kids/ does it make a difference? Any advice is appreciated, thanks.

Danny G. · Answer

No problem Steven, and yes I'm sure I'll be in touch with more questions.

Steven Hamilton II · Answer

Danny, I copied and pasted ny answer from another one of my responses.  I'm an accountant and I represent taxpayers before the IRS. Feel free to ask if you have questions.

Danny G. · Answer

Thanks to both of you for your responses. i do intend to have a CPA take over in filing however when I had asked a couple CPA's this question I got two different answers. One said either one of us could file it and the other not worry about it. The other said more along the lines that you both mentioned.

Steven, I'm not sure if you mean that a mistake is using the forum to get more info or perhaps using tax software at some point. Either way I am by no means educated enough in this area to just take one or two peoples advice on this. Since discovering this forum I have read through a lot and look forward to learning more as  I go.

Jon, the home was not rent ready as of 12/31/12 and yes we are 50/50. The partnership aspect is what clears it up for me in that we both will include it on our returns. I'll definitely be in touch with a CPA.

Jon Holdman · Answer

You have a partnership.  Whether its formalized or not (e.g., an LLC), you have a partnership.  The partnership should file its own return and should K-1's to each partner (you and your brother).  Then you include the income and expenses from the K-1 on each of your returns.  Assuming you're 50/50 into this deal, half the income and expenses will appear on each of your individual returns.

Your probably need a CPA to help you.  If its not yet rent ready, or wasn't by 12/31/2012, then very little of what you spent is deducible on your 2012 taxes.  Instead, most of what you spend adds onto the basis for the property.  Once its rent ready, then you will have established a basis.  Most, though not all, money spent after that will be deductible in the year you spend it.

Steven Hamilton II · Answer

Danny G.,

Welcome to BiggerPockets.  Congrats on getting your first property.

You have entered into a partnership in regards to the property. That means you must at least file Form 1065 US Partnership Tax Return.

All incomes and expenses will be reported on this form and that income will pass through to the both of your personal tax returns based upon your ownership percentage.

The limit is different for one person versus married.

Your biggest mistake is using a program to answer your questions.

I represent taxpayers(individual and business) before the IRS.

-Steven