Attn Accountants! 50/50 "Handshake Agreement" Tax Implications

[Kyle A.]

My best friend and I have a 50/50 stake in a rental property. He has a family and kids and did not have the free time to invest in real estate so he asked me to invest with him knowing that I have the time and expertise that he was lacking. The mortgage is in his name but we have a handshake agreement that we co-own the property and will split everything 50/50. We have a checking account with both of our names on it and all income and expenses go through there.

My question pertains to taxes. We have received conflicting information from several tax accountants. Our thought was that we split everything 50/50 including all expenses and depreciation. This is how both of our individual accountants agreed our taxes should be filed on the schedule E. However, we had another accountant say that I am not allowed to depreciate expenses because I'm not on the mortgage. I am only responsible for reporting my rental income on a schedule C. Is he right or are the other 2 accountants right? Why so much conflicting information?

Thanks in advance!

[Lynnette E.]

No, no, nope!  Get the agreement in writing, get your name on the deed, file the agreement too.  

Don't invest in real estate unless everything is spelled out in detail.  Even if you think you are best friends forever, twin brothers, etc.  get in in writing, notarized, written by an attorney, etc.  

What if your friend and his wife die in a car accident tonight?  Do you think you have any claim to that property based on a verbal agreement you can not prove?  

How do you get half of the property if his wife files for divorce and she gets half of his assets?  You think he will give you 1/2 of his 1/2?  Are you happy with 1/4 and his wife holding the majority interest?

Uncle Sam wants things in writing if you are taking a deduction, depreciation, etc.  You can not take a business loss for a business you do not legally have.  Verbal agreements in real estate mean nothing!