Rental ignored; nothing in, nothing out.

[Possi]

Hey, I have an unusual situation with my client's rental properties in Florida. The rentals (2) are money pits. My clients went in with a friend with the understanding that when one wanted to sell, both would sell.
Their friend wants to hold on to the property, so in 2008 my clients did not participate in the properties at all. No rents received, no expenses paid.
They are still liable for the loan, but the partner has agreed to making all the payments, receiving rents and handling the rentals until they settle this.
My clients anticipate paying partner around $40k to get out of the deal. They will not make any money on the sale, but will lose money.

My question is this;
Do I let depreciation stay on the return until the deal is over? I know that when it sells, even if they lose money, depreciation "allowed or allowable" must be recaptured, so I am inclined to leave it on the return and take it again this year.

Thanks,
~possi

[taxmandan]

Were the properties available for rent? why no income? If they are withdrawn from the rental market I would not continue to depreciate them. Same as withdrawing any asset from business use, no depreciation after it's taken out of service.

[krazykev]

I am not sure if I follow. Did they each separately purchase a property for rent or did they combine their funds to purchase 2 properties?

If they combined funds to purchase two properties, then it is a partnership that should file a 1065 and distribute K-1's. The partnership will have to apportion the income and expenses to the partners regardless if one is active and the other is not. If they are just buddies that are separately liable for different properties then if your client chooses not to rent or actively seek to rent his property then he cannot deduct depreciation because it is just a second home.

Maybe it is just late on a Friday and I am misunderstanding your question, but that is how I see the situation.

[Possi]

clarification

Let me see if I can clear this up...

Two guys bought 2 properties and split all income and expenses.

It has not been reported as a "partnership" but individual rental properties, each recognizing half of everything.

My client has "withdrawn" from the rental activity. He told his friend he was "done" and has not participated in it at all in 2008.

The friend was in agreement with my client's decision and agreed to carry the rentals completely, income and expenses.

So, the friend should carry 100% of depreciation for 2008. My client has "withdrawn from the rental market" but the property has not...(taxmandan's quote) BUT the property has been withdrawn from the rental market.... as far as MY client is concerned.

I am coming to the conclusion that depreciation will not be taken. I should remove the Sch E from the return this year and deal with the sale and depreciation recapture when he finally gets out of the arrangement.

What says you????

thanks~
~possi

[Gretel]

I would say allowable depreciation was taken just not by your client so your client is not responsible for recapture either. Just treat it as idle property for your client, since it was idle for him.

[Possi]

thank you!

I appreciate the help!

[RLymanC]

Partners

The way you describe it sounds like a 1065 would be required.

[taxea]

Just out of curiousity...rentals are not considered businesses so why would two people who engage in renting the property and sharing the income/expense be considered a business requiring a 1065? taxea

[S T]

Business or Rental

I have always thought if two or more people entered into a partnership either for property investments/rentals, or a business, a form 1065 needed to be completed. Husband/Wife might be an exception.

I have always completed a Form 1065 for Rentals where there are two or more partners and passed through the income/expenses on K-1 form.

Haven't you had a taxpayer that received a K-1 form from a Limited Partnership that was an investment in Rental Real Estate?

Sandy

[dsi]

Possi, what did they do in 2007? File a PS return? Or did they file seperately, each showing only their share of profit/loss?

[taxea]

Nope, never have received a K-1 for a rental property. taxea

[Gretel]

I have always thought if two or more people entered into a partnership either for property investments/rentals, or a business, a form 1065 needed to be completed. Husband/Wife might be an exception.

Sandy

Real estate is the only exception for not filing a 1065. It is optional. There might be other reasons why it still makes sense to file a 1065. Since the husband/wife exception is available there is also a tweak to the election for not filing form 1065, which could lead to SE even for rentals but I forgot what it was and my info might be outdated.

[Possi]

No PS return; second question...

Real estate is the only exception for not filing a 1065. It is optional. There might be other reasons why it still makes sense to file a 1065. Since the husband/wife exception is available there is also a tweak to the election for not filing form 1065, which could lead to SE even for rentals but I forgot what it was and my info might be outdated.

Always learning.
I didn't do a partnership return because I didn't think one was required. I had rental property with a partner and we did the same thing. I have another client who shares one of his 3 properties with his dad. I run a copy of his Sch E so Dad has the mirror image... (which isn't always the case. Sometimes one spends more than the other.)

Glad to see the "chatter" this created, because it tells me I'm not asking a dumb question.

=)

NOW, do I stop depreciation on EVERYTHING that goes with each property? Points, furniture, carpet, furnace, cap improvements?

[Gretel]

NOW, do I stop depreciation on EVERYTHING that goes with each property? Points, furniture, carpet, furnace, cap improvements?

Yes, this is what I would do.

[Possi]

thanks again

Thanks Gretel, for your quick answer. I know everyone is swamped. I love my extended office.

=)

~possi