Business Rental - Related Party

[Mo Sheets]

I have a new client who has a business located in town. The wife owns the building and the husband (Schedule C - Sole Proprietor) owns the business. Husband pays rent to wife for the building. The husband is taking depreciation on his business equipment but the wife is not taking any depreciation on the building. The building is used 100% for the business. I was trying to do some research on related party rental. He is paying FMV rent for the building.

Any thoughts or suggestions? Thanks again. I know it is a busy time for everyone.

Mo

[JAinNC]

1st Thought: If they are filing a joint return the rental could be questioned.
2nd Thought: Do they have a real business relationship or just rearranging money?
3rd Thought

[JAinNC]

1st Thought: If they are filing a joint return the rental could be questioned.
2nd Thought: Do they have a real business relationship or just rearranging money?
3rd Thought They are missing a deduction ---- not a good thing.

[Gretel]

I have a new client who has a business located in town. The wife owns the building and the husband (Schedule C - Sole Proprietor) owns the business. Husband pays rent to wife for the building. The husband is taking depreciation on his business equipment but the wife is not taking any depreciation on the building. The building is used 100% for the business. I was trying to do some research on related party rental. He is paying FMV rent for the building.

Any thoughts or suggestions? Thanks again. I know it is a busy time for everyone.

Mo

Since he is paying FMV there is no doubt that this is a legitimate rental. I assume hubby is not on deed? Depreciation will need to be recaptured not matter if taken or not.

[S T]

Depreciation

Lots of questions,

Would this scenario fall under self-rental rules, not sure that is why I am asking?

Shouldn't wife be claiming depreciation on the building regardless, even if she rents to husband's business or a non related ?

Sandy

[Mo Sheets]

So many questions....so confusing!

The building was purchased by the wife alone and is in her name only.

The business and equipment was purchased by the husband and is run as a sole-proprietorship with one full-time (non-related) employee.

He pays rent to her of $1300.00/month. She is claiming the income on Schedule E but only deducting the property taxes and insurance....no depreciation. She purchased the building (and he the business) in 2003 and she has never taken depreciation on the building. He has always taken depreciation on the equipment.

So what is a mummified accountant to do? Again, I know everyone is fried too....I just need to know if there is any reason NOT to depreciate. Also, will I need to amend prior years returns (they were "self-prepared" by him) or indicate placed in service as of 1-1-08?
Not sure where to turn!

Mo

[peggysioux]

Business Rental

Rather than filing amended returns, file a schedule 3115 as it would fall under automatic change procedure and can be corrected all in one year.

[Gretel]

Yes, agree on form 3115 to catch up on all the depreciation.

Self-rental rule does not apply since ownership of building and ownership of biz is separate. How the tax return is filed and that they are married has no bearing on this.

[WhiteOleander]

Yes, agree on form 3115 to catch up on all the depreciation.

Self-rental rule does not apply since ownership of building and ownership of biz is separate. How the tax return is filed and that they are married has no bearing on this.

In TX, as a community property state, this would be considered self rental.

[Gretel]

There you can see how much I know about community property states. But that's OK.

[WhiteOleander]

There you can see how much I know about community property states. But that's OK.

That's why I depend on all of you to keep me straight in non-community prop states. I can't wrap my mind around those rules.

[Mo Sheets]

Thanks again to everyone!

Thanks again to everyone for your help. I am always amazed at how folks are so gracious and willing to help, especially during the busiest part of tax season. As always....I am grateful!

Mo

[Davc]

There you can see how much I know about community property states. But that's OK.

No, OK is a separate property state.