Real Estate Title Tax Reporting

[stalker001]

I have two guys who buy real estate on foreclosure, restore it and rent it out. They never formed a formal partneship. Some properties are registered in one's person name, while others are in another. The same with mortgages. Some properties are clear of any debt. Could someone please provide me with some direction on how report these activies for 2009. I do not want ask them to transfer title on their mortgaged real estate to a partnership (not formally created yet) because of the provision in the mortgage agreement. Thank you!

[erchess]

Question and Comment

What kind of mortgage agreement exists and between whom. In other words do the guys have an agreement between themselves about the mortgages or are you talking about the contracts between them individually and one or more mortgage companies? Also what does the provision say?

They have a partnership but without formal paperwork. This saves them on paperwork with their Sate Secretary of State but it puts them in an awkward situation if they get mad at each other as there would be no proof of what their mutual understanding was. The better lawyer would probably win.

[stalker001]

mortgage contracts

The contracts exist between them individually and mortgage companies. I was talking about the provision that says that the loan is due if one transfers the title. Thank you for you reply. I am not sure how allocate the deductions.

[Burke]

In the absence of any kind of agreement between these parties, it looks to me as if you have no choice but to treat each one of them individually and report those rental properties which are registered in the individual's name on their individual, respective tax returns. Depreciation would be attributable to the owner of each property. If they are co-mingling funds in this endeavor, it's going to be a mess.

[taxxcpa]

Agreement

In the absence of any kind of agreement between these parties, it looks to me as if you have no choice but to treat each one of them individually and report those rental properties which are registered in the individual's name on their individual, respective tax returns. Depreciation would be attributable to the owner of each property. If they are co-mingling funds in this endeavor, it's going to be a mess.

They probably have an understanding (agreement) between themselves that they would share in income and expense. Unfortunately they have not structured the titles and mortgages in a way compatible with their intentions.

They should transfer all property to a partnership if that is their intent. It is too late for 2009 taxes for that. The only way they could achieve what they want would be to take all interest, taxes, depreciation on their separate tax returns. To equalize the net profit they could juggle the rental income to make things equalize. But that might not be a legitimate approach.

[joanmcq]

I've got my ex who is doing this with another guy who happens to be my client. (I fired my ex a couple of years ago). I treat them both as equitable owners; they bought them this way because loans were easier to get with one party. I agree its a mess though, and if there is a falling out, the better lawyer will win.

[Snaggletooth]

Every Tub

"And it shall come to pass, every tub shall sit on its own bottom." - Jordan 8:28 old testam.

Each of these guys needs to sit on his own bottom. This means properties titled to client A gets reported by client A, and properties titled to client B get reported by client B.

Payments within each property to the other party should be substantiated by a 1099-MISC and deducted by the client reporting under said property. These deductions to be reported as income by the other party.

If the payments are the result of profit divisions, then this should be substantiated by a 1099-S instead of 1099-MISC. The client reporting under said property deducts as a nominee pass through on Sch D, and the other party reports as income on Sch D.

Sorry guys, but you are the ones who created this mess, and the only way to sort it out is for Every Tub to sit on its own bottom. Stalker, hope you bill a bunch to clean up this train wreck, and make sure you get quite a bit of it up front.

[taxxcpa]

1099-s

"And it shall come to pass, every tub shall sit on its own bottom." - Jordan 8:28 old testam.



If the payments are the result of profit divisions, then this should be substantiated by a 1099-S instead of 1099-MISC. The client reporting under said property deducts as a nominee pass through on Sch D, and the other party reports as income on Sch D.

.

There probably would be no 1099-S unless property was sold through a title company and the buyer financed it through a mortgage company or bank. If it was seller-financed, there is not likely to be a 1099-S. If a 1099-S were issued by a mortgage company, then it would be issued to the owner of record. Any shifting of income to equalize expense would require some other kind of fancy footwork.

[Snaggletooth]

Nominee

Taxxcpa, my belief is that any of the forms in the 1099 sequence can be issued as a nominee statement to defray income which would otherwise be reportable by the primary recipient. Not sure about 1099-S, but I do this frequently for 1099-INT,-DIV,-MISC. Please correct me if I'm wrong.

[outwest]

Agree, the past is a mess, but going forward..

and thinking of solutions rather than doing post mortem.

How about the partners form a operating/management entity to collect all the rents, make repairs etc. The operating co then pays to each property owner a fixed amount to cover the mortgage payment, depreciation and taxes. In effect each individual rents to the operating entity with that transaction showing up on their personal Sch E.

At the operating entity level, they can allocate any profits or losses between them as they wish (I know, assuming substantial economic effect)

I used "entity" because it's not clear what entity type would fit the operating entity best.

Also, note that the operating entity may generate SE tax to the members. This might be managed with reasonable, consistent adjustments to the rent paid through to the property owners.

Last, whether this works will take some time and care to set up and these guys ( who like to wing it ) are going to have to develop some operational discipline.

[Gretel]

My two cents. I agree in this situation that, for 2009, the only way to report this is individually, however this is done.

All I am addressing is the ownership of title and mortgage. Until very recently I believed that every mortgage follows the title. That is not so. A client of mine constructed apartments buildings with constructions loans of which title was subsequently transferred to two different entities. Maybe construction loans are different from regular mortgages.

The construction loan was not paid off and bank just added the other two companies to their loan papers.

[stalker001]

Thank you.

Thank you so much for all replies!

[stalker001]

operating company

Outwest, what if they create an operating entity and charge a management fee to cover interest, depreciation, taxes, repairs, etc.

[Y2KEA]

I have a situation similar to this. I do returns for two individuals who own multiple rentals.
I report 50% of income and expenses on each of their returns. As to the 1098 forms, while they are each named as borrowers on the 1098, of course only one SS# appears on the form. And don't forget the 1098 for their personal residence.

Some loans had the SS of TP #1 & some had TP #2.

I filed this way for a number of years until the IRS matching program finally threw up a red flag. Here comes the CP2000 stating that TP #1 had deducted too much mortgage interest. IRS adjusted his return & demanded a zillion dollars.

Now these two taxpayers are every tax professionals dream. Everything is fully documented down to the penny. No ceiling deductions. Spreadsheets galore. They practically do the return for me. I told the clients what the IRS was saying & not to worry, I could make it go away.

I responded to the CP notice & provided a complete analysis of the 1098's & included copies of everything. My response with attachments was the size of a small phonebook. The IRS accepted my response & never said anything about "Ya gotta file a partnership return".

In the years following that mess, I reported on statements attached to the return showing total mortgage interest deduction reported to TP #1 and then added back 50% as "nominee interest" reported on the return of TP #2 showing his SS# and vise versa.

Since then, there have been no more CP2000 notices. So I guess the IRS can see what is going on if it gets kicked out for review and they do not seem to be concerned with a non partnership reporting of this activity. Or else they just haven't out yet that it should be on a 1065.

So, bottom line, the IRS is buying it as reported. And oh yeah, don't ask me for Cliff notes on this. These are the Cliff notes.

Y2KEA

[Gretel]

Thanks for sharing.

Besides everything else I truly believe that IRS in general is very impressed with spreadsheets and if it gets more complicated I have no idea how to read them.