Multiple owners; who/how deducts?

[Lion]

Residential rental property with two owners on deed and mortgage. One owner put up all the money to buy out former co-owners (three Haitians bought it to live in with their friends) but put his girlfriend's name on the deed (long-time live-in girlfriend he wants to have the house if something happens to him; they live on one floor of a two-family house and rent out the other floor). The bank required her signature when refinancing, so mortgage is in both names. He has a separate checking account from girlfriend. He collects rent, pays bills and property tax and mortgage, does the repairs, etc. Do both report income and expenses, or can he report 100%? If both, at what percentage: 50/50 or by time or by money invested or...?

I need code sites &/or Tax Court decisions and need help on how to find them. My very old, slow computer and AOL dial-up made web searches unproductive. But, I have a new computer this tax season and switched to Optimum cable. Need to find and bookmark sites for these things as I need them, so I can find them again the next time I need them.

Off to the office to meet with clients all day. Thank you for any thoughts and leads and help you have for me.

[OldJack]

The man has made a gift of half of the purchase price to his live-in girlfriend and must file a gift tax return, form 709, if the amount is more than $11,000 in 2005. Ownership is 50/50 and should file a partnership tax return, form 1065 which flows thru to form 1040 Sch-E, page 2, however, it is possible, depending upon the details, for each to report their half on form 1040 Sch-E, page 1. Read pub 541, "Partnerships", and pub 527, "Residential Rental Property.

[Bees Knees]

Not true

Just because they own the home jointly, does not automatically mean they need to split income equally. If he is the one collecting the income and paying the bills, he is the one who reports the income or loss from the activity.

Even if a partnership return was required (and I’m not saying one is required), partnership rules allow you to allocate income, deductions, and capital ownership in all sorts of ways. For example, you could have two partners share capital 50/50, share profits 80/20, and share losses 90/10, depending on who did what. Partnership taxation allows for all kinds of special allocations.

[Unregistered]

Code or Tax Court cites?

Thank you very much for your ideas. Does anyone have any websites for me with Tax Code or Tax Court information along these line? Good weekend everyone.

[OldJack]

true

Just because they own the home jointly, does not automatically mean they need to split income equally. If he is the one collecting the income and paying the bills, he is the one who reports the income or loss from the activity.

Even if a partnership return was required (and I’m not saying one is required), partnership rules allow you to allocate income, deductions, and capital ownership in all sorts of ways. For example, you could have two partners share capital 50/50, share profits 80/20, and share losses 90/10, depending on who did what. Partnership taxation allows for all kinds of special allocations.

For any split of partnership profit/loss other than 50/50 there must be a partnership agreement that spells out the allocations. This couple haven't a clue and don't even know they have a partnership let alone an agreement.

[Lion]

Partnership

They have not a clue about a partnership. Guy was hospitalized at age 12 in Haiti, so any education stopped at that point. He's illiterate in all languages. I got involved through a man at church who's a literacy volunteer and has been teaching him to read for the last five years or so. He'd asked for a fixed-rate mortgage to refinance, but mortgage company had him sign papers for an adjustable. He really wants the girlfriend to have no involvement in the rental but to be able to keep it when he dies (they live in 2/3 of the house and rent out one floor). Girlfriend makes no money or most was $1,200 in this country. Both are citizens now. IRS wants him to provide some cites why he can report all income and expenses and not just half. It's a loss, but the size of the loss makes the difference between owing more tax with interest on 2004 or not. I think the audit was triggered by his preparer who would come in from out of state in January or early February to pick up W-2s from employees at grocery stores, apply for RALs, and deliver returns to sign and checks at the end of March. Some very interesting deductions on those returns. However, the real case would still zero out his income and get him all his withholding back -- if he gets the entire loss on the rental and not just half. New to searching the web, finally have a faster computer and cable ISP. Please help with any leads for me.

[Bees Knees]

For any split of partnership profit/loss other than 50/50 there must be a partnership agreement that spells out the allocations. This couple haven't a clue and don't even know they have a partnership let alone an agreement.

First off, partnership agreements can be amended or drawn up after the fact, so draw up a simple partnership agreement that is retroactive back to 1/1/2005 and allocate all profits and loss to the guy, and split capital 50/50. That way girlfriend reports no rental activity, but shares in the sales proceeds should the property be sold.

Second, if the rental activity is not conducted as a joint venture, there is no partnership, since he is the one doing all the work, collecting all income, and paying all bills. A partnership exists when there is business conducted by two or more. The girl friend isn't conducting business in a joint undertaking. She only has a 50% interest in capital, so again, no partnership return is required because no partnership business is being conducted.

[OldJack]

First off, partnership agreements can be amended or drawn up after the fact, so draw up a simple partnership agreement that is retroactive back to 1/1/2005 and allocate all profits and loss to the guy, and split capital 50/50. That way girlfriend reports no rental activity, but shares in the sales proceeds should the property be sold.

I agree that if there is an understanding between the 2 owners there may not be a partnership tax return required, its facts and circumstances. I'll bet that if they split her attorney will want her share of the profits. However, it is not for a tax preparer to draft and back date documents but only to advise and prepare from the facts and figures presented in accordance with the rules and regulations.

[Lion]

Any Cites I Can Give IRS?

You've all given me great ways to think about this and to explain to my friend's mentee, if that's a word for the one who's learning from the mentor. Now, I have to find ways to show in print the nice IRS lady who's really trying to let this guy off the hook why she should accept his 100% of income and expenses due to this rental. Is my best bet finding partnership information re splitting income and expenses? A colleague found a Tax Court case re one person deducting 100% of mortgage interest when two people owned property as their personal residence. But, I don't have anything on target for deducting 100% of both income and expenses when there's another owner of a rental property. I'm a real neophyte at searching the web and find the IRS site ponderous. So any leads are greatly appreciated, any tax code cites, any Tax Court cases, anything at all is more than I have now. Thank you very much.

[Bees Knees]

One citation you can use is the Schedule K-1 of Form 1065. Show your IRS lady Part II line L and ask her why IRS allows a partnership to have different percentages for Profits, Losses, and Capital?

Then show her IRC Section 704(b) which says that a partners interest in income and losses is determined by the partner's ownership interest in the property, UNLESS there is a partnership agreement that provides for the percentage of a partners distributive share of income or loss.

Then show her Regulation Section 1.761-1(c) which says, "(c) PARTNERSHIP AGREEMENT. For the purposes of subchapter K, a partnership
agreement includes the original agreement and any modifications thereof
agreed to by all the partners or adopted in any other manner provided by
the partnership agreement. Such agreement or modifications can be oral or
written. A partnership agreement may be modified with respect to a
particular taxable year subsequent to the close of such taxable year, but
not later than the date (not including any extension of time) prescribed
by law for the filing of the partnership return. As to any matter on which
the partnership agreement, or any modification thereof, is silent, the
provisions of local law shall be considered to constitute a part of the
agreement."

Then tell her your guy had an oral agreement with his girlfriend to use their jointly owned property in a rental activity, and that he assured her she would not have to participate in the activity and that he would use his own funds to operate the activity and collect all profits, and that she agreed to the terms.

[Lion]

Wow

Wow, Bees, you and your Knees are the greatest! Thank you very much.