Partner living in Partnership Rental Property

[equinecpa]

I have a partnership client who holds investment property. Most of the expenses with regard to the property are capitalized with the exception of interest/property taxes related to a rental unit. In 2011 one of the partners moved into the rental so there is no longer rental income. Should a FMV rent be imputed for the period of time the partner lives in the property? If it makes a difference the partners are related.

[Bees Knees]

A partnership is merely a vehicle to allocated income, deductions, and credits between multiple owners. If the partnership has not elected to be taxed as a corporation, then personal use of business property by a partner is treated similar to the way personal use of business property is treated for a sole owner. Deductions are limited or denied. For example, if it is rental property, vacation home rules kick in when there is a combination of personal use and business use. You would never think to make a sole owner of rental property pay tax on imputed rental income if he decided to move in and convert it to personal use property. Likewise, there is no imputed rental income to a partner who moves in and starts to use partnership property for personal purposes. Of course, that action could be unfair to the other partner, since the actions of the one cause deductions to be limited or denied to the other partner as well.

[Uncle Sam]

Partner Living in Rental Property

Interesting.
I have a very similar case.
Two people formed a 2 person LLC partnership years ago.
One partner put up all the money, the other (construction) guy was going to use his full time business
to improve the real property.

The original intent of setting up the LLC was to purchase real property, improve it, then sell it.
They improved it (all expenses were capitalized), then converted it to rental property with
a 3rd party arms length tenant, then had to evict the tenant for a number of reasons, then the
construction partner moved in to the place as his personal residence.

I only prepare the 1065 - I don't prepare EITHER partners' 1040. For 1 year I did the money guy's
1040 - but that was during the "improving the place" time.

What I've been doing on the 1065, has been to prorate down the expenses to the level of the
level of rental income being received by the partnership and charging either nondeductible expenses
for the difference.

[equinecpa]

Likewise, there is no imputed rental income to a partner who moves in and starts to use partnership property for personal purposes. Of course, that action could be unfair to the other partner, since the actions of the one cause deductions to be limited or denied to the other partner as well.

I guess what's bothering me is the restriction for the other partners. If I impute a FMV rent, the property will still have a small loss, which would be deductible to everyone wouldn't it? If I don't what would happen to this interest/property taxes -for the one partner I imagine it would be principal residence interest and property taxes, but what would happen to the other partners' share of the expenses? Do they just lose the deduction?