Tax Guidance on partnership in rental property

3 Replies

Hi, so a partner bought a duplex back in February. He was able to purchase with a low down payment. We had an agreement that we would split the closing costs/down payment for a 50% share in the property. Agreement is to split profits 50/50 as we co-manage the property together. When it was bought though we decided it was best to put solely in his name for the title and mortgage for financing purposes. Now I understand from a legal standpoint that most people would warn against this kind of handshake agreement, which I wouldn't recommend to anyone either, however we wanted to jump into it so that is where we are. We now have an LLC together for all of our future deals, but this property remains outside of it. When it comes to tax time what is the best way to go about it so we can split the the tax advantages of owning a rental property together? Can I take 50% of the depreciation of the property along with the profits? Should I come up with another strategy where he takes 100% of the depreciation now, and later when we roll it into an LLC then I claim the depreciation at a later time. In the end we are both open to whatever and what makes the most sense. Just wanted to pose the questions to you guys before talking with a CPA, and see if you have seen it before. Thanks for your inputs!!!

@Joseph Lucido

I had the same scenario and  my CPA  split the costs 50/50 as well as the income and depreciation. Quickbooks showed the ownership as 50/50 as well and kept "partner equity" at 50/50. No problems from IRS for 20 years and I had an IRS audit in that timeframe that was not questioned. Based on that experience I think your fine but check with your CPA because the CPA can defend you if questioned with rules and regulations. 

Multi member LLC operating agreements (which are governed by partnership tax law for federal income tax purposes), can be tailored to give you just about any level of flexibility you want.

However, with that tax flexibility comes reporting complexity and potential tax consequences that you will want to fully understand before you go down that road. Additionally, partnership tax law for the more complex operating arrangements is often beyond the professional expertise of most tax preparers including most general tax practice CPAs. 

Therefore you may need to retain more sophisticated tax assistance (which could be more costly) if you do intend to operate under something other than a simple operating agreement where all tax items are shared equally.

You will ultimately need to determine if the additional operating flexibility is worth the added tax complexity and cost.

@Carl Fischer Thanks, that is pretty much my scenario, split everything 50/50.  Good  to know that option is on the table.  @Christopher Smith thanks for the info, luckily right now just doing a 50/50 agreement so nothing too complicated tax wise.  I think as things become more fruitful down the road we may have to get creative with CPAs to figure out how to optimize each of our tax earnings. For now things should be pretty simple.  

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