Do Co-owners Have to Deduct Expenses 50/50?

Question

A partner and I own a rental SFR as Joint Tennants with 50% ownership each. In the past we have split all income and expenses evenly and claimed them 50/50 on each years tax returns. We sold the property in 2017 and split the proceeds 50/50. However, my partner paid $20k more in selling expenses than I did. Can she claim more than her 50% share of selling expenses on her 2017 tax return, or must we each claim 50% regardless of who actually paid for it?

I found this excerpt in IRS Pub 527, but it refers to rental expenses, and not sales expenses...

Part interest.

If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership.

Example.

Roger owns a one-half undivided interest in a rental house. Last year he paid $968 for necessary repairs on the property. Roger can deduct $484 (50% × $968) as a rental expense. He is entitled to reimbursement for the remaining half from the co-owner.

It sounds like the IRS forces income and expenses to be divided according to ownership percentages, but since I am not a tax expert, I thought I would ask a CPA here on BP. Thank you for any help.

Michael Plaks · Answer

@Rick S.

Full discussion of various issues in your situation could be really long, and it's best addressed in a private consultation with a tax expert. I will give you something to start from, but it's not a complete answer.

Based on your description, I assume that you were not filing a partnership return for the property. Probably you were each reporting 50% of rent income and 50% of expenses, and hopefully you were actually splitting income and expenses 50/50. (If not - then it's a major mess, best left for professionals to untangle.)

Under this scenario, here is how you should have handled the sale:

• From the sale proceeds, reimburse each other for your respective contributions to the closing costs.
• Whatever is left - split 50/50.
• For taxes, each of you will report half of the sales proceeds, adjusted for the combined closing costs.

If you can go back and do it this way - your economic parity will be intact, and so will be your tax reporting. If it's too late to adjust - then, again, you will have what I will label a mess. Not just for taxes, but for basic fairness. It's possible to compensate for on taxes (not economically, though), but it requires a tax professional.

Additional complications will arise if the sale was reported by your tittle company 100% under one of your SSNs, as opposed to 50/50. I bet that this IS how it was reported. The IRS will think that one of you received 100% of the proceeds, while you actually received 50% each. Once again, a problem that can be addressed by a tax professional who knows real estate.

Michael Plaks · Answer

@Rick S.

What @Basit Siddiqi said is correct in the context of a partnership. But you did not treat it as a partnership, even though maybe you should have.

Split 1099-S will help you. If economic parity between you two is not a problem (file it under "famous last words") - then yes, each can report his/her respective contributions on taxes. Basically, each of you will have an independent calculation of your profit on your respective half-interest. It's not what I would ever recommend, but it is doable.

Your worst case scenario (and not a likely one) is the IRS auditing one of you and then deciding to cross-check against the other. Not very likely at all, but should it happen - you will be able to explain.

Basit Siddiqi · Answer

@Rick S.Unless there is a legitimate non-tax reason for your partner to pay the $20,000 closing costs. The IRS does not like shifting of income/expenses simply because the tax due to the IRS will be lower.

Rick S. · Answer

@Michael Plaks thank you for the comments. You are correct, we did not file a partnership return. We each reported 50% of income and expenses annually on our personal tax returns. The title comapny isuued each of us a 1099-S reporting 50% of the gross sales price. I am pretty sure we have done evrything correctly up to this point, and the economic parity between us is not an issue. I am trying to read between the lines on your comments, but cannot tell if you implied that we must report the sales expenses 50/50.

@Paul Allen the reason I am asking is becuase it would be more advantageous for her to have the additional $10k expense on her 2017 taxes than me. This is the reason i am asking if the IRS requires that sales expenses be slipt 50/50?

Paul Allen · Answer

@Rick S. is there some reason you can't give her $10K for your half of the closing costs to keep it simple?

Do Co-owners Have to Deduct Expenses 50/50?

Do Co-owners Have to Deduct Expenses 50/50?

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