Co-Own rental property with Brother - Tax Advice

4 Replies

I co-own a rental property with my Brother (purchased last year). He paid 100% of the expenses for the property this year, and also received 100% of the rental income. (This includes mortgage interest).

Do I have to report anything on my end when I file?

Also, for 2018, we will be splitting all expenses 50/50. So if he claims 100% in 2017, will we be able to switch to 50/50 for the 2018 return?

Thanks for the help!

Do you own the property as tenants in common?
Are you both on the title of the property?

This can be a little bit more of the gray area. 

Have you considered reimbursing your brother for 50% of the expenses and then claiming it on your return?
That may be more of the safe approach.

doing 100% on your brother's return and then 50% the following year can lead to red flags from the IRS. They may think he sold 1/2 the property.

Thanks for the reply @Basit Siddiqi !

Yes, we are both on the title and the mortgage. 

The reason I ask is because he already filed his taxes, claiming 100%. It was lack of communication on both our parts which has now put me in a limbo. 

@Sonu Sidhu

A fundamental rule in business: avoid owning properties (or doing any business, for that matter) with family and friends.

But you already crossed that bridge and will probably dismiss my warning. Fine. Let's assume, against massive evidence to the contrary, that your partnership with your brother will be problem-free. ("Lack of communication" was your first warning bell, by the way.)

Here is what happened so far. Despite you believing that you're co-owners, you both acted as if your brother was the 100% owner in 2017. You should report nothing for 2017, that's the easy part.

The difficult part is how you will report 2018. If you share income and expenses 50/50 for 2018, then you each can report 50%. However, the correct way to do it would be to file a partnership return for the two of you. I suspect you will not want to do it, but it is how it's supposed to be done.

Once you start reporting 50/50, you will need to coordinate. For example, you will need to split tax basis and depreciation. If you don't know what they are, then you need an accountant to help you.

And you will be opening a can of worms as far as economic parity between the two of you. Will have to consider who paid what for the purchase and make an adjustment related to last year 100%/0% no-split. Not an easy task if done correctly. Or you can just sweep all of the complexities under the carpet and pretend that nothing happened. The property just magically turned from 100% his to 50/50 shared. Not the right way to handle it, of course.

Hi @Michael Plaks , thanks for the input! 

I do agree with you that there was a lack of communication & the right way to go about this would be to divide costs 50/50 with proper split of expenses between us. We are going to amend his return to show the correct 50/50 amount and made the decision to have much more concise communication, that way we don't trigger any red flags in the future.

Thanks for the help!

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