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  1. #1
    Join Date
    Sep 2010
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    4

    Default Dividing Rental Property at Tax Time

    My name is Debbie and I live in Virginia. My daughter and a friend bought a house together 3 years ago. This past February they had a falling out and are now renting the house out. They have a signed lease from the occupants and have a signed partnership in the house where they have agreed to split everything 50/50. Both are on the mortgage. This past week they jointly paid off the equity loan that was against the property. For the past couple of days they have been going back and forth about how to claim the mortgage on their taxes. I want them to go to a tax professional and be honest. My daughter agrees, but her partner in the house wants to claim the mortgage as a regular home loan and not mention the rental. She feels it could have an impact on the type of home loan they have (VHDA) and their home owners insurance. I'm worried they will be audited and this could be seen in a bad light if they do not file property. How should this 50/50 "partnership" be handled?

  2. #2
    Join Date
    Oct 2006
    Posts
    5,190

    Default Re: Dividing Rental Property at Tax Time

    Quote Quoting damitchem
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    My name is Debbie and I live in Virginia. My daughter and a friend bought a house together 3 years ago. This past February they had a falling out and are now renting the house out. They have a signed lease from the occupants and have a signed partnership in the house where they have agreed to split everything 50/50. Both are on the mortgage. This past week they jointly paid off the equity loan that was against the property. For the past couple of days they have been going back and forth about how to claim the mortgage on their taxes. I want them to go to a tax professional and be honest. My daughter agrees, but her partner in the house wants to claim the mortgage as a regular home loan and not mention the rental. She feels it could have an impact on the type of home loan they have (VHDA) and their home owners insurance. I'm worried they will be audited and this could be seen in a bad light if they do not file property. How should this 50/50 "partnership" be handled?
    If they have an official partnership, then they are required to file a partnership informational return, and issue Schedule K1s via that return allocating the income to each of them in their proportional shares.

    If its not an official partnership, then your daughter should ignore whatever her friend does, and should file 1/2 of the rental income, and 1/2 of the rental expenses (including mortgage interest and property taxes) on Schedule E, and let her friend sink or swim on her own.

    However, the friend would be correct that the conversion to a rental would impact the type of insurance that they have (but that is easily remedied) and may possibly impact their mortgage. However, as long as the mortgage company is being paid, that would not seem all that likely these days.

  3. #3
    Join Date
    Sep 2010
    Posts
    4

    Default Re: Dividing Rental Property at Tax Time

    Their "partnership" is typed on paper and notarized, not official. I'm going to let her know what you have recommended. She is being asked to go the other route as it is more "advantageous" to them. We just want to make sure she does what is right - not what will maximize her refund, leading to possible later consequences.

    Thank you for the information!

  4. #4
    Join Date
    Sep 2010
    Posts
    4

    Default Re: Dividing Rental Property at Tax Time

    She relayed your response and received the below in reply:

    "I am afraid of the backlash from VHDA and its not tax advantageous. Not to mention with what we paid for the home, the depreciated value, the rental etc. its going to make us owe more on taxes, not gain, we can sit down with an advisor and they can show how and why, you can't deduct the mortgage payment, so essentially you would be filing the rent as additional income, NOT BENEFICIAL, I initially thought we had to file as investment, but with additional discussions realized we do not, if we decide to file that way, then we have to notify VHDA (they can change our terms), change the insurance policy, create an escrow account not have the mortgage just coming out of my personal checking, and take a loss at tax season. So give it some more thought, if the above has to be done we are both doing it and dealing with the backlash. I am tired of dealing with everything, but you think you can just dictate how we proceed without thorough research and talking with professionals and looking at the entire picture."

  5. #5
    Join Date
    Oct 2006
    Posts
    5,190

    Default Re: Dividing Rental Property at Tax Time

    Quote Quoting damitchem
    View Post
    She relayed your response and received the below in reply:

    "I am afraid of the backlash from VHDA and its not tax advantageous. Not to mention with what we paid for the home, the depreciated value, the rental etc. its going to make us owe more on taxes, not gain,
    This is very likely untrue. When someone has a rental property, with a mortgage, with all of the expenses and depreciation, they normally show a loss, therefore there is little to no potential tax disadvantage, and possibly a tax benefit. Certainly any profit is minimal.

    we can sit down with an advisor and they can show how and why,
    Any reputable tax advisor would NOT recommend that someone ignore rental income/expenses on their tax return.

    you can't deduct the mortgage payment, so essentially you would be filing the rent as additional income, NOT BENEFICIAL,
    That's a flat out lie. Mortgage interest and property taxes absolutely ARE deducted from rental income.

    I initially thought we had to file as investment, but with additional discussions realized we do not,
    Again, either a lie or very misinformed.

    if we decide to file that way, then we have to notify VHDA (they can change our terms),
    No, they do not have to notify the VHDA.

    change the insurance policy,
    Yes, they need to change the insurance policy...not a big deal at all.

    create an escrow account not have the mortgage just coming out of my personal checking,
    Not true at all...although it might be safer. I would certainly hesitate in having the friend in control of paying the mortgage, based on solely on this reply.

    and take a loss at tax season.
    Refer to my comments above.

    So give it some more thought, if the above has to be done we are both doing it and dealing with the backlash. I am tired of dealing with everything, but you think you can just dictate how we proceed without thorough research and talking with professionals and looking at the entire picture."
    There is no WE in this picture at all as far as taxes are concerned. Your daughter should do what is legal and correct. In addition, again, there is no reputable professional out there who would suggest anything that her friend has outlined here.

  6. #6
    Join Date
    Sep 2010
    Posts
    4

    Default Re: Dividing Rental Property at Tax Time

    Thank you! She wanted my daughter to see a friend of hers who does tax returns. In another email she mentioned saying she still lived in the house, and the lease was for roommates. As she doesn't live in the house, I am pushing for a legitimate tax professional. I appreciate your time! My daughter now has plans to go through a professional service.

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