I owned a rental property for the last 5 years, just sold in 2012. Only my domestic partner was on the mortgage, however I was on the title to home and rental agreements. I never claimed the rental on my prior taxes- she was taking the mortgage interest deduction. This past year I tood several trips involving hotel, car rental and food while working getting the rental in shape to sell. I also personally paid for from my funds only to replace damaged hardwoods and countertops in kitchen. I have receipts for all. Can I claim this on my taxes as a capital improvement without amortizing it. And can I claim at all since I was on not on mortgage. Thanks for your help.
I have tried researching online but cannot find anything on this topic.
Did all the rental income get reported on your domestic partner's returns?
Are you planning on reporting 1/2 or whatever portion of the property of the sale on your tax return for 2012?
No, I am not. There was only a very small profit (under $500), and because she was paying the mortgage and claiming the mortgage interest--she kept the small profit.
However, I could if it made a difference.
When did you sell the property?
I think you have a problem. If you don't report the sale, there's no place to deduct the costs that you incurred related to the improvements & expenses. Further, if you paid any of the rental expenses in prior years, then if your partner claimed them on her return, those tax years are incorrect also.
Did a bank hold the mortgage, and/or did you acquire your interest after your partner purchased the property on her own?
Why didn't you report your share of the rental activity on your tax returns? Was it because the mortgage was in her name alone, or were there other reasons also?
Neither of us claimed any rental expenses in prior years, we had good tenants that took very good care of the property. It was the same couple renting so there was never a move-out type of repair/clean up expense before. So, you are saying if we report the sale- and in turbo tax I did actually state the property was sold in 11/2012. I entered this already into INCOME section under rental/royalties.
I never reported it before because I didn't think I could. I wasn't on the mortgage- and the rental checks were made out only to my partner and direct deposited into her account. Because I was not on the mortgage I couldn't claim the Mortgage interest.
One or both of you should receive 1099s on the sale, if you haven't already.
A bank held the mortgage, and we both originally bought the house together in 2007. The reason I was not on the mortgage is because I already owned another home in Georgia.
I see. Okay.
Actually, that's not correct about the mortgage.
Would we split the profit on the 1099 issued by Chase?
It is highly unusual for a bank to lend money without the note corresponding to the title of the property.
Did your partner say that this was going to be her home verses a rental property?
we orginally lived in it together, and after two year's relocated back to Georgia and converted it into a rental.
I can check the original documents to see if I am on the note- but I don't think so. My debt ratio's were too high because I already owned anothe home. I am in mortgage business myself (loan officer for a mortgage company) and you can be on title but not on mortgage. Conventional loans do allow this.
You see, when you have a rental property, you MUST reduce your tax basis (cost) by the applicable depreciation whether you claim the depreciation or not; the term that applies is that "depreciation is allowed or ALLOWABLE". In other words if you don't claim it as an expense on your rental property schedule, you lose it.
I know it happens, it is unusual however in this day & age, unless there is substantial equity in the property as you can understand.
It's a little confusing. Am I understading you to say that as long as I claim it in the rental property schedule, also indicating home asset sold in 2012 and claiming 1/2 of the 1099 income on my taxes that I can claim the capital improvement. I spent 8k in new hardwoods and countertops because of damage to the existing. Have all receipts.
Not that it matters now anyway; but you said your partner reported all the rental income; so did she fill out a rental schedule each year, claiming the mortgage interest, real estate taxes, insurance, water, & what about depreciation?
There's no problem claiming the improvements and expenses, but they wouldn't go on the rental property schedule, they would enter into the computation of the property's tax basis that goes against the sale.
Yes- I just called her and asked. She did report all income on her schedule e's for each year the house was rented. And taxes/insurance, etc. I know that she also factored in depreciation, but I am not sure at what % she did that. We both used Turbo Tax, so I'm sure it was the suggested depreciation.
Well if she claimed 100% of the rental property, depreciation, etc. all these years, the entire cost of the property will be on her Schedule E, eventually transferring to Schedule D reporting the sale.
Okay. I think I am clear. Do you know what section the computation of the property's tax basis is under?
What should happen if she's going to report the sale, is that you should be reimbursed from the sales proceeds for the expenses that you incurred in getting the property ready to sell.
You really have no place on your return to report the transaction, given what was done in prior years.
I spent upward of 10k of my own money to ready the house for sale, there was only a small $450.00 check written back to us for the profit at closing. She went ahead and deposited that into her account. The only way to get anything back to claim it.
My thinking is that even though this is a new entry on my taxes, if audited, I can prove ownership in the house from 2007. I can also prove all fixes to house with receipts. We keep seperate bank accounts so nothing is joint. By proving joint ownership I was thinking I would be able to claim as a capital improvement for damages while a rental.
The computation of the adjusted basis is "behind the scenes" on Turbo Tax as it will use the information on the depreciation schedule, plus any additional information (like your fixing up expenses & improvements), plus the information entered in regards XX XXX sale, selling expenses, deed stamps, any sales commissions, etc. to compute the gain or loss on the transaction. You don't have any of the carryforward tax basis data because you never reported the rental activity.
Are you saying that there is not a basis for claiming this on my taxes? Just want to be clear.
You can't write those things off as expense when you never reported the rental activity. Even though there was only a check for $450., doesn't mean that would be the taxable profit. You also have the gain from the depreciation. Further, the maximum that you could claim in any one year as a capital loss is $3,000., unless you have other capital gains that you can offset.
Okay. Thank you so much. I think I am clear now.
Basically, your partner should pay you 1/2 of your expenditures unless you have some other arrangement as to why you spent all of your money, rather than splitting the cost.
One other point I was trying to get across:
Just so you know....................the deal with the mortgage interest being deductible..........if you were on the title to the property, your ownership interest would have been subject to the mortgage; for example, if your partner didn't pay the mortgage, in order to protect your ownership interest in the property, you would have to pay the mortgage; so that's where the deductability comes in; it isn't the same as a personal residence; so that is what makes it all confusing to people;
Yes- it is murky for sure. It just doesn't seem right that I can't deduct this expense on my taxes for a property I owned. I probably gave up deductions in the past by not claiming this property on my taxes, and now can't claim it because of that. My partner need the tax deduction she was getting on that property, and I already had one on the house I already own. But, IRS code is confusing at best.
I guess best said-- I can't have it both ways. I either claim half of the mortgage interest, expenses, small profit, etc. Or claim nothing.
Frankly, 100% of the property is on your partner's tax return; I'm afraid that you could be opening a bag of worms for both of you if you try to report 1/2 of the transaction on your return; neither one of you handled it properly from the time you turned into a rental property; the tax benefit you could receive by having a $3,000. capital loss is relatively small compared to the problems it could create.
right. I agree.
It isn't just a 2012 issue, it goes back to when you started to rent it.
You need to determine if a 1099 is going to be issued & if so to whom?
It is possible that no 1099 will be forthcoming if the sale was treated as the sale of your partner's personal residence.
Under present tax law, those sales aren't reportable.
It will have both of our names on it. The check for the $450.00 was a joint check. We both had to go to the bank to deposit it into her account.
If the gain is under 250,000 or 500,000 if married; but in your case who knows; 250K each?
OK, but perhaps they treated it as your residence.
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Senior Tax Expert; CPA/PFS(retired)
Personal Financial Planner; Small Business & Professional Mergers & Acquisitions