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I currently own a property (50/50 split) with a friend that…

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I currently own a property...
I currently own a property (50/50 split) with a friend that we currently rent to a 3rd party tenant. The rental income covers our mortgage and outlays so there is no out of pocket expense each month, nor is there positive cash flow. I am considering moving into the unit as my primary residence. What is the optimal way for both of us to account for this property from a tax perspective? If I were to pay and claim 100% of the expenses (mortgage, association, etc), making it my primary residence and no longer a rental unit-would that help or hurt my partner's tax liability? The unit is in a city that charges a Business Priviledge tax with an effective tax rate of ~1.5%,.would the savings he realizes by not having to pay the tax offset any tax gains from claiming it as a rental unit?
Submitted: 8 years ago.Category: Tax
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Answered in 10 hours by:
6/18/2010
Tax Professional: Lev, Tax Advisor replied 8 years ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,255
Experience: Taxes, Immigration, Labor Relations
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You may convert the property from rental to personal and use it as a primary residence.

As an owner of the property - you may deduct real estate taxes and mortgage interest that you will pay.

If these expenses will be paid jointly with your friend - each owner may deduct his/her portion. However for your friend that would be a second (not main) home - and the mortgage interest may be deducted only on one second home.

 

The situation when you are jointly involved into rental activity - is a partnership.

A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.

Some additional information about partnerships may be found in IRS Publication 541 - http://www.irs.gov/publications/p541/index.html

 

All business income and expenses are reported on the partnership tax return form 1065 - http://www.irs.gov/pub/irs-pdf/f1065.pdf

Partnership should issue schedules K-1 to each partner reporting pro-rata share of net taxable income - http://www.irs.gov/pub/irs-pdf/f1065sk1.pdf

You should use schedule K-1 for filing your tax return.

 

You are not required to have a partnership agreement - while it is recommended to avoid possible litigations between partners.

All relations between partners are based on the agreement between partners.

 

Business Privilege tax expenses may be deducted as rental expenses for the partnership.

 

Let me know if you need any help.

 

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