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My client is selling two of his rental properties. I know…

My client is selling two...
My client is selling two of his rental properties. I know that I should use form 4797 to enter this on his taxes. But his brother did all the repairs because he lived close by, so the agreement was when they sold, the profits would be split 50/50. How do I show this on the 4797 form? I'm thinking along the lines that I should add 50% of the actual profit to line 21 which would effectively reduce his profit by half.What do you think?
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Answered in 3 hours by:
3/19/2018
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,111
Experience: Taxes, Immigration, Labor Relations
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We may not divide teh profit on 4797...

That agreement actually is a partnership agreement...

As one brother provided teh property and another his labor (and materials) - that is reported on partnership tax return - form 1065 - and in this case - the sale transaction still is reported on 4797 - but attached to the partnership tax return - and each brother would get K1 reporting his share of the profit.

That would be the proper way to divide the profit based on the agreement.

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Customer reply replied 3 months ago
I guess I'm a little confused. Probably because I don't understand how partnership reporting works. Once the numbers are entered on form 4797 won't my tax software automatically enter the profit (assuming there is a profit) to Schedule D and then to the 1040? How does the K-1 reporting change this?

When you put amounts into the tax return of the owner - that sale should be transferred to form 4797 and the gain will be transferred to schedule D - assuming long term gain...

That is correct. In this case we will not be able to divide the gain because the income realized from the property belong to the owner.

.

But you may not reflect here the agreement to split the profit.

In this situation - all income will be assigned to the owner.

The owner may however to pay the brother fro remodeling services without forming a legal partnership - that will allow the owner to add to the basis the cost of remodeling - and reduce the taxable gain.

However - the owner will also required to issue form 1099misc to report the amount paid to the brother for his services.

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Customer reply replied 3 months ago
I'm sorry, but now more confused than ever. You've moved from suggesting to issuing a k-1 to saying we now cannot divide the gain at all. I'm going to make a request to speak to another advisor.

Yes - these are different options.

But that are your rights - I will opt out - let see what other experts may add.

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PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 5,084
Experience: 35 years tax experience, including four years at a Big 4 firm.
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I'mCustomer I see you asked for a different expert. I can assist.

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Would a phone call help? That way I can address what you were told, as well as advise.

I'll make that offer now.

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Customer reply replied 3 months ago
The two rental properties were sold in Oregon. Do you have knowledge of Oregon tax laws?

I know the Federal laws, and most states follow Federal guidance in this area. And yours is a Federal tax question.

I'll check to see if there is a difference for you, but I don't think so. Let me check and advise.

PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 5,084
Experience: 35 years tax experience, including four years at a Big 4 firm.
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