Before we discuss joint ownership of rental property income, let’s take a quick look at how to calculate income and expenses from a rental property. According to IRS Topic No. 414 Rental Income and Expenses, rental income includes:
- Amounts paid to cancel a lease – If a tenant pays you to cancel a lease, this money is also rental income and is reported in the year you receive it.
- Advance rent – Generally, you include any advance rent paid in income in the year you receive it regardless of the period covered or the method of accounting you use.
- Expenses paid by a tenant – If your tenant pays any of your expenses, those payments are rental income. You may also deduct the expenses if they're considered deductible expenses.
- Security deposits – Don't include a security deposit in your income if you may be required to return it to the tenant at the end of the lease. If you keep part or all of the security deposit because the tenant breaks the lease by vacating the property early, include the amount you keep in your income in that year. If you keep part or all of the security deposit because the tenant damaged the property and you must make repairs, include the amount you keep in that year if your practice is to deduct the cost of repairs as expenses. To the extent the security deposit reimburses those expenses, don't include the amount in income if your practice isn't to deduct the cost of repairs as expenses. If a security deposit amount is to be used as the tenant's final month's rent, it is advance rent that you include as income when you receive it, rather than when you apply it to the last month's rent
Expenses are:
- Depreciation – Allowances for exhaustion, wear and tear (including obsolescence) of property. You begin to depreciate your rental property when you place it in service. You can recover some or all of your original acquisition cost and the cost of improvements by using Form 4562, Depreciation and Amortization (to report depreciation) beginning in the year your rental property is first placed in service, and beginning in any year you make improvements or add furnishings.
- Repair costs – Expenses to keep your property in good working condition but that don't add to the value of the property.
- Operating expenses – Other expenses necessary for the operation of the rental property, such as the salaries of employees or fees charged by independent contractors (groundkeepers, bookkeepers, accountants, attorneys, etc.) for services provided.
When there is joint ownership of a property with a non-spouse, typically each party reports his or her share of income and expenses on their individual tax return using Schedule E.
You could also choose to create an LLC, partnership or S-Corp for the ownership of the property. That would require the filing of a Form 1065 or 1120-S depending upon the choice.
The question of having to file an Arizona tax return is based upon how much net income this property generates plus a proration of all your income. See: Income Tax Filing Requirements for the 2024 Arizona filing requirements for non-residents. If you are operating at a loss you would not have needed to file a 2024 Arizona tax return.
This answer is limited to the tax implication, though I would be remiss to tell you, and by extension your father, that both Arizona and California are community property states. You should check with a licensed attorney preferably one licensed in both states, if possible. I wanted to make you aware, so that you do not limit your research just to the tax implications.
Thank you for your question @rosasanc8
All the best,
Marc T.
TurboTax Live Tax Expert
28 Years of Experience Helping Clients
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
