Father owned four single family home rental properties as his sole and separate property. Father died intestate and as a result the property needed to be distributed as follows:
1/2 to surviving spouse
1/2 divided evenly among three children
Between the date of death and until the distribution of property was completed, the estate filed fiduciary returns, passing the income and the tax liabilities through to the beneficiaries according to the distribution schedule mentioned above.
In July 2020 title was transferred to surviving spouse and children to hold as tenants in common. ALL income/expenses (including mortgage payments, more details below) related to the rentals flows through one bank account. The remaining profit will be periodically distributed from that account to each owner, according to the owner's ownership interest. As far as I know this should keep the taxes simple: each owner will multiply the total rent and the total of each expense by his percentage of ownership and enter that amount on his Schedule E.
A few questions:
1. There is one owner (out of the four) who does 99% of the management, and all owners are in agreement that that one owner's share of income should be greater than his share of ownership. Instead of each owner receiving income and reporting income/expenses according to their ownership percentage, can they instead (collectively) come up with an alternative way to divide it? For example: surviving spouse = 48%, child 1= 22%, child 2 = 15%, child 3 = 15%.
1(b) Presumably, depreciation must be allocated according to ownership interest no matter what?
2. There is currently a mortgage on one of the properties. The loan is still in the name of the decedent. I've called the lender numerous times to try to get them to change it into the surviving spouse's name, but they don't seem interested. On the one hand, we like that arrangement, since that loan doesn't appear as a debt on the surviving spouse's credit report. But I wonder if the 1098 mortgage interest statement being issued in the decedent's name and SSN poses any issues. Currently, just like with all other expenses, on Sched E Line 12 each owner enters a fraction of the total interest paid that is equal to his ownership interest. Any issues there? What if the surviving spouse manages to officially assume the loan in her name? In any case , will the IRS really give us a hard time if they find out we're splitting up those interest deductions?
3. Does anything change if the three children retitle their interest as joint tenants (instead of the current tenants in common)?
Edited 10/06/2020 to reflect the fact that property was transferred from Estate to Beneficiaries in 2020, and that the previously outlined tax plans for the family were but an assumption of what would be proper for tax year 2020.
