maglib
Level 10

Investors & landlords

Thanks for that question as it made me do my homework and shockingly the IRS does not from what I found specify who must take the income and expense in proportion to their ownership....  I would definitely ensure that if you go this route, you document it clearly and keep proof of who got the cash and made the payments... individuals are cash basis taxpayers.

I do know that in NJ once when we coowned property that since we couldn't use the deduction the coowner paid all the real estate taxes and took the deduction and yes she actually paid them 100% and NJ corrected the return and would not allow her regardless of proof that she had paid them 100%.... They sited a NJ rule, the fed didn't audit it.....  I can't find the NJ rule.

Although I see no writing to the contrary from the IRS.

So then, the rent could be shared in varying proportions calculated to produce the maximum tax advantage for each owner, especially if one owner is a higher rate tax payer and the other a non or basic rate taxpayer.

See Rev. Rul. 71-268 long as the person paying the interest and taxes has an ownership interest in the property then that person can deduct the full amount paid. 

The rule when it comes to mortgage/home equity interest and property taxes is that 1) you must be obligated to pay the interest/taxes, and 2) you must have actually paid them.

If you and she are joint owners of the property, and you have taken out a mortgage/home equity loan against the property, and you make the payments, then you are entitled to take the deduction for the interest.

If you and she are joint owners of the property, then you are both obligated to pay the taxes, and if she is the one who actually pays the taxes, then she is the one who is entitled to the deduction for the taxes.

If both of you split the payments for the mortgage and taxes, then you are each entitled to take deductions for a proportional share of those expenses, assuming again, that you are both equally obligated to make the payments.

 So IRS allowed, did not subject to audit, our deduction although NJ state law did not, I can no longer find the rule the state sited.

Make sure you document your agreement FULLY!!!

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