Convert Rental Property to Primary and then Rent Rooms

[DonDR]

I own a property with my wife and son.  We purchased it and rented it for about 15 months, at which time my son moved into as his primary residence in mid 2020 when starting a new job.  He is living there as his primary residence and began renting 2 bedrooms later in 2020.  The first year of use as a rental property was on my tax return.

• How do I handle the change of use in our taxes, rental to primary and then to renting rooms?  The depreciation rate needs to change at the very least.
• Can I change reporting the rental income/property to my son's tax return?  We refinanced after he moved in and the mortgage interest now goes to his SSN.  He may be able to take advantage of at least some of the losses, which I cannot.

[gloriah5200]

If there are 3 owners of the property, then a partnership has been created unless another type of entity was selected. Each partner is entitled to his/her own % of share of partnership income, deductions, etc.

Since it was a partnership, then Form 1065 should be filed each and every year, Form 8825 is used to report the rental income and deductions and k-1s created for each individual owner from the end result to carry to their own individual income tax return.  None of the individual partners are entitled to claim the rental income or expenses or use the properties for free since they belong to a business entity and are business assets.

IRS Instructions for Form 1065

Publication 541, Partnerships

My recommendation is to go back and amend your individual return prepared incorrectly in the first year of ownership and each year since.

Unfortunately, the IRC does not allow a partnership to divide up the deductions and income anyway they want, there are guidelines to be followed.

When your son is living in the house, then he should either pay fair market value rent or consider the value of the housing he is receiving is a cash/property distribution on his k-1.  When the 2 bedrooms get rented, then the 1065 return will show rental income in proportion to the space being rented as income.

Please refer to the following link for additional information:

[DonDR]

Thanks for your response.  Not the answer I was hoping to hear as that is complicated.

[djohnson6940]

Just a thought and I'm not a tax expert, nor would I think this would be a legal issue- perhaps have your son hold a master lease with one owner of the property and only claim everything on one tax form; then figure out some sort of buyout or annual gifting arrangement.  Keep it tax legal and you should be fine. Just a thought.