Do tenants in common owners need to declare rental income proportionate to ownership interest in property?

[given-2-fly]

We own a 2 unit home with other tenants in common. We reside in one unit and the other unit is rented (to non-owners). Do all tenant in common co-owners need to declare income on the rental unit proportionate to their ownership interest? Or can an agreement be made amongst co-owners as to who declares income for a unit? i.e. can co-owners A & B declare (if any) income from "unit 1", and co-owners C & D declare (if any) income from "unit 2"? Would the IRS hour such agreement amongst tenants in common?  

[Carl]

What I'm not understanding, is that if you, one of the owners, lives in one of the units, and there's only two units, what is there to split? You only have rental income from one unit.

[given-2-fly]

Does the income from the one unit need to be declared proportionately by all co-owners? Not all tenants in common have same ownership interest.

[SweetieJean · Accepted solution]

Income from the rental unit is claimed in proportion to each owner's ownership interest.

But is this a Partnership, C Corp, S Corp, etc?

[given-2-fly]

The property is not owned by an entity (Partnership, C Corp, S Corp); it is owned tenants in common (multiple co-owners with varying ownership interest). Two co-owners reside on the property, the other four co-owners do not. Does any income from the property need to be claimed by all owners in proportion to their ownership interest; i.e. is it independent of any of the owners residing or not residing on property?

[Carl]

Ummmmm... you have a partnership. With six owners, it "is" a partnership at a minimum. All income/expenses for this rental need to be reported separately from any personal tax return, on an IRS Form 1065 - Partnership return. It will still be a SCH E - but it will be attached to the partnership return, and nobody's personal return.
For this, you need TurboTax Business, which is different from Home and Business. Using that program to prepare the 1065 partnership return will also enable each owner to be issued the appropriate tax reporting document for use on their individual personal returns. If I recall correctly, (and I may be wrong) what each owner is paid can be independent of their ownership interest in the partnership.
Note that TurboTax business is not available as an online product. It can only be purchased on DVD, or as a CD/Download that after downloaded has to be physically installed on a computer. TurboTax Business is available for the Windows platform only. It is not available for MACs.

[SweetieJean]

Carl is correct.

[Umpireatl]

@Carl - Thanks for that response. Interesting, I’m actually in a similar situation. I was told that you cannot file a partnership return unless the partnership entity has an ownership stake in the property. If the home is owned by the individual TICs, and the mortgage interest is issued to their individual Social Security numbers and not the EIN number of the partnership, you can’t file a partnership return. Is this correct? 

[Carl]

I was told that you cannot file a partnership return unless the partnership entity has an ownership stake in the property.

You were told wrong. A partnership is a disregarded entity. Assets of the partnership are either capital contributions from at least one member of the partnership, or are purchased by the partnership after the partnership is established. (Do not confuse this with a multi-member LLC, which is also a disregarded entity for tax purpsoes.)

Getting an EIN for a partnership is a no-brainer and absolutely free to at https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-n...

Just be aware that when applying for an EIN, the EIN number is tied directly to the SSN of a living, breathing human being. So in your case I would recommend you tie it to the SSN of the partner that has the most in the partnership.That person will also be the "responsible party" to the IRS for the partnership.

Understand that since a partnership is basically nothing more than a pass-through entity, the partnership itself doesn't pay taxes per-se. If any taxes are paid out of partnership funds, they are paid towards the tax liability of the partners - usually in equal shares proportionate to their percentage of ownership in the partnership.

But when each partnership reports the K-1 on their individual ax returns, any taxes due are paid by the partner on the personal return side. Likewise, any refund due is paid to the partner that has it coming to them, based on what's reported on their individual K-1.

[californiabear]

@Carl  Tenancies-in-common (TICs) aren’t automatically classified as partnerships. The number of co-tenants needed for a co-tenancy to risk being classified as a de facto partnership is 35 co-tenants. See section 6 (page 9) of this IRS rev. procedure: https://www.irs.gov/pub/irs-drop/rp-02-22.pdf. 

To answer the question posed by @given-2-fly, if you want the TIC to be considered a TIC and not a partnership, you need proportionately share income and debt and meet other requirements listed in the linked rev. proc. If you fail to meet all the requirements under section 6 of the IRS rev. procedure, then you risk be classified as a partnership. Again, a TIC isn’t a de facto partnership (business entity). If someone wanted a rental income split amongst co-tenants that’s not proportional to each co-tenant’s ownership interests, than they’d likely want to form a business entity.

Disclaimer: this post is general information related to public documents published by the IRS. This post doesn’t create an attorney-client relationship and doesn’t constitute legal advice. You should talk to a tax attorney or professional for specific tax guidance.