First year claiming jointly owned rental property does it matter the split of income and expense?

[Vinburg]

Jointly purchased a rental property with my father last year.  When we claim the income and expenses does it matter who takes the bulk of the income/expenses ?  Or do we need to split evenly both income and expenses ? 

[Carl]

Generally, it doesn't matter so long as it's consistent year to year. It also matters what type of partnership you have set up too.

Generally, when 2 people who are not married to each other own rental property, they set up a partnership and the partnership income/expenses get's reported on an IRS Form 1065-Partnership/Multi-member LLC tax return. Each partner is issued a K-1 which is required for each partner to complete their own 1040 personal tax returns.

However, with rental property you can each claim a percentage of ownership, and you are given the choice to split income/expenses based on the ownership percentage, or to let the program do the splits for you. The downside of this is that the program can not and does not split everything.  Therefore, I always recommend the establishment of a partnership. Depending on your state, registration of a partnership may or may not be required. But the partnership will need to obtain it's own EIN at the federal level.

[ee-ea]

You have formed a partnership. See this from the IRS.

https://www.irs.gov/pub/irs-pdf/p541.pdf

[Anonymous_]

See https://www.law.cornell.edu/cfr/text/26/301.7701-1

[Carl]

@ee-ea you see the first paragraph under forming a partnership? In part:

"....However, a joint undertaking merely to share expenses is not a partnership. For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants"

Now of course, there's more detail later in the document that provides more clarity. So while they may have a partnership, it's kinda difficult to state it as an irrevocable fact.

[Vinburg]

Assuming the partnership isn’t something that i can do right now before finishing my taxes, can we split the expenses / income in various percentages to benefit our individual returns?  Not looking to do anything that isn’t allowed, but didn’t know if it mattered as long as the total amount of income and expense is claimed between the two people ?  So for example could one person claim 70% of the income yet only 30% of the expense, and vise verse ?

[Carl]

You can file a 1065 as a partnership if you want. There's nothing that says you can't, or keeping you from doing so for the 2021 tax season. Overall, you may find it a better way do keep things split as they should be.

Just be aware that a partnership return filing deadline is March 15th. That's a full month before the individual income tax filing deadline.

So for example could one person claim 70% of the income yet only 30% of the expense, and vise verse ?

No. That would be seen as one of the partners trying to avoid a higher tax bracket, by claiming 70% of the expenses, while receiving 30% of the income. Especially if that 30% bumped them into the next higher tax bracket. My guess would be that it would probably raise fraud alert flags.