How do I file taxes on rental properties I co-own (50/50 split) with family members?

[nourdives]

We own two properties in different states, states we do not live in.  We split the mortgage payment and the rental fee payments.  We each have our own expenses.   We closed on both properties in 2022.  We did not have an LLC or any official partnership.

[Carl]

We did not have an LLC or any official partnership.

For rental property, you're not required to have any official partnership. But it would be a good idea to establish a partnership (not an LLC) not just for accounting/tax purposes, but for other purposes outside of taxes since the two owners are not married to each other and do not file a tax return.

Each of the two owners are perfectly fine reporting their share of rental income/expenses/depreciation on SCH E as a part of their own personal 1040 tax return.

We each have our own expenses.

If you're not splitting things down the middle, you may find a partnership simpler, as the 1065 partnership return (which is due March 15th each year) can be set up to allow for differences in ownership percentages and expense/income percentages.  Then, each owner gets issued a K-1 at tax time which each owner reports on their own personal 1040 tax return. Makes life easier also, if you live in a state that taxes personal income, and/or the properties are in a state that tax personal income.

I would highly advise you seek the advise of a tax professional in your local area so that you can make "educated" decisions. Don't rely on these public user-to-user forums to educate you, as we all have our own opinions, and I'm no exceptions. We all know what opinions are like to! Just because a forum user has a "CPA" tag or something similar after there name, doesn't mean they understand your specific and explicit situation.

[nourdives]

Why a partnership over an LLC?

[DaveF1006]

Partnerships are easier and less expensive to establish and maintain than an LLC. Taxes- While both entities benefit from pass-through taxation, LLCs have more flexibility because the owners can opt to be taxed as either an LLC or an S Corporation.

LCs can also possess other business entities, such as a partnership, corporation or other LLC. An LLC may also have foreign individuals and businesses as active owners, whereas a partnership cannot.

An LLC offers better liability protection and more tax flexibility than a partnership. But the type of business you're in, the management structure, and your state's laws may tip the scales toward partnership so you may wish to check with your state to see which is the best option for you.

In retrospect, it depends on what type of entity would suit your needs. You can research this and my suggestion is to go the legalzoom.com and speak to one of their experts and they can help set up your business entity. The cost for this service is well worth it especially if you have this type of a business/rental activity within your family.

@nourdives