Joint rental property and percentage allocation

[desanto05]

Hello All

So this is my situation. Dad owns rental property with me in SC. He has 77% allocation of ownership and the rest is mine 23% (that is how is recorded in the deed) . The percentage allocation is based on him selling his other property in Florida doing a 1031 exchange thus investing all profit funds in new property. I took a HELOC from my main residence in NY to supplement the buy of this new rental property. Question is : Most of the expenses are mostly paid from rental income except in some instances where escrow is low and I had to add funds to cover (specially teh property taxes that were higher than expected as non residents) . Do we have to allocate the same percentage of expenses?  

[KrisD15]

Who reports Schedule E and if you both do, how do you allocate income and expenses between the two Schedule E's?  

[desanto05]

Hi KrisD

We both filed Sch E in 2023 when be bought the property so I'm looking at bothe returns and I see amounts were split 77% and 23% so I'm guessing that is the way to continue. The only thing is that on the 70K I borrowed I paid the loan exclusively from my account - allocate this as well?

[desanto05]

Also the equity loan is only under my name

Thank you!

[PatriciaV]

The HELOC you used to purchase the property generates interest expense for your portion of the property. Enter this on your return (Schedule E) only.

[desanto05]

Hi Patricia

So as I’m thinking this through, my HELOC is actually being paid through the rental although it is reflected under my name only. Would you recommend for example that if the interest is $5000 we would need to allocate 23% mine and 77% my dad’s. Otherwise if I claim it all on my own the allocations would be around 55% mine and 45% his. That is taking into account all other expenses. 

[PatriciaV]

Is the rental operated under an LLC or S-Corp? If so, the interest is not deductible to the company since the mortgage is held in the name of a member/shareholder.

If instead, this is an informal shared activity, you have options. You can choose to split the interest expense between the two tax returns, most likely using the same percentage that you allocate income and other expenses. You might consider writing up a formal joint venture agreement to document the allocation of this activity to protect both owners for the future.

[desanto05]

No it's neither one, We just both prepare SCH Es and enter the rental and expenses. I was just more concerned that if I enter the whole interest expense from the HELOC on my behalf, the allocations won't add up based on the percentange allocation that's listed on deed/ownership. But I guess if we write a formal agreement that we don't have to split expenses purely on those allocations given that the HELOC is solely under my name, then that would protect us correct? 

[PatriciaV]

Yes, a formal document would allow you to allocate income and expenses as you wish. Plus, you can decide if the HELOC interest should be split using the same percentages. A legal agreement might prove to be important if you decide to sell the property or if another family member wishes to join the investment.

[desanto05]

Thank you for your guidance!