Partnership Real Estate

[globug666]

A friend and myself formed a partnership in 2021.  It is residential real estate.  They own the property we are renting and we pay the mortgage and all expenses out of the partnership as well as all rental income comes into the partnership.  Do we depreciate the property on the partnership return, even though she owns the property and it is in her name?

[DianeW777]

No. If the property is not owned by the partnership then the partnership cannot depreciate it. You can deduct all expenses paid to operate and maintain the property as long a there is an agreement between the partnership and the owner for leasing the property.

Also you should have a partnership agreement.

[globug666]

Does the owner depreciate that on her personal taxes then?

[DianeW777]

Yes, if income is being received for the property and the partnership does not own it, then only the owner can depreciate the property.  If that is the partner then they will likely have to calculate that outside of the tax return then enter the net result as income. A partnership agreement must still exist.

If it is owned by someone who is not a partner, then again legal documents and agreements between the property owner and the partnership must exist.  Legal advice is recommended so that everything is set up properly in your situation.

As a reminder, the mortgage interest is a deduction for the owner, but the partnership must have an agreement as to what those payments represent to the owner before a deduction can be taken.  Principal payments would not be allowed since the partnership does not own the property. The property owner should issue a statement to the partnership for payments received whether they represent rent payments or interest payments depending upon how the agreement is written.

Legal advice is important in your situation.

[globug666]

So since the property is in his name and the partnership pays the actual mortgage.  

1. The partnership cannot take the interest deduction on the partnership return? 
2. Can they deduct property taxes and insurance that are in escrow as part of the payment?
3. Does the owner of the property take these as deductions?  If so, how can he claim the deduction, when he doesn't actually pay for the home?
4. Does he pick those amounts up on Schedule E of his personal return as rental income and depreciate the property there?

[Rick19744]

I'm not sure where you got advice on your current business plan, but it is not good:

• You indicate you have a residential real estate partnership, but no real estate in the partnership?
• In order to have a true partnership there needs to be a business purpose and like any other business entity there must be an intent to be profitable.
• The partnership can't pay expenses related to property it does not own.
• The partnership seems to be more of a rental agent.
  • However, this doesn't make sense for the owner of the property
  • Why would an owner give up 1/2 of the rental income
  • In addition, if audited, I believe the IRS would collapse the structure as this appears to be shifting income; which in this case is not good.
• So to answer your second set of questions:
  • The partnership cannot take any expenses related to the ownership of the real estate property
  • The partnership, as mentioned by @DianeW777 , is eligible to take expenses related to the business of the partnership.  As noted above, the expenses would be more along the line of what a rental management company does.  This does not, however, include rental income
  • The owner of the property should be reporting all income and expenses related to the property and then any management fee the partnership may be charging
• You need to get some professional tax advice before you go much further down the line with this enterprise.