Can a property I co-own be considered a rental/investment for me and primary for the other co-owner(s)?

[j0ntaxID00]

I co-own a house with a couple, but don't live there. The other co-owners uses it as their primary residence. I helped with the acquisition of the property (paid for most of down payment and closing cost), but they make all the monthly mortgage and insurance payments as well as property tax and pay for upkeep. From my perspective the mortgage payment and the upkeep is "rent". We are all on the mortgage and the property deed.

1.) Can this property be considered an investment property for me and a primary residence for the other co-owner?

1a.) If it can be considered an investment property for me, can I write off depreciation as an expense on my tax return?

1b.) If not, is it because the other co-owner is paying for property tax and maintenance?

1c.) Would that change if I paid for part of or all of property tax and maintenance? (Or perhaps, regardless of who's paying for what, it can't be both an investment property and a primary?)

2.) Say we go to sell this house in 5 years for a net profit of $500,000. Can the co-owners (married filing jointly) get the full $500,000 exemption if they've lived there the whole time?

3.) Basically, what can I do to maximize my tax benefits and what can my co-owners do to maximize their tax benefits in this situation?

Thank you!

[ThomasM125]

The property is an investment property for you since you don't live there. However, depreciation is not a deduction allowed on an investment property. The only way you could deduct depreciation is if you rented the property out. This may be to your advantage, however, since when you sell the property you have to recover the depreciation you took as ordinary income (as opposed to capital gain income) to the extent you have a gain on the sale.

When you sell the house at a gain, the couple that lives there can only exclude their share of the gain from taxation, you would have to account for your share on your tax return.

Since you are all legally obligated to pay the mortgage and property taxes, the portion the couple pays is not income to you, as there is not anything in the mortgage agreement that says you have to pay, only that it gets paid.

[Carl]

Your questions can't be answered cut and dry as posted, because more information is needed. Your questions just raise more questions in an effort to provide you useful responses. First things is, in what tax year was the property purchased/acquired?

1.) Can this property be considered an investment property for me and a primary residence for the other co-owner?

It depends. It may be considered a 2nd home. Do you have a rental agreement/contract where those who live there are obligated to pay you for your 50% of the property? Such a document may not be necessary. But if "called on the carpet" by the IRS or state taxing authorities, the general rule of thumb is, if it's not in writing, then it did not occur.

1a.) If it can be considered an investment property for me, can I write off depreciation as an expense on my tax return?

Have you been reporting your rental income every year on SCH E since your acquisition of your 50%?  You most certainly can treat your 50% as being rented to the occupants.

1b.) If not, is it because the other co-owner is paying for property tax and maintenance?

That has nothing to do with it. You only claim those expenses that meet two basic requirements.

a) You are obligated to pay them.

b) You actually pay them.

But overall, half of the property taxes and half the mortgage payment (half the entire mortgage payment, not just half the interest) would be treated as rental income to you.

1c.) Would that change if I paid for part of or all of property tax and maintenance? (Or perhaps, regardless of who's paying for what, it can't be both an investment property and a primary?)

If you're treating your 50% as rental property, and you claim half of all the expenses (property tax, mortgage payment, property insurance) as income, then you "are" paying half of all those expenses.

2.) Say we go to sell this house in 5 years for a net profit of $500,000. Can the co-owners (married filing jointly) get the full $500,000 exemption if they've lived there the whole time?

If the half they own was their primary residence for at least two of the last 5 years they owned it, then yes.

You will be taxed on your share of the gain on your rental portion that you own 100%, and you will also pay tax on all the depreciation taken, since you are required to recapture all depreciation and pay taxes on it in the year you sell the property.

3.) Basically, what can I do to maximize my tax benefits and what can my co-owners do to maximize their tax benefits in this situation?

Both of you should talk with an estate planner in your local jurisdiction. A lot of things can come into play that makes this public user-to-user forum the last place you want to be seeking financial advice. For example, if you live in a community property state, things can (and will) get very messy very fast if the couple currently living in the house as their primary residence should separate and/or divorce. In such a case, you "WILL" be pulled into the middle of that mess, like it or not.

[j0ntaxID00]

@CarlYou may be right that "public user-to-user forum [is] the last place you want to be seeking financial advice" but your thoughts were still very helpful. Thank you.

[j0ntaxID00]

Thanks @ThomasM125 for your response. It makes sense that since I am not getting an actual rent check from the couple, I would also not be able to deduct depreciation. It also makes sense that since the couple is obligated to pay the mortgage and property tax (and especially since they are not paying me directly), it cannot be considered as "rent" from my perspective. I see that you're drawing a distinction between an investment property vs a rental property, which I hadn't thought of before. That's also helpful.

What expenses would I be able to write-off as an investor then? The house is a bit far from me. When I go to inspect that the house is in good order, can I deduct travel expenses? Refinancing expenses?

Thank you.

[ThomasM125]

You can add the refinance expenses to the basis of the property. That is how investment expenses are deducted, as an increase to the cost (basis) of the investment, so you can't deduct them until you sell the property, as a reduction on the gain from sale.

Any expense that is necessary and ordinary for the maintenance of the investment is deductible as an increase to the basis, so you can deduct the travel expenses.