Depreciation of rental property two owners 50%

[Anonymous_]

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@Carl wrote:

- An amended tax return can not be e-filed. The IRS Says so.

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The IRS does not say an amended return cannot be e-filed. 

TurboTax may not support e-filing an amended return but professional software, indeed, does support it.

[Carl]

but professional software, indeed, does support it.

Which is one reason professional help is suggested.

[Anonymous_]

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@Carl wrote:

but professional software, indeed, does support it.

Which is one reason professional help is suggested.

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The point is the IRS allows amended returns to be e-filed (at least the last two tax years) which is the exact opposite of what you posted.

[ecfisher]

Hi @Carl - I have exactly the same situation as described by the OP: shared ownership of rental property with my brother. The partnership 1065 return and K-1 presentation of rental income and expenses makes sense for all the reasons you describe in this comment.

One question: title to property is held in our names personally, so how should we record depreciation expense? Our CPA suggested recording depreciation on 1040 Sch. E (50% for each partner), and to charge our partnership fair market rent for the property (also reported on 1040 Sch. E) which it will then “sublease” to the end-tenant. This way rent to end-tenant and operating expenses of the property will be presented on 1065 form 8825 and allocated to each partner via K-1s, but depreciation expense will be handled on 1040s as the property is owned by the individual partners and not the partnership.

Do you agree with this approach? I’ve noticed in your prior posts a strong bias for simplicity which I appreciate.

[Mike9241]

one suggestion is to include the property in the partnership return and take the depreciation there. I don't see the IRS having a problem with this because the depreciation will be matched with the revenue and other expenses.

another way is there is a section in the K-1 for partner expenses. you would each (if both using Turbotax)  enter in the asset entry worksheet your cost basis based on your % of ownership and Turbotax will compute the depreciation. the net income or loss reported would be the net of the cash income/expenses and the depreciation.  also  the won't muck up the QBI deduction.

or follow your CPAs advice which I think is excessively complicated for your situation. 

[Carl]

Do you agree with this approach?

Not at all. My initial impression is that you're conversing with a CPA whose primary goal is to make things more complicated so you will "require" their services. But that's just me.

Doing it the CPA's way has a much higher potential of creating complications if/when something in the partnership changes - such as taking on a new partner, or losing a partner. Especially when it comes to depreciation.

Keep it simple, and "ALL" information concerning the rental is reported on the partnership return. Yes, that includes depreciation. Things will be split between the K-1's based on each partner's percentage. Each partner's percentage of depreciation is on line 16a of their respective K-1. Therefore, assuming there's a mortgage on the property I would expect all partner's to show a loss on their K-1 every single year.  Let me explain why I expect that.

When you add up the deductible expenses of Mortgage Interest, property insurance, property taxes, and add to that depreciation you are required to take, the total of those four deductions alone are usually more than the total rental income received for the year. So the partnership will show a loss. Add to that the other allowed rental deductions such as maintenance, repairs, etc., and you're almost certain to show a loss.

When your rental losses get your taxable rental income to zero, that's usually it. However, a few years ago tax law was changed. If your AGI is under a certain threshold, then up to a maximum of $25K can be deducted from your "other" ordinary income. Anything after that gets carried forward.

In my own experience with my three rentals, it only took me about 3 years to "use up" my carry overs that had accumulated in the past, with the ability to deduct up to $25K of those losses from my other ordinary income. So I would imagine in a partnership, it's perfectly possible those deductions that exceed the rental income would further reduce your "other" ordinary taxable income. That would mean it's also possible you would have no carry over amount to carry over to the next tax year.

There's pro's and con's to the $25K maximum against other ordinary income. But for the most part, it seems to all "work out in the wash" when all is said and done.

[Fefe]

What if you are 50/50 owner and you buy her sister out and now own the property 100%?  How to I change Turbo tax to reflect the change from 50% to 100%?

[Carl]

You don't "change" anything you already have. You simply add the other 50% you now own, as a completely new asset acquisition to the existing list of assets for the property, since that's basically what it is. How you set it up, depends on how you set up the 50% you owned originally. Typically, they'll be set up the same, but with a different acquisition date and different cost basis, based on what you actually paid for that second 50% of the property.