Rental Income

[jntmuller]

My niece and I own a condo. She will receive rent payments. We will share expenses: I will pay condo fees and property taxes. She will pay a loan she acquired for improvements prior to renting the condo. Can I deduct the condo fees and property taxes if we do not split the rental income 50/50 ?

[Mike9241]

since there seems to be 50/50 ownership so income and expenses need to be split 50/50.  you both have a tax issue because the way you want to report income and expenses lacks economic substance. It would probably result in reallocation or disallowance if audited. Also, possible penalties for failure to file a partnership return.

do consult with a tax pro. 

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Lacks economic substance means that a transaction does not have economic substance or lacks a business purpose. The economic substance doctrine is a common law judicial doctrine that disallows tax benefits of a transaction if the transaction lacks economic substance or a business purpose. Applicable case law analyzes two factors in determining whether a transaction lacks economic substance: (1) whether the transaction changes the taxpayer’s objective economic position apart from tax benefits; and (2) whether the taxpayer has a subjective non-tax purpose for entering into the transaction. The Fifth Circuit has held that a transaction must exhibit an objective economic reality, a subjectively genuine business purpose, and some motivation other than tax avoidance, and that the failure to meet any one of these three factors renders the transaction void for tax purposes. However, the Fifth Circuit has also noted that there is a near total overlap between the second and the third factors.

[Carl]

This would most likely require several things.

1) A 1065 partnership return since things are not being split 50/50.

2) Some kind of evidence of economic substance, of which I don't see any and am not aware of anything that would provide it in this situation.

3) Professional help - especially if your state taxes personal income, as this could very easily be a double whammy.

I would expect the rent to be high enough to cover "all" recurring rental expenses such as mortgage payment, insurance and property taxes, with sufficient cash flow for dealing with those unplanned expenses such as having to replace the hot water heater, or something else of that nature.