Will I owe tax on this rental property?

[Fruton]

My brother, sister and I have recently inherited my mother's house in Colorado. It is divided equally. My sister lives in the house with her son. My brother and I live out of state. My sister's rent comes out of her share of the value of the house. Her son pays $500 a month for rent. He signed a lease in November and has paid 2 months rent for 2020. All the money we collect for rent goes into an account for paying taxes, insurance and up keep of the property. It is not intended to be a profit for any of us. So, I'm new to this. Will I have to report this on my tax form? I live in NY. Or do I report it in CO? Or, not at all? If I have to report it are there deductions I can make? I'm confused. Any help is greatly appreciated. Thanks!

[ColeenD3 · Accepted solution]

Yes, you report the income in your home state of NY.  A nonresident is required to file a Colorado income tax return if they:

• are required to file a federal income tax return, and
• had taxable Colorado-sourced income.

Nonresidents will initially determine their Colorado taxable income as though they are full-year residents. Nonresident of Colorado will complete the Colorado Individual Income Tax Return (DR 0104) and the Nonresident Tax Calculation Schedule (DR 0104PN) to determine what income will be claimed on the DR0104 form.

How your report the rental income depends on whether you have a profit motive. If so, it is reported on Schedule E. If not, a not-for-profit rental is reported as Other Income.

Not Rented for Profit

If you don’t rent your property to make a profit, you can’t deduct rental expenses in excess of the amount of your rental income. You can’t deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year.

Where to report.

Report your not-for-profit rental income on Schedule 1 (Form 1040), line 8. If you itemize your deductions, include your mortgage interest and mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses from your not-for-profit rental activity when figuring the amount you can deduct on Schedule A.

Presumption of profit.

If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit.

[Fruton]

Very helpful thank you.

[Carl]

Overall, I believe it would be in the best long term interest of all owners if you seeked professional help for "at least" your first year dealing with this. The fact that you're dealing with two states that tax personal income, along with the fact that it's being rented to a family member, and the fact that the family member is one of the owners of the property can really complicate things. Especially since only two of the three owners are reporting income from the property.

The formation of a legal partnership (or possibly a multi-member LLC if that's a better way to go tax-wise) would probably be called for here, to keep things straight on the legal and tax fronts.