Hi - I'm looking to buy a property with a business partner and was wondering about a few questions. We're not planning on buying it via an LLC. The questions are: If the mortgage is only in one person's name, does that impact how interest costs are distributed?Would having the deed/title in only one person's name also change anything related to expense allocations?

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calm technician

Level 2

Question

Where does income from a non-spouse jointly owned property go?

Forum|Forum|6 years ago
October 24, 2019
10 replies
92 views

Hi -

I'm looking to buy a property with a business partner and was wondering about a few questions. We're not planning on buying it via an LLC. The questions are:

If the mortgage is only in one person's name, does that impact how interest costs are distributed?
Would having the deed/title in only one person's name also change anything related to expense allocations?

Anonymous

if you intend for joint ownership, you have a partnership. a partnership is supposed to file its own annual tax return with penalties for failure to file. if a partnership then, the title to the property should be in the partnership's name and the mortgage will also be in the partnerships name. there's a good reason for this.

One of the basic rules of income taxes is that the person paying the expense gets the deduction, and the mortgage interest deduction is no exception. If you and another person pay the mortgage, you can each take a deduction only for the amount of mortgage interest that you actually pay, assuming you meet the other requirements. For example if the total mortgage payments for the year are $10,000, and you pay only $4,000, you can deduct only 40 percent of the mortgage interest, even if the other person agrees to let you claim his portion. This applies not only to unmarried individuals, but to married couples who file separate returns.

this doesn't become an issue when the property and mortgage are in the name of the partnership, because it is the partnership paying the mortgage not the individuals. but say the partnership is short of cash when a payment is due. the wise thing to do would be for each partner to put money into it and have it pay the mortgage rather than each sending personal payments to the mortgage company

if only your name was on the mortgage, and it went into default, if there was a balance after the sales proceeds were applied, if the mortgage company could come after anyone it would be only you.

if you were the only one on the title and mortgage, it might be possible to sell the property without your "partner's" okay and walk off with the net proceeds. he might sue, but without the proper paperwork, I don't think he wouldn't stand a chance

I'm an accountant, but I've seen many things happen that turned out badly for at least one of the "partner's" in the course of practicing for over 40 years. a written partnership agreement would be a good idea. without one if you or your partner go to court of the actions of the other it's going to be resolved by whom the judge believes. Suppose he's to come up with his cash for the venture when needed but doesn't. What recourse do you have?.

I'm not a lawyer and laws vary from state to state, so you should probably consult one to best structure the arrangement.

Carl

Level 11

In my experience (well, my observation of the experience of others) the one ship that never makes port, is a Partnership. I've a few horror stories about some of the failures I've seen too.... and when I say "horror" that's putting it mildly.

TO start with, understand that long term rental property is always reported on SCH E *no* *matter* *what*.

Next, be aware that both a partnership and a multi-member LLC file the same IRS Form 1065-Partnership Return each year at tax time.

Next, putting a rental in a multi-member LLC is a waste of time and will not give you the legal protection you may think... I don't care what the CPA's tell you. It flat out "will not" protect your personal assets from litigation should you, the other members, or the multi-member LLC be sued by a rental tenant. So don't waste your time with a multi-member LLC. Just establish a Partnership instead.

When purchasing the property, the deed needs to have the name of all partners *OR* the name of the partnership. I prefer the latter because it allows for a change in the number of partners for tax reporting purposes, without having to go through the hassle of changing things on the deed. That's a really big hassle with the mortgage holder, and it's rare of a mortgage holder to allow that.

But the downside of that is, if there's only two partners in the partnership and one of them leaves with no one to replace them, then you no longer have a partnership and the partnership is dissolved. Then the one remaining "owner" reports the rental stuff on SCH E as a part of their personal 1040 tax return. Changing ownership on the deed from the partnership to the one remaining sole owner requires that sole owner to be able to "qualify" for the mortgage on their own merits. For most (not necessarily you) if they could have qualified on their own merits, they would have never agreed to a partnership in the first place.

So if you're going to do a partnership make sure you both have your ducks in a row. You both need to see a lawyer and draft up a partnership agreement that will hold up in court. Here's a few examples of things that need to be covered.

- What happens if one of the partner's die? Will those inheriting his assets also get his percentage of the partnership and the power that comes with it? Do all partners even have a last will and testament?

- What happens if one of the partner's losses their job while the rental sits empty for 3 months? Remember, rented or empty the mortgage payments still have to be made.

- What happens if a partner just decides "I don't want to do this anymore. I quit!"

- What happens if a partner is in an accident and becomes disabled and not only unable to work, but are also unable to "actively participate" in rental activities?

- What happens if a partner is in an accident and ends up in a coma for 6 months or more? They're not dead, so nothing of their share is "inherited" by anyone.

- What if one partner hits the state lotto for $300M and wants to buy the other partner's out? Or better yet, what if they want to buy themselves out of the partnership so they don't have to deal with it anymore?

The above are just a few of the things I'm managed to think of off the top of my head just while sitting here and typing it. But the list could be endless.

calm technicianAuthor

Level 2

Carl - thanks for your response! I just replied to HACKITOFF, which address some of the points that you made.

Completely agree with you that having a partnership without an Operating Agreement, legal entity in place or not, is completely asinine. I'm assuming that what you mean by "establishing a partnership" is having an Operating Agreement in place rather establishing an LP or LLP. Also appreciate that having an LLC in place for real estate: 1) isn't a panacea, and 2) doesn't protect members as much as it is made to seem.

There are two things that I want to bring up related to part of your answer:

1065 return: My understanding is that real estate partnerships seem to be exempt from having to file 1065 returns, which decreases a good bit of managerial overhead.
Sched E: My understanding here is that, yes, all passive (unearned) income is reported on Sched E. The difference between having flow through a multi-member LLC vs not is that with a multi-member LLC the figures go on part 2, whereas with no multi-member LLC the figures go on part 1. I'm drawing a distinction here between solo vs multi-member LLCs since solo LLCs are ignored so don't have to file a 1065 & produce a K-1 and just put in the figures in part 1 of Sched E as if you owned the property without an entity.

Let me know if you have any clarifications on the points above or any other thoughts. Thanks!