Both on title , only one on mortgage, can either claim?

[cgiraldo94]

• My fiancé and I are both on title. But only he is on the mortgage. Since we bought the investment property he has been claiming (2021) and this year he made too much so the losses on it phase out. Can I claim the property this year instead of him?  Are there any implications when we go and sell re:depreciation etc? 

[ThomasM125]

Since you are a part owner of the property, you are by default obligated to pay the mortgage, so you would be able to deduct your share of the property taxes and mortgage interest. It would be helpful if you actually paid the mortgage, but if you co-mingle funds you may be able to argue that you did that, especially if paid from a joint bank account.

There wouldn't be any depreciation to deal with when you sell the property unless you rented it out. Who paid the mortgage or deducted it on their tax returns would not affect the ownership of the property, so it would not matter when it comes to reporting the sale of the house.

[cgiraldo94]

Thanks for the reply! The property was rented out so I would need a schedule E for rental income, HOA, expenses, depreciation, etc. 

Since 2021 he reported it on schedule E and has depreciated it, too. Would this change anything? I would like to claim the entire rental income and all expenses associated since I made less to benefit from the losses (increased HOA). 

[RobertB4444]

Since you jointly own the property the correct way to report the income and expenses on schedule E is to evenly divide the property between both of your tax returns.  Each of you would report 50% of the income and expenses on your individual returns.  That would include depreciation and HOA fees.

@cgiraldo94 

[cgiraldo94]

Good morning,

the route I would like to take is have her file schedule E for the property entirely and simply not deduct mortgage interest since she’s not on the mortgage. 

The property is currently rented out and rental income is received. That’s why I am concerned on the treatment of the sale if I schedule E the property from 2021-2023 and all of a sudden she does it for 2024. 

[ThomasM125]

Since you both own the property but only one of you reported the rental on their tax return for several years, your only justification for having the other partner report the rental going forward would be if the managing of it changed over to that individual. You aren't allowed to report things on a tax return simply because it saves taxes without having some practical reason for doing so. Since you both own the property, your only justification for only one of you reporting it on your tax return would be if that individual managed the rental. That is a legitimate reason, but you can't make that argument if you simply switch the reporting to the other partner.

[cgiraldo94]

Understood! And we would still be able to deduct the mortgage interest even though she’s not on the mortgage, right? Appreciate the insights. 

[ThomasM125]

Yes, the mortgage is an expense that is necessary to maintain the rental property, so it is deductible on the Schedule E.

[cgiraldo94]

@ThomasM125 thank you for the feedback and replies. 

An additional question, when we go and sell the property, how would we recapture depreciation if he has fully claimed for several years and I’ll start to fully (or partially) claim this year? We also heard that a Form 3115 may be needed. Can you please advise on that as well ?

[ThomasM125]

The sale of the property would be reported on a Form 4797 and that is where the depreciation recapture would be reflected. The gain on sale would first be applied to the depreciation taken and as such would be reported as ordinary income (capped at 25% federal tax) and the rest would be capital gain income. Hopefully you will be married by then and you can file a joint tax return and just complete one Form 4797. Otherwise, you would each have to file the Form 4797 showing your share of the sales proceeds, cost basis and depreciation allowable, based on what you reported on your tax returns in previous years.

Form 3115 would only be necessary if you didn't claim allowable depreciation in previous years and you wanted to correct that in the current year.