Reporting Rental Income and Expenses if not on the Deed?

[KeithE77]

My wife and I are contemplating an investment with my daughter and her spouse.  They currently own a home in Texas that would be a great rental. They need to move to another part of Texas for work related reasons.   Can we pay them to become co-owners in the current house  and then be able to report our share of rental income, expenses and depreciation in TurboTax without being added to the deed or mortgage?

My daughter and her spouse need some of the equity from the current home that they have lived in for more than two years to purchase their new home.  If we buy into the proposed rental property, they will have the down payment they need to purchase a new home and we all can benefit long term from a rental that is cash flow positive and likely to appreciate significantly over time.  We also both benefit from the current attractive interest rate they have on their mortgage (~ 70% of the home's current value) so we prefer not to go through the hassle and expense of formally getting added to the title. 

My wife and I remain in the original area so can help with routine maintenance, meeting prospective renters, etc.  Our daughter and her spouse have excellent careers and we have a great relationships so we are not worried about risks related to future financial struggles, family squabbles, etc.

If we can't report rental income, expenses, etc. without being on the property deed, then an alternative might be to structure this as us investing in their rental property operation?  In that scenario, they would report rental income, expenses and depreciation on their tax returns and we would receive a return from them on our investment.  If we paid them a lump sum investment amount up front:

1. How would we report our initial investment in TurboTax?  
2. How would we report revenues or additional investments from our share of rental income and expenses?
3. How would we report our share of the proceeds when the rental property is sold?
4. Similarly, how would my daughter and her spouse report the up front investment from us and their payouts to us for our share of profits?

Search Terms: report rental income and expenses in TurboTax without owning property; investing in rental property operation without being on the property deed

[Mike9241]

see a real estate lawyer. without being on the deed, I don't see how you could be owners. the mortgage also presents a problem. if you become owners this might be treated as a sale and many mortgages have a due on sale clause.

an option would be to lend them money, not in excess of the FMV of the property reduced by the present mortgage, and take back a second mortgage. they would still be the owners so they would report the rental activity on their return. you must charge interest and that would be reported as such on your 1040

also realize that while the rental can create positive cash flow, the owners must depreciate the property which can result in a loss for tax purposes. then the owners would likely be subject to the passive activity loss rules.

[Critter-3]

Also if you all own the rental property you have technically formed a partnership and need to file a form 1065 and issue everyone a K-1 form for their personal returns.   I highly recommend you seek local professional assistance/guidance on how to do this legally according to your state laws  and how to be properly insured. 

[KeithE77]

Thank you. I am arriving at the same conclusion that we can't be co-owners of a rental property without being on the deed.  However, we don't want it to be a loan with a simple interest rate.  Is there any reason why this can't just be drawn up as a simple business partnership where we front some cash in return for an agreed upon split of expenses and profits?  A contract would clarify the terms of our agreement, including upon disposition of the property itself.  We would try to design it such that the risks and rewards were shared relatively equally.

I'm confident that the business agreement would not be that difficult to construct.  What I struggle with is how each side of this transaction would report the various cash flows in TurboTax.  For example, if we paid $100,000 to be a partner in the rental property business, would my daughter report that as ordinary income or would it be a debit to the business partnership against the home's equity and not be reportable until final disposition of the property?  Payments of profits to us would be expenses to the business partnership?

Alternatively, we could make the up front payment a loan with low interest rate in return for some smaller split of profits but that seems more complicated and does not reflect the intent of our business venture.

I would think this is not an unusual situation where a child has a house and is moving up or moving to a new area.  Property has characteristics to make it a good rental option and a parent, friend or sibling decide to jointly invest to enable that rental rather than just sell the property outright and lose the opportunity? 

[Critter-3]

Seek a local RE attorney that is also versed in income tax law and the setting up of partnership arrangements.  Best to have this done in writing and legally  since  property/money between family members are the cause of many an argument.  

[KeithE77]

Thank you for that heads up.  I see that we could prepare Form 1065 and the appropriate K1's using Turbo Tax Business (~ $145 at Costco).  In Texas, general business partnerships don't have to be registered so I believe the Form 1065 and K1's would be the only documentation required.  We would also construct a written contract even though it isn't technically mandatory.

We have several months before they would be moving.  It looks like a great investment opportunity and I'm just trying to sort out whether the administrative / reporting burdens are too great to make it work, or if there is some structural obstacle to implement this investment and achieve our objectives through a relatively simple approach.  If it is practical, we would likely use an accountant to help set up the details and prepare the first year's Form 1065 and K1's.

I really appreciate the perspective the experts on this forum are able to provide!!