Basis and "At-risk"

I assume they are not married to each other?

The basis of the house is 150,000, and the amount of the mortgage is a red herring.

The individual basis of each taxpayer is determined by the partnership agreement. In theory the partnership agreement can be oral, but that just creates all sorts of problems and some states may not recognize such an agreement for real estate.

So if there is no written partnership agreement, it would behoove them to draw one up.

Note: I am arguing they have probably entered into a partnership even if there's nothing in writing, even if there's no formal papers filed with local officials.

Draw up a written partnership agreement.

Recourse is governed by the mortgage agreement and their own partnership agreement. The mortgage agreement is governed by state law as to whether recourse is allowed.

The basis for retal opurposes, if no money is placed into the property, is the lower if original basis or FMV on date it is placed into rental service.

I am concerned by the nature of these questions, and would suggest seeking professional tax and legal assistance.

Each has a $75,000 basis in his half.

Forming an LLC will not shield them from liability from a debt entered into previously by them personally.

Generally if you transfer mortgaged property to a business entity completely owed by the previous owners (e.g. corporation, LLC or trust) there is often either an exemption or the creditor doesn't have a problem with the transaction because the true ownership didn't really change.

What is their agreement in purchasing it? It looks like A is putting in $130,000 and B is putting in $20,000 (the fact that A borrows some of that is irrelevant. The fact that the bank wouldn't lend it without B also signing the mortgage is a side issue.)

Same as before.

What liability? The mortgage is still A's, B didn't sign so has no liability.

So you're claiming that ownership is 50-50, even though A put in more. Who will actually pay the mortgage? (B paying half of it could lead to interesting questions about deductibility.)

Seth

This has been bothering me a little. Doesn't A effectively pay $130,000 and therefore have that as a basis and B have a $20,000 Basis? How A got the funds seems moot. Not discussing the partnership aspect yet, just basis for tax purposes.

Interesting. It could be structured that way, but it would have to be in the partnership agreement that A is the owner of almost 87% and B is the owner of the remaining 13%. Otherwise the presumption is 50% ownership by each.

Only one owner signing a mortgage is highly unlikely. A lender would generally not agree to that kind of situation, because it would make foreclosure more difficult.

If the second person became an owner after the first person purchased, the mortgage still is on the entire house, and it appears (without additional evidence to the contrary) that the second person is buying a half interest.

The correct answer is D - not enough information to answer.

We'd need to know more about A & B and their relationship to each other - are they married, do they live together as a couple, are they brothers, are they friends?

While A may be the only one on the mortgage, what is the REAL agreement? Who is responsible for paying the mortgage - I now what the loan doc says, but is this two people who have decided to be roommates and who are going to pay for the property equally while only one has sufficient credit to get the mortgage?

We'd also need to know, and I'm sure that lender would like to know too, are both A & B on the deed? You said they both put in money but that only one signed the mortgage. Does the bank know that there is another owner?

Placing the property into a an LLC or partnership to rent it will have an impact. Now you need to understand and calculate INSIDE AND OUTSIDE Basis - not just basis. You'll also have to look to either the partnership agreement (if a partnership) or the operating agreement (if an LLC) to see who's responsible for what. If you don't have one of these agreements then you deserve all the grief that you are going to get sooner or later.

Pass-through taxation is complex - at its easiest it is still so much more convoluted and difficult to grasp that the average person has no chance of doing it right. Sadly, it is also beyond many tax professionals because of the oddities in the rules - interestingly, many of the rules almost make sense (sort of) once you understand the taxation issues.

For example, and with the caveat that you CANNOT rely on this since I don't have near enough information -

1- as individuals A's basis is likely $130K ($20K he put up plus the $110 mortgage) while B's basis is just the $20K he put up. 2 - on the other hand there are court cases that say if A signed the mortgage but it is really B who lives in the house, then the house actually belongs to B and B is entitled to the tax deductions. There is a bit more to this, but it could possibly apply to your situation. 3 - once the property goes into an LLC or partnership the attribution rules kick in and IF the partnership/operating agreement so states, even though the lender will hold A responsible, B could get the use of half of the debt towards his basis - which would reduce A's basis accordingly.

You also have to understand what changes to basis really mean and how they come into play. For example, using your example, let's say that A & B put the house in an LLC, which is taxed as a partnership (the default option). Now they would each have a basis of $75K - $20K they put in plus $55K for half of the loan. Now assume that in the first four years the property shows a $100K loss - they each get to deduct $50 on their returns which reduces their basis down to $25K each. The loan balance at the end of the four years is $100,000.

NOW assume that the lender agrees to reduce the loan - A & B say that they can't make the payments because of the economy and they only way they can keep the property is the lender reduces the loan to $40,000 and the lender agrees. This reduces the loan by $60K or $30K each - remember that their basis was only $25K each and that was because they used the loan to increase their basis. Now they have income of $5K each because the loan they used to establish basis was reduced PAST the point of their actual basis.

But wait, there's more . . . which I won't go into here.

Your question leads me to two possible conclusions - Either this is a homework problem which you need to work on yourself so that you better understand the intricacies of partnership taxation OR you're in WAY over your head and you need professional help. So you either need to get with your professor or a tax pro in your area who understands partnership taxation.

Good luck, Gene E. Utterback, EA, RFC, ABA

Awesome reply, Thanks for you time spent and concerns.