Can partial Mortgage Interest Deductions be made if property has more than 1 owner?

If an investment property is purchased by a group of people, and they are dividing the monthly mortgage payements equally, how does the interest tax benefits work?

Can they each take an equal fraction of the deductions, or does the law not allow this sort of thing? I have a friend who only gets the tax deductions once every 5 years (when it rolls around to him) but he would rather have a smaller deduction every year. Is this common?

Reply to
benn
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See form 1065. They have a partnership.

Reply to
D. Stussy

Wouldn't they most likely use schedule E? And, I believe if they are all liable to pay the mortgage and all in fact pay it, they can all take their appropriate expense item.

Actually, we would need more information on how the investment property is held, the loan structured, etc.

Reply to
Gil Faver

It's a partnership unless they establish that they aren't required to file as one. And the partnership agreement will determine how the income and deductions are allocated, assuming the agreement has "economic substance." I've never heard of this kind of arrangement, but it could well be valid.

Stu

Reply to
Stuart Bronstein

"Gil Faver" liable to pay the mortgage and all in fact pay it, they can all take their

No - not on their individual returns. They will use a 1065 Schedule K-1.

Type of ownership is not relevant. It's still a partnership.

Reply to
D. Stussy

not so. It is, of course, a legal partnership. But each can file using schedule E if they meet the proper IRS requirements. Perhaps an expert should be hired.

Reply to
Gil Faver

now that I think about it, I think that if there is NOT a written partnership agreement and no restriction on an individual selling, each owner may use a Schedule E and the partnership return avoided (of course they are still a partnership under non-tax law). This has worked in some family situations I have seen, but don't know I would recommend it among non family or families that are not truly on the same wavelength.

I don't know where my research on this point is - I last needed it ten years ago.

Reply to
Gil Faver

See page 3 of IRS Pub 541 for the rules for an investing partnership.

Reply to
Alan

...And the IRS has been going after such groups for failure to file a 1065. There are no "proper IRS requirements" for splitting this across returns. Two decades ago, the IRS would look the other way after auditing all members of the group and seeing that it was split properly, but about 5 years ago, the IRS cracked down. The only remaining exception is for a husband-wife partnership where the couple files jointly - where a Schedule C (or F) is permitted in lieu of the 1065.

Reply to
D. Stussy

Section 761(a) says,

"For purposes of this subtitle, the term ?partnership? includes a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a corporation or a trust or estate. Under regulations the Secretary may, at the election of all the members of an unincorporated organization, exclude such organization from the application of all or part of this subchapter, if it is availed of?

(1) for investment purposes only and not for the active conduct of a business,

(2) for the joint production, extraction, or use of property, but not for the purpose of selling services or property produced or extracted, or

(3) by dealers in securities for a short period for the purpose of underwriting, selling, or distributing a particular issue of securities,

if the income of the members of the organization may be adequately determined without the computation of partnership taxable income."

The default is that more than one person is a partnership. The IRS can change that by regulations.

Stu

Reply to
Stuart Bronstein

Reply to
Stuart Bronstein

well, that is not what their Pub. 541 says (thanks, Alan), for certain situations.

Reply to
Gil Faver

Here's Publication 541:

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For organizations formed after 1996, it basically says all combinations of two or more people are taxed as partnerships unless they are taxed as a different kind of legal entity. It does say, though, that

"a joint undertaking merely to share expenses is not a partnership. For example co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants." It has to be pretty much a completely passive investment.

I didn't see anything in the regulations to support that statement, though I didn't do an exhaustive look. Remember, courts have generally said you may not be allowed to rely even on something in writing from the IRS in describing what the law is.

If that's what OP's investment group is, and if they are not considered a partnership, then they are apparently required to share their tax write-offs pro rata each year, and not as OP described as is being done now.

Stu

Reply to
Stuart Bronstein

and... the Secretary published the Regulations as 1.761-2. Pub

541 adequately reflects the regulation. One part of the regs that is not in the Pub, is a section on making the election that does not require filing the formal election with the filing of the first partnership return.

(ii) If an unincorporated organization described in subparagraphs (1) and either (2) or (3) of paragraph (a) of this section does not make the election provided in section 761(a) in the manner prescribed by subdivision (i) of this subparagraph, it shall nevertheless be deemed to have made the election if it can be shown from all the surrounding facts and circumstances that it was the intention of the members of such organization at the time of its formation to secure exclusion from all of subchapter K beginning with the first taxable year of the organization. Although the following facts are not exclusive, either one of such facts may indicate the requisite intent:

(a) At the time of the formation of the organization there is an agreement among the members that the organization be excluded from subchapter K beginning with the first taxable year of the organization, or

(b) The members of the organization owning substantially all of the capital interests report their respective shares of the items of income, deductions, and credits of the organization on their respective returns (making such elections as to individual items as may be appropriate) in a manner consistent with the exclusion of the organization from subchapter K beginning with the first taxable year of the organization.

Reply to
Alan

Here is the complete regulation on electing out.

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or

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Reply to
Alan

See Treas. Reg. § 301.7701-1(a)(2) for the "joint undertaking" language.

Reply to
jmail7

Thanks. It's certainly not a model of clarity, though I get the idea that if it's purely a passive investment (or not a money-making kind of investment), then a partnership is not required. It sounds clear, but it seems like it would be a very fuzzy line to draw in many cases.

Stu

Reply to
Stuart Bronstein

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