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Investment Property

Hi,

Two friends of mine own a rental house. They were running tight on expenses so they needed another partner. So, I gave them some money to become a one-third owner (I just signed an agreement with them, I didn't put my name on the mortgage or deed). Each month, I share in the expenses. The expenses are everything over and above the rent that they receive - (I don't get any rent since their mortgage payment is more than the rent). The reason I wanted to do this is because the property is on the corner of a busy and growing intersection and is currently for sale as potential commercial and I would double or triple my money if it were to sell. It will be 10 years before the mortage is paid so I think it should sell by then. So, on my taxes I'm planning to not mention the property at all (because I receive no income on it, just expenses) until it sells. When it sells, I'll add up everything I've spent on it and deduct that from my proceeds. Is this ok to do? In other words, I'm treating it like a stock - for a stock purchase, it's not even mentioned until it's sold, then you give details as to when you bought it and what cost you had in it. Is my thinking good here?

Thanks for any help, Jeff

Reply to
JB
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NO. It is NOT OK. You need to report your share of the activity as it happens. But first you need to know HOW to report it.

You didn't say how this was organized, a partnership, LLC, S or C Corp (I do hope it isn't a C corp.). By default, assuming no LLC or corporation was ever formed, it should be treated as a partnership and a Form 1065 should be filed. There is a provision in Subchapter K of the IRC that allows the partners to report individually their share of the activity on their personal Schedule E, BUT doing this requires that the FIRST 1065 be filed with the disclosure that it will be reported on Schedule E. So you need to know what they did when they started this and how they've been reporting it since.

For a partnership, LLC or S Corp the entity will issue you a K-1 which you'll incorporate into your return. If they made the proper election then reporting will be done on individual Schedule Es. Either way, you report your share of the activity annually on your return. You can NOT ELECT to accumulate your losses and take them all when you sell, though you can be forced into doing so if the PAL rules apply to you.

I would suggest you get with a local accountant who understands rental activities so you can get a better understanding of what's involved.

Gene E. Utterback, EA, RFC, ABA

Reply to
Gene E. Utterback, EA, RFC, AB

If the mortgage is a recourse note is doesn't make any difference whether your name is on the deed or not. The mortgage holder can come after any and all of the partners (including YOU) if the partnership defaults.

You not only need a tax professional with expertise in rental activities, you need one who is also an expert in partnership taxation.

It's a little late but you also need to consult with an attorney who specializes in partnership law.

Reply to
Bill Brown

Thanks very much for your advice - I will get an accountant to help me since I don't know what i'm doing. Jeff

Reply to
JB

And you should have done this before getting on board as a partner.

Reply to
removeps-groups

Wouldn't that depend on the wording of the mortgage, since OP wasn't specifically added to it?

Seth

Reply to
Seth

A general partner is always responsible for all the debts of the partnership, even if his name is not specifically on them.

Reply to
Stuart A. Bronstein

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