Is this allowed?
Anne and Bob, brother and sister, inherit vacation property from their parents. Each owns 50%. They decide to keep the property, share the usage and expenses. Real estate taxes are about $4000 per year. All other expenses, are about $3000 per year. Anne is subject to AMT, so there is no allowed deduction for the real estate taxes. If Bob pays all the r/e taxes, and Anne pays the other expenses, may Bob deduct the entire r/e taxes on schedule A?
This sounds like a homework question, but I'll bite anyway. ;-)
Generally speaking, "special allocations" among partner/co-owners must reflect "substantial economic effect" apart from tax considerations. So a scheme where one partner pays all of the deductible items, while the other partner pays a substantially equal amount of non-deductible items should be ignored for tax purposes. So each party should end up with a deduction for 50% of the taxes under the circumstances (or, perhaps, Bob gets a deduction of 57% of the taxes, while Anne gets 43% owing to the slightly disproportionate contributions).
Any time you have a situation involving a quid-pro-quo agreement between the parties and/or where a party is protected against loss by a reimbursement arrangement, etc., the allocation of deductible items will likely be subject to question.
MTW
I've been posting here sporadically since 2009. If I were still a student, I must be really dumb (and some regulars here might think I am).
I know there is a code section that apportions r/e taxes among buyer/seller regardless of who pays them. I would think that the "substantial economic effect" that you mentioned pretty much says the same thing and would render that code section as redundant.
In this example, it sounds like a craftily worded partnership agreement could pass a court test. Possibly, "As long as Bob pays all the taxes, he gets the high season of July, while Anne gets the best skiing during the February school vacation". The economic benefit to Anne is that she pays less, but gets less benefit.
I agree with you. In this case the partners are sharing the total expenses close to equally (58%/42%), but want to allocated those expenses so that one gets more than his share of deductions. The only reason I can think of for allocating those expenses in this way is for tax purposes. And when tax purposes drive a transaction, the IRS can recharacterize it in a way they think makes more logical and financial sense.
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