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Real-life scenario regarding rental property that is also a partner's personal residence

This scenario is probably pretty common for you tax pros out there, but I'm needing a little bit of clarity in my thinking about it.

My roommate owns (along with his father who lives elsewhere far away) the house in which we (roommate and I) currently live. My roommate is currently a graduate student.

I believe their goal all along was to buy the house and rent out a room to someone while he was in graduate school.

So, we have rental property and we have a partnership between the father and son, right? I'll assume for the sake of simplicity that they are equal partners, sharing expenses and revenues (everything basically) equally.

The correct way to report this partnership then would be on Form 1065, right? The K-1 for each partner would then flow to his Schedule E.

I guess where it gets a little confusing for me is where should my roommate take me into account? That is, my roommate's father should be able to take his entire (1/2 I'm assuming) share of mortgage interest deduction (along with other deductions like depreciation) from his K-1 because NONE of the residence serves as his personal residence. So, the father really has no worries about me, as far as I can tell. For my roommate, though, I guess the IRS code says that only "half" of the residence serves as his personal residence (for tax purposes), right? Or no?

I guess I'm wondering where on the tax forms the deductions should be split up to take me into account (for my roommate). And does my presence affect the depreciation my roommate can take, in any ways that aren't widely known?

I guess I'm about to answer my own question and say that the partners' Schedules K-1 will look identical. But, the flow-thru items flowing to the Schedule E on each return is where things will look drastically different I'm assuming. Basically, to take the mortgage interest deduction as an example, father will get to deduct half, while the son will only get to deduct 1/4 (assuming he doesn't itemize) because of me, right?

Is my analysis correct? Are there any pitfalls to these kinds of arrangements that I'm leaving out, perhaps with depreciation issues?

Reply to
xyzer
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This scenario is probably pretty common for you tax pros out there, but I'm needing a little bit of clarity in my thinking about it. My roommate owns (along with his father who lives elsewhere far away) the house in which we (roommate and I) currently live. My roommate is currently a graduate student. I believe their goal all along was to buy the house and rent out a room to someone while he was in graduate school. So, we have rental property and we have a partnership between the father and son, right? I'll assume for the sake of simplicity that they are equal partners, sharing expenses and revenues (everything basically) equally. The correct way to report this partnership then would be on Form 1065, right? The K-1 for each partner would then flow to his Schedule E. I guess where it gets a little confusing for me is where should my roommate take me into account? That is, my roommate's father should be able to take his entire (1/2 I'm assuming) share of mortgage interest deduction (along with other deductions like depreciation) from his K-1 because NONE of the residence serves as his personal residence. So, the father really has no worries about me, as far as I can tell. For my roommate, though, I guess the IRS code says that only "half" of the residence serves as his personal residence (for tax purposes), right? Or no? I guess I'm wondering where on the tax forms the deductions should be split up to take me into account (for my roommate). And does my presence affect the depreciation my roommate can take, in any ways that aren't widely known? I guess I'm about to answer my own question and say that the partners' Schedules K-1 will look identical. But, the flow-thru items flowing to the Schedule E on each return is where things will look drastically different I'm assuming. Basically, to take the mortgage interest deduction as an example, father will get to deduct half, while the son will only get to deduct 1/4 (assuming he doesn't itemize) because of me, right? Is my analysis correct? Are there any pitfalls to these kinds of arrangements that I'm leaving out, perhaps with depreciation issues? I tried misc.taxes, but got basically no response. Anybody in this group have any comments on this situation?

Reply to
xyzer

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