All Things Tax

All Things Tax

Like the title says, from the filing process and tax questions to tax policy and reform, you can search and share All Things Tax here. This is the place to find answers to all your general questions that don't fall under the other categories. And just a reminder: questions about software or online filing should be posted in DIY Products.

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Pioneer
Posts: 1
Registered: ‎01-10-2018

Rental Property w/ Sister

I purchased a 2 family property with my sister.  She lives in one apartment and we have tenants in the other.  How do I claim this as my rental property with the expenses I've paid (I pay $150 per month to the mortgage on top of what she and the tenants pay) plus I've done some repairs (new roof, chimney fix, etc)?  Do we just split the rental income?  Does she claim half as primary residence and I claim half as rental?

Tax Pro
Posts: 6,039
Registered: ‎02-23-2016

Re: Rental Property w/ Sister

Hi bethanysilva82,

 

 

 

Welcome to the H&R Block community.

 

So 1/2 of this property is your sister's primary residence.  It's not a rental unless she is paying you rent.

 

The part of the property that the tenants occupy is rental property for which you'll report income and deduct expenses on Schedule E.  What you'll need to do is determine your ratio for figuring your deductions on the rental piece of the property.  Since we're talking about 2 units, the easiest way to do this is that if the units are pretty much identical (the same size) you can use 50%, or a 1/2 ratio.  I usually go by the square footage of the rental area versus the square footage of the entire building but you can go by rooms or units if they are identical or very close in size.  What you do is multiply your total utility, repairs, mortgage interest, mortgage insurance, homeowners insurance, real estate taxes, and other indirect expenses by 50% and deduct the result on Schedule E.  For instance, if your water bill for the property is $500 for the year then your deduction is $250.  Direct expenses, such as repairs on a wall in the tenant's unit, are deductible on Schedule E in full.  For income, only report the income for the rental unit.

 

The type of repairs that you did are an indirect expense (they apply to the entire property/building), so those are deductible using the ratio I just discussed.

 

You can also deduct depreciation on the rental unit.  You would have to subtract your basis in any land that is part of the property from your total basis in the property and then multiply by your ratio to determine your depreciable basis.  For you that ratio is 50%.  From there you'll figure you depreciation on the depreciable basis that you calculate.

 

If you are renting below market value and not intending to make a profit then that is called a not-for-profit rental.  If that applies here then let me know and I'll walk you through the process for reporting for that type of rental.

Valued Neighbor
Posts: 87
Registered: ‎02-28-2016

Re: Rental Property w/ Sister

How do I claim this as my rental property with the expenses I've paid (I pay $150 per month to the mortgage on top of what she and the tenants pay) plus I've done some repairs (new roof, chimney fix, etc)?

Normally a 50/50 investment in rental property would be reported as such, i.e., you split everything equally. However, since your sister uses one of the units as a primary residence, only the other unit is a rental property.

 

Do we just split the rental income? Does she claim half as primary residence and I claim half as rental?

The answer depends on the agreement you have for the ownership of the property.

For the rental unit, you should tally all the rental income and expenses for 2017 and divide in half (or whatever your proportion of ownership is agreed upon). If it was agreed that only you own the rental unit and she owns the other unit, only you will file Schedule E with your taxes to report the gain or loss on the rental. Your would also be depreciating only the value of the rental structure (not the entire structure). She would not be entitled to any rental income. She would however report 50% of the mortgage interest and property taxes of the property as personal itemized deductions.

 

The chimney repair is an allowable expense. The new roof is an improvement and must be factored into the depreciation (not a single expense). The tenants don't pay or claim any mortgage interest. They pay to occupy your property, nothing more.

 

Tax Pro
Posts: 6,039
Registered: ‎02-23-2016

Re: Rental Property w/ Sister

bethanysilva82,

 

 

 

Adding to this.

 

The new roof is a depreciable addition to the property, so make sure that you figure depreciation instead of deducting the cost.

 

Also, take into account your sister's interest in the property.  If you own the rental by yourself than figure expenses exactly as I explained on your own tax return.  Otherwise, divide the deductible expenses that you figure based on your ownership percentages.  I see that BluesDog left you a post in more detail on this part.