Duplex with 4 owners

Technical topics regarding tax preparation.
#1
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TP is contemplating purchasing a duplex with some relatives (4 people on the title – 2 sets of married couples). The relatives will live in ½ of the duplex, and the other ½ will be rented out, and they are still deciding how to split the rental portion.

If rental portion is 100% to TP while relatives live on the other side (so 50-50), should the title best be held as joint tenancy between the two parties so that we can allocate the expenses/income to those who actually pay/receive the income? IS TIC better? On the sale of the building, the relatives would get personal residence exemption, while the TP pay the capital gain on the other ½? Seems a bit off that relatives get tax-free gain, but flip side is TP gets all income and deductions. Is there any sort of “evening-out” decisions that need to be made? Often duplexes are purchased by one person who then lives on one side and rents out other, but am unsure what to do in this scenario. Any thoughts?
 

#2
WEISSEA  
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TIC, along with TP and co-owner(s) drafting a written agreement covering each owner's rights and responsibilities.
 

#3
JR1  
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This is way more a legal question. What do they want to happen if ___________________. (Fill in the blanks: divorce, death, pissed off, one wants to move, one wants to sell, etc.)
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#4
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True - I'll send them off to an attorney for title.

But they will still be splitting the duplex - one side living and one side rental. As i mentioned - this is straight-forward when it's owned by only one person/couple - but not sure what I should be thinking about as far as the equity issue when one family receives tax deductions while the other side/couple receives passive losses. And then of course the equitable issue upon a sale.
 

#5
Nilodop  
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... the equity issue when one family receives tax deductions while the other side/couple receives passive losses.. Even that depends on their agreement. If there is one deed and one mortgage, and the interest and taxes are paid 50/50, who is paying what? Did the couple who lives in one side pay the half of the interest and taxes on both sides, or all of the interest and taxes on their side? Etc.
Last edited by Nilodop on 25-May-2018 12:12pm, edited 1 time in total.
 

#6
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Sigh. I know. I think they are asking me for opinions on what is best. On the face of it, it sounds easy, but in reality, it seems much more complex than I originally thought. I think I need to ask them a lot more questions (with an attorney). Thanks.
 

#7
Dennis2  
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Assignment of income is a no no. If you want anything other than a 50-50 split on rental there are consequences.
 

#8
Nilodop  
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If they split the rental income (and, I assume, the expenses also) 50/50, then they'd also need to account for the half of the duplex that one couple occupies. The occupying couple would otherwise be getting a free ride.

If it's viewed as a barter, we'd say one couple barters its share of the rented-out half in return for the right to occuoy half of the other half. Doesn't sound like a great tax result.

Can't they agree that the occupying couple can live on one side without paying rent, but paying the expenses of that side, while the other couple can rent out their side and also pay the expenses of the rented side. Mortgage payments would be 50/50, as would the sale proceeds. However, the occupying couple would forgo depreciation deductions. It's effectively an informal condo arrangement, without a legal deed of condominium. Either couple might one day choose to occupy or rent their side. Kind of challenging (the non-tax side of it) but perhaps doable.
 

#9
Dennis2  
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the right to reside is an income interest. the right to rent is also an income interest. If the property were held in trust there are viable options, however absent that you get stuck with things like the fair market value of each possibility...♫ In the words of Monty Python....run away
 

#10
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@Dennis2 – I am not following.
If you want anything other than a 50-50 split on rental there are consequences.

Are you saying that they must split the rental portion 50-50? Income, and all expenses – including depreciation? Why would that be?

And what happens with the people who actually live in the duplex? If this were held jointly and they paid all the expenses, then would they not receive the deductions?

I probably will “run away” but want to give this a fair go. Is this really that unusual of an issue?
 

#11
Dennis2  
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Why would that be?


you have given us a scenario in which each couple owns half of each side of the duplex. All expenses and all income are shared.
If couple that live in half pay half the property tax are they not making a gift?

Is this really that unusual of an issue?


Honestly I would have expected the attorney not to allow them to do this.
 

#12
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Dennis2, isn't it the couple that does not live in half the property that is making a gift by paying half of the property tax? You have two dwelling units, one owner occupied and one a rental (or if you prefer one rental with no personal use days and the other rental with 365 personal use days but that leaves a similar result: deductions not allowed on Schedule E for the owner occupied one). Income and expenses for the rental shared between the two owners makes sense, but the fact that they are also splitting costs attributed to the owner occupied half seems like a gift from the non-occupant to the occupant.
Because on T.A. ten was the most you were allowed
 

#13
Nilodop  
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you have given us a scenario in which each couple owns half of each side of the duplex But can they not agree with one another, despite the TIC deed, that each owner may choose to rent out or occupy one specific side of the duplex, and keep the rent from that side, and pay the operating expenses of that side, and further agree that the value of each side is identical, and that each party will pay half of the principal and interest on the mortgage and will receive half of the net proceeds upon a sale (of the entire properrty? To an outside party, such as the mortgagee, of course the TIC liability will prevail, but as between the two owners, it would be as if this property were a condominium, each owning a specific side, and each having an undivided interest in the common areas and the land.
 

#14
Dennis2  
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They can certainly redeed the property so that each owns a separate half. I just don't think they can pretend that's what they did. After one side has been lived in for a year and the other rented are they necessarily still identical? The complications are seemingly endless.
 

#15
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Wow. I guess I am not seeing these deeper issues here.

Two couples purchase a duplex. One couple rents out one side, and the other couple lives in the other side. I thought the problem was going to be upon sale of the property, and how to equalize the positions. Or even maybe the rented side is allocated somehow between the two couples depending on what they wanted to do.

I probably won't want to take on this new client - it seems like I don't know just enough to make me nervous.
 


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