Real Estate Tax Deduction - Jointly owned Property

Technical topics regarding tax preparation.
#1
Jake  
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3 people own real estate as tenants in common, not JTWROS, A, B and C each own a 1/3 undivided interest in this real estate.

Person A & B are filing joint return.
Person C is child of A & B

Persons A & B pay RE taxes.

Can Persons A and B deduct all or just 2/3 on Person A & B's joint return?
 

#2
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the married A&B owners can only deduct their 2/3 of the RE taxes unless a partnership return is filed and all the rigamarole for special allocations of expenses is followed. Or they gift the money to child for child to pay her/his 1/3.
 

#3
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There is an old Tax Court case [T.C. Memo 1956-8] that seems to me to support A and B's deducting 100% of the real estate tax.

Here's an excerpt from Opinion:
"With regard to the claimed deductions for interest and taxes paid, the parties are agreed on the fact that petitioner made the payments and the amount thereof, but the Commissioner argues that petitioner was not paying his own obligations but those of his daughter and so is entitled to no deduction. On the facts we think the Commissioner is wrong. Petitioner and his daughter inherited the property from petitioner's deceased wife, share and share alike. This constituted them tenants in common. N. Y. Real Prop. Law, sec. 66 (McKinney). Petitioner did convey his interest to his daughter, but we think under the facts that he thereby retained his beneficial interest as a tenant in common, there being no intent that anything but bare legal title be passed by the conveyance. As a general rule, taxes are a lien on the land which both tenants in common are equally bound to discharge. The same would be true of a mortgage debt on the land. 2 Thompson, Real Property, secs. 1809, 1810. In paying the taxes and mortgage interest petitioner was therefore in fact satisfying his own obligation and not that of his daughter. No question of whether he could enforce contribution from her is here involved. The mortgage interest and taxes paid by petitioner, exclusive of the tax penalty (which petitioner concedes is not deductible) are properly deductible. See F. C. Nicodemus, Jr., 26 B. T. A. 125 ; Archibald R. Watson, 42 B. T. A. 52 , affd. on another issue, (C. A. 2) 124 Fed. (2d) 437 ."
 

#4
Doug M  
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Powell v. Commissioner, T.C. Memo 1967-32

The only bar to not being able to deduct would be a situation where state law (PA comes to mind) does not allow a deduction for more than your share of the liability.
 

#5
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Doug M, can you direct me to he source of the comment about PA? I have no view either way, I've just honestly never thought about it.
 

#6
Jake  
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Doug M wrote:Powell v. Commissioner, T.C. Memo 1967-32

The only bar to not being able to deduct would be a situation where state law (PA comes to mind) does not allow a deduction for more than your share of the liability.


Ohio does not have any provision in its state income tax law for deductions of this sort so I am sure there is no Ohio statute addressing this issue. The 1/3 part of the r.e. taxes in my example are about $1,300, and in the 25% bracket that is a tax difference of $325. Owner C would not be itemizing. When I run the final numbers A & B may be in Alternative minimum tax territory anyway so then probably would not do them any good to claim the $1,300 they paid anyway. And In 2018 and after the $10,000 limit on state/local income and r.e. taxes would rule it out.
 

#7
Doug M  
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Len, this article talks about the PA situation.

http://law.scu.edu/same-sex-tax/shared- ... eductions/
 

#8
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Thank you, Doug M. I've lived here a long time and never knew that. I've actually never run into such a situation. It's logical in a way yet kind of odd, in a practical sense.

For the record:

The article you linked is a blog by a CA law prof, and it contains this sentence.
I can find only one case to the contrary and it involved the special application of Pennsylvania law which appears to create separate tax liens against undivided interests in property. So, if a one-sixth owner did pay one-sixth of the taxes, her interest would be safe from a tax foreclosure sale. As a result, she could only deduct one-sixth of the taxes. See James v. Commissioner, T.C. Memo 1995-562 (holding that the deduction must be claimed pro rata under Pennsylvania law where property taxes on jointly owned property are assessed separately against each co-owner).


James case: https://www.leagle.com/decision/1995149 ... m142011228. A footnote says
4. Petitioner had no legal obligation to pay more than his share of the taxes under Pennsylvania law, and Pennsylvania law would not divest petitioner of his cotenancy interest for his cotenants' failure to pay their proportionate share of the taxes. 72 Pa. Cons. Stat. Ann. secs. 5968 and 5969 (1995).
. Two other footnotes are of note (pun intended obviously).
2. Respondent concedes that, if the Court determines that petitioner is entitled to only 50 percent of the deductions arising from the properties held in cotenancy, petitioner should report only 50 percent of the income arising from such properties.
3. We note that, in fact, petitioner did receive significant contribution from his cotenants, since he received their share of the rental income.
.

Here are the PA sections cited.
The undivided interest of any tenant in common or coparcener of any seated lands in this Commonwealth shall not be sold, or title thereto be divested by any treasurer's or sheriff's sale, for the failure of any of said tenants in common or coparceners to pay their pro rata share of the taxes assessed against said land, if such tenant in common or coparcener has paid to the proper collector of taxes his or her proportionate amount of taxes chargeable against such land; and the sale of such lands shall divest and pass title to such undivided shares or interest only in such land as is held by such persons who have failed or neglected to pay their proportionate part of such taxes.
Credits
1917, May 24, P.L. 270, § 1.
72 P.S. § 5968, PA ST 72 P.S. § 5968
Current through 2017 Regular Session Acts 1 to 43, 45 and 49
. And here is 5969.
And any such tenant in common or coparcener shall have the right to pay his or her proportionate part of such taxes, at any time, before the sale of the land under any lien entered in the prothonotary's office or before any treasurer's sale, to the prothonotary or county treasurer;  and it shall be the duty of the prothonotary or county treasurer to receive the same for the district levying the tax;  and the sale of the residue of the shares or interest in such lands, on which the taxes remain unpaid, shall in no way affect the right, title, or interest of those who have paid their proportionate share of such taxes for which the land is sold.
 

#9
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Doug that Santa Clara Law School article was interesting. btw, how did you find it?
 

#10
Doug M  
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"shared property taxes" in google
 

#11
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I'm interested in knowing how the principles described in this thread would apply to other expenses paid in respect of rental income.

Publication 527 states the following:

Part interest.
If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership.
Example.
Roger owns a one-half undivided interest in a rental house. Last year he paid $968 for necessary repairs on the property. Roger can deduct $484 (50% × $968) as a rental expense. He is entitled to reimbursement for the remaining half from the co-owner.

It would appear based on the tax court case quoted in #3 that the situation is not as simple as the IRS is trying to suggest here. I've learned not to trust IRS publications in cases where I can't understand the basis for their claims, so I'd like to get some opinions or other sources on this issue.

My position has generally been that Schedule E expenses directly related to the property (tax, insurance, interest, repairs) should be split according to ownership percentage, but that other rental expenses such as travel and tax prep fees should fully attach to the person that pays the expenses, because they and they alone benefit from them. Is that position reasonable? Or perhaps even too conservative?
 

#12
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Thank you, Doug M. I've lived here a long time and never knew that. I've actually never run into such a situation. It's logical in a way yet kind of odd, in a practical sense.


It’s been discussed before. I have this thread in my database on this “right of contribution” issue. See Post #19.

viewtopic.php?f=8&t=1916

It’s a real thorny issue. It pops up in these familial situations, typically with the parent paying more than his share of an expense. It also comes up with non-family co-owners. One is a deadbeat and the other one, the good guy, ends up paying more than the good guy’s share. IRS could assert the doctrine in either of these situations (and, actually, in any case where a state law right of contribution exists). In the latter situation, though, with non-family co-owners, if we play it out until the property is sold, we can almost bet that the good guy is going to stake a claim for more than his normal share of the sales proceeds. And that “excess” he is staking a claim to is the “excess” expense amount he paid over the life of the property, for which he likely has impeccable records…which establish his “Receivable From Co-owner.”
 

#13
Chay  
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I've researched the question I asked in #11 and my findings are somewhat surprising.

The following encapsulates the issue and is from Petrie v. Commissioner (70 T.C.M. 1566):

The third issue for decision is whether petitioner had additional rental income and is entitled to claim additional rental expenses for 1991. Petitioner contends he should be permitted to exclude the rental income on his 1991 return and is entitled to claim the rental expenses because the Temporary Orders mandated such treatment. Respondent contends that petitioner must report his share of the income and expenses.

Income with respect to joint tenancy property is allocated and taxed in proportion to that which each co-owner is entitled to receive under local law. Parsons v. Commissioner [Dec. 27,196], 43 T.C. 378 (1964). A co-tenancy under Colorado law provides that each of two joint tenants owns an undivided one-half interest in the property as a whole. Commercial Factors v. Clarke & Waggener, 684 P.2d 261 (Colo. Ct. App. 1984).

However, co-owners are entitled to a deduction for mortgage interest and real estate taxes paid on jointly-owned property to the extent that they have actually paid these amounts and provided that no other tenant has previously claimed a deduction therefor. Blackburn v. Commissioner [Dec. 36,178(M)], T.C. Memo. 1979-266, affd. [82-2 USTC ¶ 9444] 681 F.2d 461 (6th Cir. 1982); Finney v. Commissioner [Dec. 34,074(M)], T.C. Memo. 1976-329. The reason for treating interest and taxes differently from other types of expenses and losses is that even though a co-owner may not be personally liable for the entire amount of the interest and taxes, payment may be necessary to preserve that co-owner's rights in the entire property. Powell v. Commissioner [Dec. 28,348(M)], T.C. Memo. 1967-32.


There is a footnote in the case indicating that of the seven categories of expense the petitioner had originally claimed, five were allowed only according to his 50% ownership interest: auto and travel, cleaning and maintenance, insurance, repairs, and depreciation.

I was surprised that auto and travel would need to be split even though it didn't relate directly to the jointly owned property, but I found the rationale in Boyd v. Commissioner:

Obviously the phrase "ordinary and necessary expenses," as used in section 23 (a) (2), is to have the same meaning as has been given to the same phrase in section 23 (a) (1). Trust of Bingham v. Commissioner, 325 U.S. 365. Under either section the permitted deduction is for expenses and the expenses must be both ordinary and necessary. There might be doubt that the expense, in excess of one-half, when paid by the owner of a one-half interest would be "ordinary" — on the theory that it is like paying the obligation of another.


The Code references are to the statutes that predated § 162 and § 212.

The general theory here is that any expense incurred to produce income is only deductible by a taxpayer to the same extent that she is entitled to the enjoyment of that income. The remaining portion of the expense generates a proportional right of reimbursement from the other beneficial owners of that income.

The reason that mortgage interest and real estate taxes are fully deductible is that they aren't paid to produce income but rather to secure a continued right of enjoyment of a property. To answer my own question, then, expenses such as travel and tax prep fees don't "attach" to anyone based on who pays them - they "attach" to the reason that the deduction is allowed in the first place. Because tax prep fees are with reference to the individual tax liability of a taxpayer, they are fully deductible by that taxpayer - not so for travel expenses.

The right of reimbursement and proportionate allocation of expenses strongly evoke partnership tax concepts. Unless the agreement specifically denies the right of reimbursement to a partner, no UTP's are allowed on a return. I suppose that the partnership may deduct such expenses regardless of whether it has reimbursed the funds or not? Also, income and deductions in a partnership must be allocated according to ownership interest, unless there is a specific arrangement otherwise - but even then the expenses may be reallocated under § 704(b) if there is no "substantial economic effect". I suppose this statute contemplates a case when the primary motive is tax avoidance.

A final note - Boyd also mentions that "the important distinction between mere coowners and coowners who are engaged in a partnership lies in the degree of business activity of the coowners or their agents". More business activity implies a situation where a partner may be compensated in respect of the actual work he does in addition to his capital contribution, which would seem to justify the right of partners to allocate income and expenses where "mere coowners", compensated only for capital interest, could not.
 

#14
Doug M  
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I'm interested in knowing how the principles described in this thread would apply to other expenses paid in respect of rental income.


I will go with the premise that "other expenses" means expenses other than taxes and interest. I've gone with this premise. If you are sharing income & expenses, generally as two or more people in a business for a profit, (QJV or partnership) it needs some economic substance. Follow the money.
 


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