Rental property - Joint Ownership?

Technical topics regarding tax preparation.
#1
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I have a MFJ client. This MFJ client investments in one to four unit rental real estate, and is starting to scale pretty quickly.

Recently the client couple partnered with a sibling and the sibling's spouse to buy a few properties. Most of the properties are TIC ownership on the title (50-50 my client couple and the sibling and spouse) and both couples are on the loan. That's clear cut and above board.

However, for one of the properties, my clients are not on the title and they're not on the mortgage. I inquire and my client states that they "put down" 50% of the purchase cost and they "own" 50% of the property. As they're related parties, I assume this is a verbal and handshake agreement.

I'm slightly uncomfortable with this dynamic. Particularly because I don't really understand how you'd be able to do this without deceptively filling out a mortgage application.

Would you be comfortable splitting the revenue and expenses 50-50 in this situation?

I'm also concerned about at-risk basis. I don't believe my client has basis in the mortgage as they're not a signer or co-signer. Are they at risk only for their capital investment, absent any kind of written agreement to the contrary? (if that's even permissible and enforceable)

I should have really quoted more for this return... :)
 

#2
MilesR  
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Sounds like your client "gifted" their sibling the 50 grand on that house. At least that's how it looks on paper (or not on paper in this case). If the client is not on the title then I don't think they are actually entitled to deduct any of the rental expenses in the eyes of the IRS. The money they spend out of pocket for rental expenses looks like additional gifts to the sibling.

They should probably either quit claim your client on as whatever % 50k is to the total purchase price, or maybe change it to 50/50 on title and refinance/add them to the mortgage.
 

#3
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Ownership of real estate is generally by a recorded deed. Since they are not on the deed, I see support for MilesR's opinion. But the verbal/handshake agreement that indicates with intent of TIC ownership and that the deed was filed incorrectly -- possibly an innocent oversight -- or that the agreement equates to an unrecorded deed.

I have a client with several residential (non-rental) properties with family members in which he isn't on the deed but has a verbal agreement that he owns 35%-50% of each property based upon his paying 35%-50% of the purchase prices. In my client's situation, I'm debating whether nominee ownership (without written agreement) can apply to real estate. If possible, my client wouldn't have made gifts at acquisition, the relatives won't make gifts upon sale (or recording deed to reflect TIC ownership), and there wouldn't be loans with imputed interest. If not, we'll treat everything as gifts.

Any thoughts as to nominee ownership of real estate without a written agreement?

I wouldn't feel comfortable claiming any rental income/deductions without some sort of written agreement signed by both parties documenting their handshake.

Ideally, your client and family members will correct the deed ASAP since there are many other issues with the current arrangement including insurance, liability protection, and no proof of ownership in the event of death or family spat.
 

#4
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MilesR wrote:Sounds like your client "gifted" their sibling the 50 grand on that house. At least that's how it looks on paper (or not on paper in this case).


Well there are at least a couple possibilities that I can see.

One, they lied on the mortgage app. In this scenario I would imagine that on the mortgage app the sibling/sibling spouse listed that cash in their assets column with no corresponding liability, and most likely answered "no" to the question of whether the applicant received a loan for this purchase that wasn't reflect previously in the app. Otherwise the loan would have been flagged and there would have been questions. The loan likely wouldn't have gone through as-is. In this scenario, that's pretty compelling evidence for gift treatment if the IRS wanted to pursue it.

Two, sibling/sibling spouse purchased the property using their own cash. My clients reimbursed them 50% of the down payment post closing. Here we have a verbal unrecorded deed. This is also probably violates the due on sale clause to some degree.

CantonCPA wrote:Any thoughts as to nominee ownership of real estate without a written agreement?


I think we have beneficial ownership here, but it's very sloppy and full of risks as you noted.

CantonCPA wrote:no proof of ownership in the event of death or family spat


No kidding.
 

#5
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I think we have beneficial ownership here


Agreed. That’s the first issue. If we have beneficial ownership, then the next question is whether or not equitable/beneficial ownership can extend to a joint tenancy. I see no reason why it wouldn’t, but I haven’t dug into it.

Be aware: These situations are not all that uncommon. Often one guy buys using his credit because he is the one that has the credit. It’s also possible “they” got a better interest rate for sole ownership. Might be that they pursued joint ownership with the bank, but the bank didn’t want to deal with co-owners who were not spouses. I don’t know. But these situations are not uncommon. Typically I run it through a 1065, as a common law partnership. What you probably want to have is some type of written ownership agreement wherein the guy that’s not on the mortgage agrees that he is responsible for half of it. That agreement would also state that non-owner is, in fact, the owner of half the property and that income/expense will be split 50/50.

No kidding.


See my comments above. A title is just evidence of ownership and doesn’t really control for income tax purposes. It would insulate the law firm/title company, for example, if the property is sold and all the proceeds get paid to the guy that’s on the title. The non-owner would have no claim against the closing attorney/title company. But I can assure you, if there is some situation where ownership is disputed for whatever reason (i.e. distribution of proceeds on sale, or paying off a mortgage deficiency, or coming up with funds to cover operating expenses), the agreement between the two parties will matter.

With all that said, I take issue with Post #2.

We have a similar thing going on with ownership of a yacht. Two guys are involved. The bank agreed to lend only on the credit of one guy, so that forced that one guy to own the yacht. The non-owner put in the funds for the down payment. He’ll get that back first if the yacht is sold. Both parties agreed to split the operating costs. This thing really is, without a doubt, a partnership. But it’s being cast as sole ownership with the other guy’s contributions, including his down payment, being booked as loans. And since those are booked as loans, whatever the owner puts in are booked as loans as well. Whatever. If it blows up, it blows up. These guys have been informed.
 

#6
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I think the verbal agreement controls, regardless of title. If the parties consider ownership to be joint, you can file on that basis.

The fact that a BFP could take title free of the TP's undisclosed interest does not mean that the TP has no interest.

I do not see a gift.
Steve
 


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