Unsual situation?

[ILLMAS]

Once in a great while you get a client with an usual situation that gets you thinking. So here it is, Jack and Jill (no relation) bought an investment property together. Jill had better credit so the mortgage was put on her name only and they had an agreement, that Jack will be responsible of reporting 100% of the rental income and expenses, and Jill would be like a silent partner until the property was sold. Jack has been reporting the property for a couple of years on Sch E, fast forward to 2013, Jack no longer wants to do anything with the property and has waived all his rights to Jill, a quick claim deed had been made and Jill is 100% owner now, my question/concern is how to properly transfer the property from Jack Sch E to Jill Sch E? Is it reported as a sale to dispose of it from Jack tax return, or simply just transfer it to Jill's tax return, same basis, accumulated depreciation?

Thanks

[OldJack]

Sounds like the original agreement and purchase created a non-related party partnership of real estate holding. Since the only asset was real estate no partnership return was required if each owner reports their own 1040 income and expenses according to the agreement. It appears the quick claim deed transfers ownership without sale proceeds, gain or loss, so no sale required to report by Jill, however, Jack may need a Form 4797 (zero sale loss) to report any tax basis in the real estate. Jack having zero income and expense has no need to continue reporting on Sch-E. Jill will now have rental income and expense to report on 1040 Sch-E and nothing more until sale of the property.

[ILLMAS]

Thanks, now I would like to use numbers:

Building Cost $450,000

Land Cost $ 50,000

Total Cost $500,000

Down Pymt $100,000 $50K from Jack and $50K from Jill

Current outstanding loan: $370K Jack is responsible for $185K and Jill is responsible for $185K

Jack reported the $450K + $50K on Sch E, his accumulated depreciation is $40K, so his adjusted basis is $460K. But technically they are 50/50 owners, now to dispose from Jack tax return would this be the following entry:

Jack adjusted basis is $460K

Sales Price $370K this is the amount of the outstanding loan, Jill agreed to assume the 100% of the loan.

Loss ($90K)

But Jack isn't entitled to the 90K loss, his loss would only be $45K (half).

Maybe I am seeing things wrong or mixing things up, if someone can help me on this I would really appreciated it.

Thanks

[jainen]

>>Jill agreed to assume the 100% of the loan<<

I thought you said Jill was already the 100% borrower? It doesn't sound like they set it up correctly. Co-ownership does not necessarily constitute a partnership as such, but the unequal distribution looks like they didn't treat it as co-owners. So I suggest you pretend it was a partnership all along.

In that case Jack's basis in his 50% interest is no more than his 50K contribution since neither he or the partnership had any liability.
Adjust that for net income and expenses he claimed over the years, which will determine gain/loss for the retiring partner. I don't think the loan balance or FMV are relevant (unless Jack wants to be taxed on $185K relief of liability). Jill should continue the depreciation schedule already in place and hope the IRS doesn't go snooping around.

[ILLMAS]

"I thought you said Jill was already the 100% borrower?"

That's correct, Jill was and is still 100% responsible for the loan according to bank papers, John name is not on the loan, but in the written agreement, they are both responsible for the loan at that time. They were both supposed to be on the loan, however John credit history was not the greatest. Something that surprised me was that John never received a letter from the IRS for the mortgage interest that was not under his name or ss#. I did not think (cross my mind) of John basis being limited to the $50K he came in with and I really wished they would of reported 50/50 on each tax return that would simplify things.

[jainen]

>>John never received a letter from the IRS for the mortgage interest that was not under his name or ss#<<

Investment loans don't always generate a 1098, so if the mortgage seems reasonable for the property and the rest of the return looks good the IRS might let it go. On the other hand, you said this went on for "a couple of years" and they're just getting started on the 2011 audits.