Yardley CPA Posted April 23, 2019 Report Share Posted April 23, 2019 Three brothers purchased their parent's home for $1 many years ago (probably not the best route to go, but that's how it was done). Parent's lived in the home until they passed which happened recently. Brothers are considering renting the home for a year before they place it up for sale. Intent is to split income and expenses of the rental and sale evenly. Questions: Must a partnership be formed? Does the home have any basis that would allow for depreciation. There have been no significant upgrades over the years. Since the brothers purchased the home for $1, I do not believe they are subject to any type of stepped up basis or anything that would allow them to depreciate the value of the home?? Am I mistaken? If the intent is to sell the home in the relative near term, do they simply include Schedule E's on their personal returns showing the income and expenses for the period it is rented, with no basis to depreciate? Quote Link to comment Share on other sites More sharing options...
Lynn EA USTCP in Louisiana Posted April 23, 2019 Report Share Posted April 23, 2019 Their value for depreciation purposes is the lower of their basis (their $1 cost plus their parents basis - purchase price plus any improvements) or FMV at the time available for rent. The $1 purchase price is a smoke screen, and a gift tax return 'should' have been filed for the gift of equity in the home from the parents to the sons. Ask to see the paperwork (if there is any) in case there is mention of a life estate allocable to the parents' use of the home until their death. If no life estate then there is no step up in basis. They could do a QJV splitting the income and expenses (according to their ownership %) and reporting on their respective schedule E's in lieu of a formal partnership return. 4 1 Quote Link to comment Share on other sites More sharing options...
Lion EA Posted April 23, 2019 Report Share Posted April 23, 2019 If it was a gift from the parents, then parents' basis is the brothers' basis. ($1 was not an arm's length sale.) If the parents retained an implied life estate under the laws of their state and the house was included in their estate, then the brothers do get a step-up or step-down in basis. It is my understanding, but I haven't needed to look it up for years, that common ownership for a rental does not require a formal partnership. Hopefully, someone with a lot more rentals in their practice will jump in. Oh, oh, Lynn did jump in! What Lynn said. 4 1 Quote Link to comment Share on other sites More sharing options...
jklcpa Posted April 23, 2019 Report Share Posted April 23, 2019 Agree with Lynn except that it wouldn't be a qualified joint venture, because that is only available where the only owners are a married couple with both spouses materially participating and elect to not be taxed as a partnership, BUT it could be reported as a joint venture where each partner reports his share. Just make sure that the QJV box isn't checked if you do it that way. 5 1 Quote Link to comment Share on other sites More sharing options...
Lynn EA USTCP in Louisiana Posted April 23, 2019 Report Share Posted April 23, 2019 Thanks for that clarification . 1 Quote Link to comment Share on other sites More sharing options...
Yardley CPA Posted April 24, 2019 Author Report Share Posted April 24, 2019 Thanks very much to all of you for your thoughts. Much appreciated. Quote Link to comment Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.