Rental property ownership

[Joel]

I was recently advised, but without documentation, that the IRS no longer allows joint (husband and wife) ownership of rental property.

Has anyone seen anything in writing about this?

[zeke]

Joel - I find it difficult to imagine the IRS having the authority to "no longer allow joint (h&w) ownership of rental property."

zeke

[jainen]

>>the IRS no longer allows joint (husband and wife) ownership of rental property<<

Title to property is defined under the laws of the separate states, not federal law. The IRS (under Congressional authority) interprets ownership in various ways for purposes of taxation. For example, in certain circumstances you can ignore joint ownership and apply a 100% basis step up when one spouse dies. In other situations tax effects must be determined without regard to community property. Adding a foreign spouse to title can trigger gift tax where you might expect a marital exemption. Related party rules often supersede actual ownership.

Saying you were "advised" suggests more than a casual rumor. If you could identify your source and the context of the advice, we might be able to make more sense of it.

[joelgilb]

Jainen is correct that State Law defines how title in property is held. Further IRS generally has no legal authority to define law, unless Congress specifically gives them that right to expand the Code in the Regs. That has clearly not happened here.

[jainen]

>>IRS generally has no legal authority to define law<<

In theoretical fairness, I'll point out that the original post didn't exactly say the law had changed. Most of tax administration is, well, administrative. The IRS can and does "allow" things not specifically expressed in the law. In fact, until a taxpayer works up to court the IRS can reject some legal rulings. Even in court, the IRS interpretation of a law is likely to carry a lot of weight.

Besides, in general language IRS is a broad metaphor for the entire tax system spanning all three branches of government. So I wouldn't simply say Joel's source is wrong. I'd like to know more about the question. One thing I've noticed is that questions about marital assets are often really about breaking up the marriage.

[joelgilb]

>>IRS generally has no legal authority to define law<<

In theoretical fairness, I'll point out that the original post didn't exactly say the law had changed. Most of tax administration is, well, administrative. The IRS can and does "allow" things not specifically expressed in the law. In fact, until a taxpayer works up to court the IRS can reject some legal rulings. Even in court, the IRS interpretation of a law is likely to carry a lot of weight.

Besides, in general language IRS is a broad metaphor for the entire tax system spanning all three branches of government. So I wouldn't simply say Joel's source is wrong. I'd like to know more about the question. One thing I've noticed is that questions about marital assets are often really about breaking up the marriage.

Good Points

[kcjenkins]

Well, clearly, Joel did not mean exactly what he 'said', because the IRS can not allow or disallow anyone to own property. If property is held in joint tenancy, that is a matter of state law, not tax law. I think what he must have meant, or what his 'adviser' must have meant, is that there is a question of whether rental property can be treated as joint property just because they have previously filed a joint return, when in fact the property may be titled in the name of only one of the spouses.

That is the only area where I could see it even being an issue that the IRS would have any grounds for the question. And since the only time it would actually matter would be one where the couple was now filing MFS, I bet that was where the issue came up. After all, on a MFJ return, it really has no impact at all which one, or both, owns the property.

[jainen]

>>the only area where I could see it even being an issue<<

KC, you mean you didn't like ANY of my examples? Let me expand on them.

The IRS might not allow a basis step up to a surviving spouse who had previously owned the property and simply added the now-deceased partner to title (i.e., even for MFJ it can make a difference). IRS might not allow an injured spouse to claim a share of community income derived from separate property in a business (another one for MFJ). IRS will not allow a foreign spouse to be added to title without gift tax implications. IRS will not allow a spouse to be identified as a separate property owner for certain partnership transactions.

If that's not enough, I can give you lots of others. Sometimes it even works to taxpayer's advantage. IRS won't allow a spouse to become a joint owner during a 1031 exchange. IRS will not allow any additional exclusion under Section 121 for joint ownership compared to a spouse's separate property. IRS will not allow a co-owner of the same sex to take advantage of tax benefits as a spouse.

Some of these are in statute; some are in regs and other IRS rulings. Some are new enough to perhaps be the issue at hand, if only we knew the context of Joel's advice.

[joanmcq]

I'm gonna bet this is somehow releated to the new H/W joint venture rules getting warped in transmission (remember the game of 'telephone'?) The instructions to the Sch E mention that you don't use Sch E to report an H/W 'rental real estate business' that is a qualified joint venture. This could easily be extrapolated to the OP.

[Julie]

I'm gonna bet you're right.

Has anyone noticed that ATX provides no easy way to comply with the joint venture rules? They require that the business file two Sch C's for the year, for the same business. "Duplicate form" merely opens a new blank C. (TRX doesn't handle this, either.) ATX wants you to file a single Sch C with two SEs, which is not allowed under the QJV rules. Logically, if one clicks the "joint" box on the C, it should ask for a percentage (default=50/50) and then print two Cs, each with half the income or expense. But it doesn't. It apparently forces you to fill out the Sch C twice, once for each spouse.

BTW, I can't complain to ATX because I'm locked out of their website. Answering the question correctly doesn't work.

reference: http://www.irs.gov/businesses/small/articl...=177376,00.html

http://www.irs.gov/pub/irs-pdf/p553.pdf, pp 14-15

I'm gonna bet this is somehow releated to the new H/W joint venture rules getting warped in transmission (remember the game of 'telephone'?) The instructions to the Sch E mention that you don't use Sch E to report an H/W 'rental real estate business' that is a qualified joint venture. This could easily be extrapolated to the OP.

[Joel]

I think joanmcq is correct in the extrapolation of the h/w joint venture rules to include Sch E rental ownership. That is probably why I was advised to not have joint ownership on a Sch E. Now the question is, is that correct and how do we handle rental income to joint owners? Do we split the income and expenses onto two Sch E's?

How should we handle this?

[joanmcq]

Julie, being as CA is community property, isn't the joint Sch C (w/2SEs) still available to us? That's why that check box has been in every program for as long as I can remember, although the noncommunity property people often didn't know that. Under community property laws any split for a jointly owned biz is going to be 50/50 by default.

[Julie]

Yes, the income is going to be 50/50 under community property laws, but SE tax is not allocated 50/50. SE tax is supposed to be applied to the earner, not the community. I have an MFS couple where each has a Sch C....I can't make the comm prop adjustment on the C, because that would screw up the SE. So I made it on the worksheet between the C and 1040 in ATX. I remember reading an IRS ruling about six years ago where they decided that CA businesses did not automatically have to file 1065's for community property (good thing, since no one was doing it.) Hadn't even occurred to me to think about it before then.

For a rental this would not matter in California, because there is no SE tax involved, and community property is automatically a 50/50 split. (Although, on an MFS return, you still have to ask some questions....)

There was a time when ATX did not have that check box. I remember.

Julie, being as CA is community property, isn't the joint Sch C (w/2SEs) still available to us? That's why that check box has been in every program for as long as I can remember, although the noncommunity property people often didn't know that. Under community property laws any split for a jointly owned biz is going to be 50/50 by default.

[Julie]

Joel, check out the links I posted last night. There are specific instructions for rentals as well as businesses.

I think joanmcq is correct in the extrapolation of the h/w joint venture rules to include Sch E rental ownership. That is probably why I was advised to not have joint ownership on a Sch E. Now the question is, is that correct and how do we handle rental income to joint owners? Do we split the income and expenses onto two Sch E's?

How should we handle this?

[kcjenkins]

Julie, call the ATX help line, and they can get you back into the support pages. I had to do that recently. Seems that the 'code' that I used to install the program is not the 'code' that they are showing, two of the 20 numbers were changed, so I could not use the normal procedure to reset my passwords. But support was able to fix it where I could get in, plus give me the current correct install code data. You need to get that fixed, anyway, because it's the portal to all the other parts that you need from time to time.

[kcjenkins]

Julie, call the ATX help line, and they can get you back into the support pages. I had to do that recently. Seems that the 'code' that I used to install the program is not the 'code' that they are showing, two of the 20 numbers were changed, so I could not use the normal procedure to reset my passwords. But support was able to fix it where I could get in, plus give me the current correct install code data. You need to get that fixed, anyway, because it's the portal to all the other parts that you need from time to time.