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Old 04-06-2014, 12:06 PM
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rental income and expenses for joint tenants

Ok, first the relatively easy question: My husband and his brother own a residential property as joint tenants. They do not live there. My husband is receiving rental income. Who reports the income and how much? What about deductions? Does it matter who receives the rent or who pays the expenses?
Now, the complicated part: They also own a restaurant which is an S corporation. The restaurant is the entity which is paying the rent. It's for storage of restaurant supplies. They make a check out to my husband every month. In addition, a couple of employees live there on and off. They are not charged any rent or any other expenses. The restaurant also pays the expenses for the house (taxes, insurance, etc.) So I was wondering if anyone could tell me how to handle this and what should be done in the future. Any advice would be greatly appreciated.



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Old 04-06-2014, 07:17 PM
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Originally Posted by christinek View Post



#1;Ok, first the relatively easy question: My husband and his brother own a residential property as joint tenants. They do not live there. My husband is receiving rental income. Who reports the income and how much? What about deductions? Does it matter who receives the rent or who pays the expenses?



#2;Now, the complicated part: They also own a restaurant which is an S corporation. The restaurant is the entity which is paying the rent. It's for storage of restaurant supplies. They make a check out to my husband every month. In addition, a couple of employees live there on and off. They are not charged any rent or any other expenses. The restaurant also pays the expenses for the house (taxes, insurance, etc.) So I was wondering if anyone could tell me how to handle this and what should be done in the future. Any advice would be greatly appreciated.
#1;Since your husband and his bro jointly own the property that they rent out, and they have not formed a partnership, MMLLC or corp, generally each of them would report their proportional share of the rent income and rent expenses on their individual income tax returns. An unincorporated organization with two or more members that carries on a business and divides the profits would normally be classified as a partnership for federal income tax purposes. But the IRS views that co-ownership of property that is rented is not a partnership unless the co-owners provide services to the tenants.So they do no need to file f1065.


#2; As mentioned above, aslongas therestaurant is co owned by them, same situation;however, as the own it as S corp, then, rental income generated from the restaurant needs to be reported each SH’s Sch K1 and Sch E/1040(as they do NOT actively participate the S corp biz, the restaurant biz but just receive passive income, rental income). Based on several factors, the IRS determines that the business activities amounted to the conduct of an active trade or business and, therefore, in this case,the rents would not be classified as passive investment income. So the rental income of an S corp that actively manages the real estate is not passive.UNLESS it is passive the rent related expenses can be deducted on their 1120S, NOT on Sch E of each SH/owner.



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