Invvestment Propert problems

[Max W]

Client (C) invested with another person in a house, for investment purposes, but ......

1. Purchased 2004 under partner's (P) name  (Cost $720K) put down pmt $65K and took out mortgage in his name.

2. Right after purchase (C) paid $190K for improvements.  Partner put in $55K.

3. 2007 client added to title.

4.  2019-20 client paid for $900K remodel.

5. 2021 - sold for $2,050,000.   Proceeds allocate for client $1.3M, $750M for partner.

6. Each is filing 1040.

My question -

Does this arrangement sound equitable?

I also  think that it should have been set up as a partnership.

[Lee B]

So has this house remained investment property with no income for 18 years and no one deducted mortgage interest or property taxes?

[Max W]

3 hours ago, cbslee said:

So has this house remained investment property with no income for 18 years and no one deducted mortgage interest or property taxes?

Partner rented it for 4 years, 2011-14, but all that was on his returns.  He also paid mortgage int. and prop tax.

[Lee B]

3 minutes ago, Max W said:

Partner rented it for 4 years, 2011-14, but all that was on his returns.  He also paid mortgage int. and prop tax.

So the Partner and not your client reported all of the rental income and deducted the Mortgage Interest and the Property Taxes for 2011- 2014.

Does that mean that for 14 years no one deducted the property taxes and mortgage interest?

 

[Max W]

9 minutes ago, cbslee said:

So the Partner and not your client reported all of the rental income and deducted the Mortgage Interest and the Property Taxes for 2011- 2014.

Does that mean that for 14 years no one deducted the property taxes and mortgage interest?

 

It's not clear. Client says she didn't pay and partner says client paid some??  Still trying to get this straight.  In any case if client paid anything it was to partner.

I'm going to assume, for now, that client did not pay anything.

[Lee B]

From The Tax Advisor:

Regs. Sec. 1.266-1(b) allows the taxpayer to capitalize the following into the cost or adjusted basis of the relevant property.

In the case of unimproved and unproductive real property:

Annual taxes;

Mortgage interest; and

Other "carrying charges."

I used this election for a number of years to capitalize  these expenses on some vacant commercial property owned by two partners

for Investment Purposes only. Fortunately in my situation there was a partnership with good recordkeeping.

In your situation it would be hard to decide how to handle everything unless they could provide you with detailed activity going back to 2004.

I am really glad it's not my client.

 

[jklcpa]

Technically speaking, the sec 266 election is made by attaching a statement to the timely filed (including extension) tax return for that tax year.  The election must be made each year the taxpayer desires to capitalize those costs.  Also, sec 266 says that only those costs that would otherwise be deductible may be capitalized. 

[Sara EA]

Doesn't sound like a partnership to me.  Your client was merely an investor.  The money received on his investment is cap gain.  He put in $1.09m (58%), partner put in $775k (42%).  Client is getting more than his share of the sales price.

[Lee B]

14 hours ago, Sara EA said:

Doesn't sound like a partnership to me.  Your client was merely an investor.  The money received on his investment is cap gain.  He put in $1.09m (58%), partner put in $775k (42%).  Client is getting more than his share of the sales price.

If this client is an investor, is there any substantiation for that assertion? All of us can create various scenarios of what might be but . . . .?

If there is no paperwork, then there needs to be some written notes about what P and C's verbal intentions were, that they both  agee with.

[jklcpa]

As cbslee said, we could come up with a variety of labels, but client and "partner" need to describe what their intentions were and provide available documentation.