Owning A Rental Property With Others

By Jason Watson, CPA
Posted Saturday, August 3, 2024

We discuss this sporadically throughout the chapter in various ways. It is very easy to purchase a rental property with another person. You hold title as joints tenants with rights of survivorship (JTWROS), and report the allocated rental activity on Schedule E of your individual tax return (Form 1040). 50-50, 1/3 1/3 1/3. Easy.

Remember that marriage is easy to get into, hard to get out. A real-life case presented itself to WCG CPAs & Advisors where two couples bought a ski condo in Colorado as a short-term rental. One of the couples got divorced and moved to California. The Colorado couple would let anyone and their brother use the condo without paying rent. The California divorced couple would continuously inject cash to float bills. This went on for almost a decade. Nothing the California divorced couple do but smile and nod. Sure, they could have stopped injecting cash but then again, they were guarantors on the mortgage loan. Rock and a hard place sort of thing.

Eventually the Colorado couple divorced and were suddenly compelled to sell. Needless to say, no one exchanges Christmas cards.

This could have all been solved with a multi-member LLC with a beefy Operating Agreement. Even with your parents or sibling or someone who is close to you, formalizing the relationship with an LLC and Operating Agreement protects everyone in an agreed-upon (and ahead of time) way.

Specifically with parents, you are still able to get a step-up in basis upon their death for their portion. For example, you and Mom buy a rental property for $300,000. Mom passes away, and the property is worth $400,000. Your basis would end up being $150,000 plus $200,000 or $350,000. If the rental property was owned by an LLC which was in turn owned by you and Mom, an IRC Section 754 election might be required.

See Real Estate Investing With Family Partners for additional considerations. You won’t have to wait long… it’s next.

Another minor issue that happens from time to time with titles held as joint tenants, when the rental property is sold and a Form 1099-S is filed by the title company, they do one of three things-

• put all the proceeds on one person’s SSN,

• they file multiple 1099s with the full proceeds for each owner, or

• they accidentally do it correctly and split it.

The first two situations stink and can be resolved within the tax returns, but invite risk and headache. An LLC resolves this issue.

Regardless of LLC or not, another wrinkle exists when selling real estate in a state that is not your resident state. The title company is often required by law to withhold taxes (what we accountants call backup withholdings). How these withholdings are coded when submitted to the state can be problematic. One SSN? Everyone’s SSN? The entity’s EIN? Messy. The lesson here is to dig deep into the reporting when you sell a rental property.

At times you might want to hold title as tenants in common (TIC) where upon your death, your interest transfers to the remaining owner(s) for very narrow reasons. This is rare, however.