If you own rental real estate property with your spouse or business partner, the Internal Revenue Service tax rules for calculating the amount of income you must report are the same as when you are the sole owner. However, the amount of losses you can deduct depend on both the ownership arrangement and your level of active participation in the rental activities.
Ownership With Spouse
If you and your spouse own a rental property together, file a joint tax return and you both materially participate in the rental activities, the IRS allows you to elect qualified joint venture status. Since you materially participate in the rental activities, the IRS treats you like a business and requires you to each separately report your share of income, deductions and losses on a Schedule C or C-EZ in proportion to your individual ownership interests. The benefit of electing a qualified joint venture on your Schedule C is that you both receive credit for Social Security and Medicare taxes, which is separate from the federal income tax. If you don’t materially participate in the rental business, then you report your rental income and deductions on a Schedule E.
Business Partner Ownership
When you own rental real estate jointly with other investors, the IRS treats your rental arrangement as a partnership for purposes of calculating tax on your rental income. Unless you materially participate in the rental activity, you must report your share of rental income and deductions on a Schedule E. However, the fact that one investor materially participates in the rental business doesn’t mean that you can file a Schedule C as well. The determination is made based on your particular activities. Generally, you split all tax items that relate to the property in proportion to your ownership interest. For example, if you have two partners and you each own equal portions of the rental properties, you will report one-third of the income and one-third of the losses and deductions.
The most important factor that determines your tax liability and reporting requirements is not the ownership arrangement you have but the level of your participation in the rental activities. If you materially participate in the daily operations of the rental properties, then the IRS will treat you like a business. Material participation requires your involvement in the management of the properties or the frequent provision of services to tenants, such as daily cleaning of apartments or changing of linens. However, if you only provide utility and trash collection services, this is a passive activity.
Income and Deductions
Calculating your taxable profit on the rental property requires meticulous record keeping throughout the year. From the total rental payments you receive on all rental properties, there are a number of expenses you can deduct. Typical rental deductions include utilities you pay for, cleaning service charges, management fees and commissions you pay real estate firms, the cost of necessary repairs to the property, interest payments on a mortgage, state and local property taxes, and depreciation on the purchase price of the properties.
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.