Published April 10, 2012
Dear Tax Talk,
In 2004, my then-girlfriend and I purchased a house in both of our names. (Bad idea, I know.) We are no longer together. In fact, she has since been married. She and her husband have been living in the house. She has been claiming the house on her taxes since we purchased it.
But she and her husband have just purchased another home and plan to move into it. Selling the house she and I bought together isn't an option, as it is underwater. So the plan is to rent it out. I will begin claiming the house on my taxes as a rental property. As a result, the rent payments will now be considered income, offset by expenses and interest. Neither I nor my ex-girlfriend want full ownership. Fortunately, we have an amicable friendship.
The problem is, I don't know what I need to do regarding claiming the house on my taxes rather than hers. Any help would be greatly appreciated.
I'm not sure why you're getting saddled with the negative equity, but maybe you're just being nice. You'll need to report the rental activity on Schedule E for the year that you commence the rental of the property. Ideally, you would like the lender to report the amount of mortgage interest you pay in your name and Social Security number. Confirm this with the lender before the end of the year by asking them to make the necessary changes in their system to IRS Form 1098.
You'll need to claim depreciation on the house once it becomes an investment property. This is not optional. You must do it. When a personal-use asset is converted to business use, its basis for depreciation is the lower of its original cost or its current market value. Seeing as you have negative equity, I'm guessing that the property's value has decreased since you bought it. You can probably get by with looking up the market value of comparable homes on various real estate information websites such as Zillow.
Technically, you own half of the property. But based on your letter, it sounds like you're agreeing to take over the entire property. You should try to get some sort of written agreement with your ex-girlfriend that details your relationship in the rental activity. While you're amicable now, later problems with the house may change that. If you are assuming full responsibility for the rental unit, then 100% of its income and deductions would be reportable by you on Schedule E.