Brother and I opened a checking account together because we are renting out a house. I deposit the rent into this account. (some of the money is used for repairs to the house, property taxes receipts I paid here, etc.) My brother is basically a long-distance landlord, and he is out of state, but he said he will handle the income tax on this. (I sent him all kinds of information, receipts, property taxes, etc.)
My husband and I file our income tax together. Husband says since he is going to be paying taxes on my income from the rent ( which came to under $2000 for last year), the best thing to do would be to withdraw my share of the rent received from my brother and mines account, put it into our joint checking account until we got our taxes done, and then put the money back into my brother and mine’s account.
Does this sound like something reasonable? I know nothing about taxes, and I have tried for weeks to get hold of my brother. He spews gobbledy gook tax information at me or just isn’t available.
I ask because my husband doesn’t like my brother, and I don’t want them to get into an argument on the phone. As usual, I am caught in the middle.
So should I withdraw my cut of the rental money for a short time till husband and I get our income tax done, and then put it back into my brother and mine’s account?
II don’t see how moving your money from one account to another and back again makes any difference. The money is income, regardless which account it’s in.
This. The IRS doesn’t care whether you put your income in checking account A, savings account B, or as bills stuffed under the mattress; once you have control of it, it’s income regardless of where it ends up.
So moving the money doesn’t matter. But you (and this probably actually means your husband) need to talk with your brother to determine your share of the rent proceeds, AND your share of deductible expenses for the rental business (I don’t know what’s deductible or how; hopefully your brother does).
The income from the property is total rent collected less expenses. That is stuff paid out of the checking account. And added to the expenses is the depreciation of the property. This can be the complicated calculation and one that needs to be taken each year. Because if you don’t you are loosing the tax advantage and when you sell the property could mean the capitol; gains taxes get more complicated. I am not sure just how this works that is why my CPA does the calculations.
Then when you get the calculated net income then that would be devided up for tax reasons. It is possible instead of having a guess income of $2000 you could actually have a paper loss that you would be giving up.
As noted by Snnipe 70E above, your share isn’t just the rental income, you also have a share of all of the expenses associated with owning a rental property. It doesn’t sound like your husband should be doing your taxes, if he doesn’t get that.
Essentially you and your brother have a partnership that is in the business of renting a house. Talk to a CPA.
Why? because “half that rent money is yours, and we’re paying taxes on it and we should have that money in our account. Your brother can do whatever he wants, but half that rent money is yours, and we’re paying…blah blah…”.and it’s getting close to tax time at H&R Block. He thinks if we just take my share of the rent money put into that account, it will be all set!
I don’t know about this stuff, but even I thought it doesn’t sound right. I can’t just take ‘my money’ out. (I wanted to put it back in brother and mine’s account, we need that money, it can’t just sit in husband and mine’s account.)
Hopefully this is of no concern to you, but if you live in a community property state this finagling could have distinct legal consequences. For example, if you opened the account with your brother before your marriage, and deposited only money from the rental operation, then it is probably your separate property. The moment you deposit any money into it from an account owned jointly with your husband, it probably becomes community property.
This would matter if you divorced, but it could conceivably matter under other circumstances, too, e.g. if the IRS audits you or sues you, or you or your husband or your brother get sued someday. Basically it’s a question of whether your (husband + you) and your (brother + you) and your brother’s assets are getting legally mingled in some way. If they are, it may open them up to discovery, attachment, judgment, whatever, by additional avenues. Or it may not. Only a good lawyer in your state would know.
Generally real businesses are very, very careful how accounts are kept, for much of this reason, to keep legal walls between them. Families usually use much sloppier accounting of course, with some vague morality-based idea of what’s “mine” and “yours” and “ours.” Unfortunately, the law doesn’t respect those ideas, which can sometimes lead to pain. Since you’re kind of running a business, my default suggestion would be to do your accounting like a business as much as you can. Which means you would never commingle funds in accounts with distinct legal ownership without thinking long and hard (and possibly taking legal advice). If you don’t need to do it, I wouldn’t.
You have a tax reporting nightmare … and it’s out of H&R Blocks range. Hire a CPA …
Send the money into the IRS … right now … maybe a little more … just make absolutely sure you’ll be getting a refund from them when the forms are finished. This is the stuff why CPAs go to college, and their fees are tax deductible.
Well, I finally got hold of my brother, he forwarded a spreadsheet showing rent money coming in, and expenses for the property. He said he called our tax preparer at H&R Block and said it’s all straightened out. I will give her a call and make sure all is good to go, and if I have to bring anything with me. I am not touching the money in my brother and mine’s account at all, it will stay right where it is.
Thank you all for the advice. I hope this is the end of it. till next year anyway!
You also might want to talk to a lawyer about setting up a partnership or an LLC. I won’t pretend to know what would work for your situation, but I will speak from the general sense of, since you and your brother own an asset worth ten of thousands or maybe hundreds of thousands of dollars, it might be a good idea to have a written legal framework to start to help you address potential issues like:
When and how much money to distribute to the partners, and who decides.
How you will decide to sell the property, especially if you are 50/50 partners. Say partner A needs to sell and partner B wants to hold onto the property, but can’t afford to buy partner A out.
Is one of you always going to take the lead on managing the property (collecting rent, finding tenants, handling maintenance and repairs). Maybe that person should be compensated for the extra work.
Having a partnership account might calm your husband’s feelings that “our money is sitting in that account and we have to pay tax on it, and besides, its half our money.” Instead, it is the partnership’s money being held in reserve for taxes, large repairs, future investment, etc., and not something that either of you (you or your brother) can just decide to willy nilly take out “your half.”
The accounting and tax aspects of partnerships and rental real estate can be tricky, so unless your brother has that kind of knowledge, it might be a good idea to get a professional involved.
A partnership might not solve all of your problems (or any of them), but you will at least be on firmer ground.
** I just saw your last post. Do the figures your brother provided include depreciation, for example? If they don’t, that is something that would likely reduce your income on paper, without affecting the cash. In a real estate partnership, your taxable income and the actual cash you receive in a year as a distribution usually are not going to be the same amount. At least in my limited experience.
Again, I am not an expert by any stretch of the imagination. I only intend this as something for you to consider and look into further.
You husband’s tax and accounting opinions are highly questionable. You should not let him do the family taxes. His ignorance will cost you a lot of money. You need a CPA at this point.
To the IRS it does not matter if you touch the money or not. The money came in in 2015 so if taxes are due on it you owe them for 2015 and the IRS gives you until April 15, 2016 to get it right.
Get a CPA involved or you may have problems with the IRS. If I was in your position I would also consider a lawyer to set up a partnership with a managing partner.
I’m definitely looking into it. (The problem is, I don’t quite understand all of this, but I will look into it.) The depreciation is included, and fair market value of the house has been determined. The house is being rented by a relative and we, and she, are hoping she can buy it by next year.
I got as far as filling the Schedule K to the IRS form 1065 … page 24 of the Instructions for Form 1065 {PDF} … I have no idea where to attach the IRS form 4562 or section 1033 involuntary conversions.
I suggest looking through the forms and if you find the Schedule SE to the IRS form 1040, and this form includes your rental income … you’ve done something very expensively wrong (unless you’re a professional real estate agent).
Lawyers, CPAs … the IRS can and will just simply take your property … get professional help.
ETA: Did you separate the building portion of the original basis from the land portion? You can only depreciate the buildings, the land never depreciates.
What may matter is how you’re determining how much is “your money” and how much is your brother’s and how you’re thinking about how the property is owned. If you two are treating the property more like you’re a manager and getting $x00/month to take care the day-to-day running of the place, you’ll account for the money differently on your taxes than if you’re treating it as though you’re co-owners and you’re getting a % of the profits.
Either way, or whatever is in between, your brother’s assurances are lacking in appropriate detail.
Again I am going t say talk to a CPA. If you are going to sell the property this year or next then really talk to a CPA. I just got my tax forms back from my CPA looks like I do not need to pay any taxes this year and will get a full refund. I sold a rental property in 2015 at a loss because I was loosing money on it.
Turns out I should have had a sit down with my CPA before the end of the year. My income for 2015 ended up being “0”. We should have moved funds out of my wife’s 403s last year. If we had then instead of a negative income we would have had just a small income at low tax rate. In a few years when we will need to take some money out it will be added to our retirement and SS income and be taxed at a higher rate.
Plan and look ahead if you don’t it can cost you money.
I will give her a call and make sure all is good to go, and if I have to bring anything with me. I am not touching the money in my brother and mine’s account at all, it will stay right where it is.