Can a silent partner claim tax deductions?

I recently purchased a rental home with a silent partner that did not want to be listed on the deed or mortgage. Can the silent partner now claim expenses on the home for tax purposes?

I am hoping here that you have a partnership agreement written, signed and notarized. If so, then that question should have been answered in that document. If not, and the silent partner is not on the deed, I would question their legal right to claim tax deductions. Imagine if they were audited and the auditor requested proof of ownership. A tax consultant, however, may be able to work it out for you.

Silent Partners CAN claim depreciation, but as CampbellSimon says, you will need to document proof of ownership.

Not only can the silent partner claim tax deductions, you can use SPECIAL ALLOCATION to distribute deductions where they do the most good.

Let’s say that you are a beginning investor with relatively low income. You invest 50/50 with your angel investor. He or she has a much larger income and could use the depreciation to a greater advantage. So you split the rents 50/50, but your angel gets ALL the depreciation.

This can be a tricky tax move, so be sure to check with a CPA schooled in real estate issues in regard to income tax. But this can be a nice bone to throw to investors if the depreciation doesn’t mean that much to you.

Generally a special allocation must have some economic basis. you can’t just “spread around” the deductions wherever you want them every year.

That’s called tax evasion.

To the question of “can” a silent partner take deductions. Of course he can.

You and I can have a handshake partnership or joint venture. We agree to conduct business a certain way, and we simply report our respective shares on our tax returns.

No partnership agreement or other document is required. I’m not saying that this is smart; in fact I would say that this is NOT smart, but it is perfectly legal.

The problem arises when you continually report losses. At some point you may have to substantiate these losses. Generally you can’t deduct losses unless you have some type of economic basis in the activity, sometimes referred to as the economic effect of the activity.

The fundamental principle for the economic effect is that for an allocation to have economic effect it must be consistent with the underlying economic arrangement of the partners (partnership agreement).

Absent a formal agreement, one of the tests is that the allocation received by the partner is independent of the tax impact to the partner. So keep this in mind when looking for a “special” allocation.

Best to put it in writing, cover every conceivable scenario, and sign it. And then stick to it.