I looking at buying a duplex with a family member (brother and sister in law) I am planning on using a VA loan and splitting the closing costs with the other party 50/50. I plan on living in one unit and renting out the other unit. We plan on putting everything in a contract so there is no problems in the future as to who is responsible for what. What are things to consider when structuring this deal with a partner from a tax perspective?
Also, how will Expenses, Income, Property Taxes, Interest (from mortgage payment) be reported? I will be a first time home buyer and my partners have already claimed a tax credit this year for their home. Will I be able to collect the full $8000 tax credit (for Veterans this was extended until 2011 and the $10,000 California tax credit?
First, the extended credit for veterans requires that you have spent at least 90 days of 2010 outside the country. Just FYI. Maybe a few other restrictions, but I know this one off the top of my head.
If the partnership is purchasing the property, you will not be eligible for the credit. You are not the owner.
If you purchase the property yourself, you will have to allocate the purchase to the residence and the rental units to calculate the credit. Then the partnership will not own the property and the rest of the plan may not work. Technically you can contribute part of the property to the partnership, but you need an atty to put together a complex contract like this.
Generally I don’t think it’s practical (maybe even impossible) to mix the credit (which is for a personal residence) with a rental business (which is not).
However.
how will Expenses, Income, Property Taxes, Interest (from mortgage payment) be reported
It will be reported however you state in the partnership agreement it will be reported. Typically the partnership will file a 1065 and 50% of the rental revenues and expenses will be allocated to each partner. You’ll have to reach an agreement how to handle things like shared expenses (roof repairs, property taxes, common utilities, etc), which should be part of the partnership agreement.
If you are using your VA loan entitlement to get 100% financing, then why do you need a partner? Just to bring half the closing costs to the table, while you and you alone remain liable for the loan in the event of default?
I would think long and hard about going into a partnership where you have all the liability and your partner has virtually none yet still gets half the income and profits.
I would think even longer and harder about going into a partnership with family. Too many things can go wrong that can destroy your relationship. If that happens, the rest of the family members will take sides so you may strain your relationship with more family members than just your partner.