Tax Deductions Related to Jointly Owned Property by Unmarried Individuals

Take deductions on jointly owned property in a way that mimizes the total tax.

Take deductions on jointly owned property in a way that mimizes the total tax.

More and more couples are living together these days, either before or instead of getting married. Owning property jointly may lead to complications at tax time, however, since unmarried couples cannot file a joint tax return. If you and your sweetheart buy a home together but stay unmarried, talk with a tax professional about the most beneficial way to handle deductions on your income taxes.

Deductions for Property

The most common tax deductions for property, whether owned jointly or singly, are related to home ownership. Taxpayers who itemize their deductions on the federal Schedule A can deduct property taxes, mortgage interest and mortgage insurance premiums from their income. Often these deductions, along with other itemized expenses, add up to more than the standard deduction, resulting in a lower taxable income.

Who Can Take the Deductions?

For mortgage-related deductions, the loan must be secured by either your main home or a second home. Real estate taxes must be levied on your primary or secondary home, based on the home's assessed value. Special assessments, such as for sidewalks or street lights, are not deductible. You must be legally liable for the payments to take the deductions.

How to Split the Deductions

For jointly owned property, you are entitled to deduct the actual amount of interest or taxes that you paid. If you and your partner contribute equally to the expenses, you can each take 50 percent of the deduction. Often, however, dividing the deductions will result in the highest total tax, because neither partner will have enough to itemize. In many cases it is most advantageous for the person with the highest income to take all the deductions, which will provide the biggest decrease in taxable income. You might find it helpful to prepare your tax returns three times: taking the standard deduction; itemizing using your percentage of the deductions; and itemizing using the full deductions on the tax for the partner with the highest income. Compare the results with those of your partner's -- for example, if you take the standard deduction and include none of the deductions for property, and he itemizes the full amounts allowable on the property -- and determine which scenario results in the lowest net tax in total on the two returns.

Rental Property

Rental property that is jointly owned can lead to some complicated tax calculations. Like personal property, you are entitled to your share of the expenses and income related to the property. It might be easiest to set up a partnership for jointly owned rental property. The partnership files an information tax return and calculates each partner's net share of the gain or loss on the rental. The gain or loss is reported to you on a Schedule K1, which you include on your personal tax return.

 

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