Tax Reporting for Tenancy-in-Common Rental Property

When two or more people own rental property as tenants in common, each owner reports their proportional share of rental income, operating expenses, and depreciation on Schedule E of their individual tax return, with no special entity pass-through required.

Ownership Structure and Tax Treatment

Tenancy in common is a form of concurrent ownership that does not create a separate tax entity. Each tenant in common holds an undivided interest in the entire property and may own a different percentage than the others. Unlike a partnership or LLC, there is no Form 1065 filing; instead, each owner files their own Schedule E and reports only their share of the financial results.

The key distinction is that the IRS treats each co-owner as a separate taxpayer responsible for their own proportional slice of income and deductions. If Alice owns 60% and Bob owns 40% of a rental house, Alice reports 60% of net rental income (or loss) and Bob reports 40%. The property itself has one tax identification number, but the income flows through individually.

How to Calculate Your Share

Your ownership percentage is typically spelled out in the deed or co-ownership agreement. This percentage determines your taxable share of all rental items:

• Rental income (from tenants’ rent payments)
• Operating expenses (property taxes, insurance, utilities, repairs, HOA fees)
• Depreciation (non-land portion of the building)
• Mortgage interest (if you hold a note)
• Capital improvements versus repairs

If the deed is silent on ownership percentages, most states presume equal shares. However, the co-owners can agree to split income and deductions differently from their title percentages if they want—this is permitted as long as it reflects reality and is properly documented. Any unusual split should be evidenced in writing to withstand audit scrutiny.

Schedule E Filing Requirements

Each tenant in common must file Schedule E (Form 1040), Part I to report rental real estate income. You will need:

• The property address and legal description
• Your ownership percentage (or share)
• Gross rental income received during the year
• Itemized operating expenses
• Depreciation amount (calculated on Form 4562)
• Any casualty losses, mortgage interest, or other deductions

If the property generated income, all owners must report it even if they did not receive a separate check; the income is allocated to them on a pro-rata basis regardless of how money was physically distributed.

Depreciation Reporting

Depreciation is one of the largest tax benefits of rental real estate ownership, and each tenant in common claims only their share. The building (excluding land) is depreciated over 27.5 years using the straight-line method.

To calculate your depreciation:

1. Determine the original purchase price and date of acquisition
2. Separate the land value from the building value
3. Apply your ownership percentage to the building value
4. Divide by 27.5 years

Example: A property cost $400,000 at purchase. Land is valued at $100,000, building at $300,000. If you own 50%, your depreciable basis is $150,000. Annual depreciation is $150,000 ÷ 27.5 = $5,454.55. This appears on Form 4562 and flows to Schedule E.

When the property eventually sells, depreciation recapture will apply to your share of the gain attributable to depreciation deductions claimed. This is taxed at 25% rather than long-term capital gains rates.

Mortgage Interest and Loan Obligations

If the property has a mortgage and multiple tenants in common hold it, the way debt and interest are structured matters for tax purposes:

• If the mortgage is in all owners’ names and each is liable, each owner deducts their proportional share of the interest paid.
• If only some owners are on the note, only those parties can deduct the interest—ownership percentage is irrelevant to interest deduction.
• If one owner has loaned money personally to the property or another owner, that constitutes a separate debt and is handled differently (not a standard mortgage interest deduction).

The property manager or servicer typically does not split the interest calculation; you must track your share yourself or receive a statement from the co-owners showing how much total interest was paid, then apply your ownership percentage.

Passive Loss Limitations

Rental real estate income is generally classified as passive activity income under IRC Section 469. This means:

• You can only offset passive losses against other passive income (not wages, salaries, or dividends)
• If you have a passive loss and passive income on Schedule E, they net together
• Real estate professionals (defined narrowly by IRS rules) may escape the passive loss limit

Because rental losses are often larger than gains in early years, the passive loss limitation frequently caps how much you can deduct. Any excess loss carries forward to future years.

Your ownership percentage does not change the passive classification—a 20% share of a rental property is still passive. If you actively manage the property or make real estate professional income, consult a tax advisor about potential relief.

Coordinating with Co-Owners

Accurate tenancy-in-common tax reporting requires cooperation among all owners:

• Agree on how the property will be managed and how expenses are split (should match tax treatment)
• Keep a clear, running record of all income and expenses during the year
• Decide how mortgage principal and interest will be allocated
• Document the ownership percentage and any unusual allocation of income
• Coordinate depreciation calculations to avoid inconsistencies
• If one owner pays an expense on behalf of another, create an IOU or reimbursement schedule to avoid confusion

Many disputes between co-owners stem from misaligned expectations about tax treatment. A simple written agreement clarifying how income, expenses, and depreciation will be reported can prevent years of conflict.

Sale of Property and Basis Step-Up

When a tenant-in-common property is sold, each owner reports their own gain or loss. The sale price is divided according to ownership percentages, and each owner’s adjusted basis (original cost plus improvements minus depreciation) is compared to their sale proceeds.

If one owner dies and the property passes to an heir, that heir receives a step-up in basis for the deceased owner’s share only. The surviving co-owners retain their original basis. This can create significant tax savings for heirs of rental property.

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