Legal Question in Real Estate Law in California

Re: Real estate partnership

I have several rather general observations about your question.

First, it doesn't take a formal agreement to create a partnership. Many partnerships are created by oral agreements or facts and circumstances showing that a partnership exists even though the partners have never really made an express agreement, whether written or oral.

A partnership is formed, according to the Uniform Partnership Act, when two or more persons associate to carry on as coowners a business for profit. A person who receives a share of the profits from a business is presumed, in most cases, to be a partner. So, you might already be "de jure" partners as well as de facto.

Property, including real property, belonging to a partner and used by a partnership as an integral part of its operations can become partnership property even without benefit of a deed from the erstwhile owner to the partnership.

As to deduction of mortgage interest, it may fall into any one or more of three categories: "qualified residence interest," investment interest, or interest on business debt. There are different limitations on each. You will definetly need tax advice from an expert.

Note that the deductibility of interest is dependent upon who owns the mortgaged property, who lives in a residence, and who actually makes the payment. For example, qualified residence interest may be deducted only by the person who owns the property. In the other cases, it may be deducted only by the person who is legally obligated to make the payments and actually does make them, regardless of ownership. I repeat, have a tax expert explain these rules to you; I do not practice tax law.

The succession issue also has tax sub-issues. Ideally, you should retain full ownership and let your daughter inherit (through your living trust or will) everything, thus receiving a stepped-up basis in all the assets.

Perhaps the best deal is for you to set up a living trust, place all the property in the trust, then form a partnership pursuant to a written agreement which would be more of a management entity rather than an ownership entity. For this you need a wills, trusts and estates or estate-planning attorney with good tax law knowledge. The attorney may suggest having your daughter quitclaim any interest she may have acquired (as a possible partner) to the trust.

Finally, be sure to carry liability insurance on your landlord operations.