Date: 2/9/2026
2025 Tax Alert: OBBBA Wins & The BOI Exemption
The One Big Beautiful Bill Act (OBBBA) has fundamentally changed the tax environment for landlords. If you own property with others, the combination of this law and a recent FinCEN ruling offers significant tax breaks alongside stricter oversight. You should consult a certified public accountant for rental property owners to ensure you are taking advantage of these new permanent deductions while staying compliant with updated anti-abuse rules. These changes provide long-term certainty but require a more disciplined approach to your annual filings.
The End of BOI Reporting for Domestic Owners
The most significant administrative relief in 2025 is the effective elimination of Beneficial Ownership Information (BOI) reporting for domestic investors. As of March 2025, FinCEN issued a rule exempting all domestic U.S. entities, including LLCs and corporations, from these filings. This means you no longer have to worry about the paperwork associated with reporting personal information to the federal government. Only foreign entities remain subject to these rules, allowing domestic co-owners to focus on property management rather than federal registries.
Permanent Deductions and Bonus Depreciation
The OBBBA restored 100% bonus depreciation permanently for qualified property acquired after January 19, 2025. This makes a cost segregation study for residential rental property a high-priority strategy for maximizing immediate cash flow. By identifying components like appliances, furniture, or qualified improvement property that qualify for this 100% write-off, you can significantly reduce taxable income in the year of purchase. Furthermore, the Section 199A (QBI) deduction is now permanent, including a new guaranteed floor deduction of $400 for taxpayers with at least $1,000 in aggregate active QBI.
Stricter Rules for Income Splitting
When it comes to how to split rental income between co-owners, the IRS has introduced “High-IQ” anti-abuse measures to prevent artificial tax dodging. You must divide income and expenses in strict accordance with your legal ownership interest as listed on the property deed. Additionally, to claim the full 20% QBI deduction, a business must now have less than $5 million in gross receipts to prevent large-scale operations from splitting into smaller entities to dodge caps. The IRS is now empowered to audit any arrangement where the income split does not match the actual capital contributed by each owner.
Passive Losses and Participation
Understanding the passive activity loss limitations for real estate investors remains vital under the new law. The $25,000 allowance for those who actively participate remains, but it phases out as your adjusted gross income rises between $100,000 and $150,000. To bypass these limits, you must meet the real estate professional status qualification requirements 2025. The OBBBA maintains strict participation tests to ensure only truly active managers can use rental losses to offset other types of income, such as W-2 wages, ensuring that tax benefits are reserved for those with genuine involvement in property trades.
| Provision | 2025 Rule/Limit |
|---|---|
| Bonus Depreciation | 100% Permanent (Post Jan 19, 2025) |
| SALT Deduction Cap | $40,000 (Temporary through 2029) |
| Section 179 Limit | $2,500,000 with $4M phase-out |
| BOI Filing | EXEMPT for domestic U.S. entities |
| Senior Deduction | Additional $6,000 (Age 65+) |
Income Splitting: The ‘Nominee Reporting’ Fix for 1099s
When you co-own a rental property, the IRS expects the income reporting to be crystal clear. However, tax forms like the 1099-MISC or 1099-K are often issued to only one person—the “primary” owner. This creates a major headache because the IRS “Matching Program” looks for that full amount on your specific tax return. If you only report your 50% share, the IRS computers will flag the discrepancy and likely send you a CP2000 underreporting notice.
To avoid this, you must use “Nominee Reporting.” This process allows you to act as a middleman, acknowledging the full income while officially passing the correct portion to your partner. Many investors consult a certified public accountant for rental property owners to ensure this paper trail is bulletproof, as simple mistakes here can trigger unnecessary audits.
2025 Reporting Thresholds
For the 2025 tax year, the rules for who receives a 1099 have shifted. Following the passage of the Working Families Tax Cut Act, the aggressive lower thresholds for digital payments have been rolled back. Here is what you need to know for 2025:
| Form Type | 2025 Threshold | Common Use Case |
|---|---|---|
| 1099-MISC | $600 or more | Rent paid via cash or check. |
| 1099-K | $20,000 and 200 transactions | Rent paid via Venmo, PayPal, or Stripe. |
How to Split Rental Income Between Co-Owners
If you received a 1099 for the full rent but need to know how to split rental income between co-owners properly, follow these three steps to stay compliant:
- Generate a Nominee 1099: You (the nominee) must issue a new 1099-MISC to your co-owner. List yourself as the “Payer” and your partner as the “Recipient” for their specific share of the gross rent.
- File Form 1096: This is the cover sheet for your nominee filing. You must mail the co-owner’s 1099 and Form 1096 to the IRS by February 28, 2026 (or March 31 if filing electronically).
- The Schedule E “Wash”: On your own Schedule E, report the full 1099 amount on Line 3. Then, on Line 19 (Other Expenses), write “Nominee Distribution to [Co-owner Name/SSN]” and enter their share as a negative. This results in a “wash” that leaves only your portion as taxable income.
Exceptions and Advanced Strategies
Not every co-owner needs to go through this manual process. For example, a qualified joint venture election for married couples allows spouses who file jointly to split income 50/50 on separate Schedule C or E forms without needing nominee 1099s, provided both spouses materially participate in the activity.
Sophisticated investors often look beyond simple income splitting to maximize their bottom line. This might include performing a cost segregation study for residential rental property to accelerate depreciation or checking if they meet the real estate professional status qualification requirements 2025 to bypass passive activity loss limitations for real estate investors. While nominee reporting fixes the “matching” problem, these broader strategies ensure you aren’t overpaying on the income you do keep.
Filing Status: Qualified Joint Ventures (QJV) vs. ‘Accidental Partnerships’
Owning a rental property with a spouse or business partner involves specific tax compliance requirements. If co-owners provide services beyond basic maintenance, they may trigger an “accidental partnership.” Under Revenue Ruling 75-374, the IRS distinguishes between “mere co-ownership” and a business partnership. Providing customary services like heat, water, and repairs is generally safe. However, offering additional services such as cleaning, guest meals, or hotel-like amenities transforms the activity into a partnership by default. Failing to file the required Form 1065 is expensive; for the 2025 tax year, the penalty is $245 per partner, per month. For a two-person group, a single year of non-compliance results in a $5,880 penalty. Many owners work with a certified public accountant for rental property owners to confirm their filing status matches their activity.
The Qualified Joint Venture (QJV) Election
Married couples filing a joint return can often avoid partnership filings through a qualified joint venture election for married couples under IRC § 761(f). This election allows spouses to report income directly on Form 1040 instead of filing Form 1065, which simplifies the filing process. To qualify for the 2025 tax year, both spouses must materially participate in the rental activity, typically meeting the 500-hour rule or the 100-hour test where they work more than anyone else. Owners must also understand how to split rental income between co-owners; under a QJV, income and expenses are divided based on ownership percentages. Each spouse reports their share on a separate Schedule E (or Schedule C if providing substantial services) and must check the “QJV” box on Line 2 of Schedule E.
A significant hurdle exists for properties held in a multi-member LLC. In common-law states, holding a property in an LLC generally disqualifies the owners from QJV status, requiring a partnership return. However, spouses in community property states—AZ, CA, ID, LA, NV, NM, TX, WA, or WI—can use Revenue Procedure 2002-69. This allows them to treat a joint LLC as a disregarded entity, providing liability protection without the burden of partnership filing. In these states, the couple can report income on one Schedule E or split it without a formal QJV election.
2025 Tax Updates for Rental Owners
The 2025 tax year introduces changes under the “One Big Beautiful Bill” (OBBB). The State and Local Tax (SALT) deduction cap has increased to $40,000, or $20,000 for those married filing separately. This cap begins to phase down for taxpayers with a Modified Adjusted Gross Income (MAGI) exceeding $500,000. Additionally, the standard mileage rate for operating a vehicle for rental management is 70 cents per mile for 2025. For those investing in equipment or property improvements, the Section 179 expensing limit is $2,500,000, with a phase-out threshold starting at $4,000,000.
| 2025 Tax Category | Key Figure or Limit |
|---|---|
| Partnership Late Filing Penalty | $245 per partner / per month |
| SALT Deduction Cap | $40,000 ($20,000 if MFS) |
| SALT Phase-out Threshold | $500,000 MAGI |
| Standard Mileage Rate (Rental) | 70 cents per mile |
| Section 179 Expensing Limit | $2,500,000 |
| Section 179 Phase-out Threshold | $4,000,000 |
Deduction Traps: Mortgage Interest & STR Rules
When you own a rental with someone else, the IRS does not care as much about your deed as it does about your checkbook. The “Actual Payment” rule means that if you pay 100% of the mortgage interest, you can deduct 100% of it, even if you only own half the house. However, this creates a hidden trap for the unwary. A certified public accountant for rental property owners will tell you that paying more than your legal share is technically a gift to your co-owner. For 2025, if that extra payment exceeds $19,000, you must file a gift tax return (Form 709) to stay compliant with the law.
The rules get even more specific if you pay from a shared pot. If you use a joint checking account, the IRS assumes a 50/50 split of the deduction by default. If you want to claim a different ratio, you must keep meticulous records showing the exact source of every dollar. This is a critical part of learning how to split rental income between co-owners without triggering an audit. For those not even listed on the mortgage, you can still claim interest through “equitable ownership” if you can prove you bear the burdens of ownership, such as paying the taxes and insurance.
Unmarried co-owners actually have a massive advantage over married couples thanks to the Voss v. Commissioner ruling. While married couples are limited to a single $750,000 debt limit, unmarried partners can each apply that limit to their individual share of the debt. This means two friends could potentially deduct interest on up to $1.5 million in combined debt on a single property. This “double limit” is one of the few areas where the tax code significantly favors single filers over those who are married.
The 2025 tax year also brings a major change to the State and Local Tax (SALT) deduction. The cap has moved from $10,000 to $40,000, which provides significant relief for co-owners in high-tax states. However, this benefit is not for everyone. If your modified adjusted gross income (MAGI) tops $500,000, the deduction begins to phase out. Once you hit $600,000 in income, the cap drops back down to the $10,000 floor, making timing your income more important than ever.
Short-term rentals (STRs) offer another way to bypass the usual passive activity loss limitations for real estate investors. Under the “7-day rule,” if your average guest stay is a week or less, the IRS does not view it as a traditional rental activity. This allows you to deduct losses against your W-2 income without meeting the strict real estate professional status qualification requirements 2025. But there is a catch: you must “materially participate” by working at least 100 hours and more than anyone else, including your cleaning crew or property manager.
Finally, watch how you report your income to avoid the self-employment tax trap. If you rent your home for 14 days or less, the income is tax-free, but you cannot deduct any expenses. Most STR owners use Schedule E, but if you provide hotel-like services, you must use Schedule C. This triggers a 15.3% self-employment tax on your profits. To offset these costs, many investors use a cost segregation study for residential rental property to speed up depreciation. Married couples might also consider a qualified joint venture election for married couples to simplify their filing.
2025 Key Tax Numbers for Co-Owners
| Category | 2025 Rule/Limit |
|---|---|
| Mortgage Debt Limit | $750,000 (Post-2017) / $1M (Pre-2017) |
| SALT Deduction Cap | $40,000 ($20,000 MFS) |
| Standard Deduction | $15,750 (Single) / $31,500 (MFJ) |
| STR “Short Stay” Rule | Average stay ≤ 7 days |
| Bonus Depreciation | 100% (For property placed in service after Jan 19, 2025) |
FAQ: High-Intent Answers for Co-Owners
Do co-owners always have to file a partnership tax return?
Not necessarily. If you and a friend or family member simply own a property together and collect rent without providing extra services like cleaning or meals, the IRS views this as “mere co-ownership.” In this case, you can skip the complex Form 1065 and report your share of income and expenses directly on your own Schedule E. However, if you hold the property in a multi-member LLC, the IRS usually requires a partnership return and K-1s. Navigating these nuances is why many investors hire a certified public accountant for rental property owners to ensure they aren’t filing unnecessary paperwork or missing specific state-level filings.
How do we legally divide income and expenses?
When determining how to split rental income between co-owners, you must follow the legal ownership percentages listed on the property deed. You cannot simply assign more income to a co-owner in a lower tax bracket to save money on your 2025 return. For this tax year, you can also deduct 70 cents per mile for any local travel related to managing the property. Additionally, the OBBB Act increased the SALT deduction limit to $40,000, which provides a significant boost for co-owners in states with high property taxes who previously felt capped by the old $10,000 limit.
What are the 2025 rules for deducting large improvements?
The OBBB Act brought back a major win for your wallet: 100% bonus depreciation. If you bought appliances, installed new carpeting, or made land improvements after January 19, 2025, you can deduct the full cost in a single year. To maximize these benefits, many co-owners commission a cost segregation study for residential rental property to identify specific assets that qualify for this immediate write-off. For smaller items, the De Minimis Safe Harbor still allows you to instantly expense any invoice under $2,500 rather than depreciating it over several decades.
Can married couples simplify their filing?
Yes, through a qualified joint venture election for married couples. This allows spouses who co-own a rental to avoid the headache of a partnership return, provided they both materially participate in the business. Each spouse simply reports their share of income and expenses on their own version of Schedule E. This keeps your filing simple while ensuring both spouses receive proper credit for Social Security and Medicare if the rental is treated as a business. Keep in mind that for 2025, the IRS may still verify that your rental meets the “trade or business” definition to qualify for this election.
How do the 2025 QBI and loss limits affect us?
The 20% QBI deduction is now permanent, but the OBBB Act lowered the income thresholds, meaning more high-earners will see this benefit shrink. Furthermore, passive activity loss limitations for real estate investors still apply. You can generally only deduct up to $25,000 in rental losses against your other income if your Modified Adjusted Gross Income (MAGI) is under $100,000. If you exceed these income limits, you might need to meet the real estate professional status qualification requirements 2025 to bypass these restrictions and claim your full losses against your salary or other income.
| 2025 Tax Provision | Threshold / Limit | OBBB Act Change |
|---|---|---|
| QBI Phase-Out (Single) | $75,000 | Threshold Lowered |
| SALT Deduction | $40,000 | Limit Increased |
| Bonus Depreciation | 100% | Restored (Post-Jan 19) |
| Standard Mileage | 70 cents | Rate Increased |
About the Author
ARUN KP
With over 15 years of extensive experience in the accounting and taxation industry, Arun KP specializes in cross-border India-US taxation. As an Entrepreneur and AI Content Generator, he leverages cutting-edge technology to simplify complex financial landscapes for individuals and businesses.
Entrepreneur | AI Content Generator | India-US Tax Professional | Accountant
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice.
