My client has co-owned rental properties with a friend for several years. During those years they have shared in the rental income/expense 50/50. In 2007 they decided to do a like kind exchange to effectively buy eachother out of the properties. They are in the process of doing this now.

Once they determined the property each of them would be taking, they each took over the property at the beginning of 2007 even though title won't transfer until sometime this year. Effective 1/1/2007 each took 100% of the expenses/income for one of the properties. On the tax returns, would I just take the 100% of income/expense for the property my client actually received/paid, or would I take 50% of the rental income/expense for each property since it is still legally 50/50 on the title.

I get really confused when I think about depreciation, because obviously he can only depreciate the 50% of the house that is his, right?

Please help!

Lets assume that there were 2 rental properties and both partners owned 50/50 prior to 2007, and in 2007 effective 1/1/07 they did a like kind exchange and both partners now owned 100% of 1 property. I think that this the actual scenario you are presenting!

Now that the partner has acquired 100% of the rental property, there is an additional amount of basis that is acquired and depending on the that amount, the property would be subject to additional depreciation in 2007. This amount would now equal to sum of the depreciation on the original 50% amount (that was claimed in 2006) plus the depreciation on the newly acquired basis (on the exchange of the 50% interest on the 2nd rental property, assuming on exchange of any cash).

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