Partnership Structure and Taxes

[Sam McPeek]

I've searched the forums and I can't find direct answers to my questions. I am looking at starting a partnership(s) in order to invest in buy & hold rental properties, where I bring the deal and management and the partner brings the money. Looking for some insight from those who have done it before, maybe @Brandon Turner or @ Amanda Han can weigh in.

1. With the pass through structure of a LP or LLC, does the entity have to own the mortgage in order to pass through the tax savings to the members? What if my partner is named on the mortgage, and I am only on title...can I still get the tax benifits?

2. The banks I have contacted all say they require everyone who is on title to be on the loan, but in listening to @brandon turner it seems that others have structured it so they are not named on the mortgage. How is this done?

3. Obtaining financing in the name of an LLC or LP vs. personally holding the mortgage?

[Brian Burke]

@Sam McPeek you have two choices in how to structure the capital: equity or debt. 

If you structure this as debt, your money partner loans you the money and gets paid interest.  The loan can either be secured by the property or unsecured. Based on the way you framed your question I don't sense that a debt structure is what you are looking to do.  

If you structure it as equity, your money partner becomes an owner. He or she would either own the real estate directly (such as being on title alone or with you) or would own a interest in an LLC or LP that would own the real estate.

I'm not an attorney, so this is not legal advice. I'm also not a CPA so this isn't tax advice either. Please consult with the proper professionals and get specific advice on the best structure for your situation. That said, here is what I would do.

I wouldn't recommend owning the property as individuals. When two or more people own real estate together it doesn't make sense to own it individually because things can happen to one partner that can effect the other partners interest in the property. Entities are designed to mitigate that risk.

If I were you, I would buy the house in an LLC or LP with your investor as the limited partner and you as the general partner, or if you go with an LLC you could both be members of a member-managed LLC or your investor could be a member and you the manager of a manager-managed LLC.

The entity should hold title to the real estate and should be the borrower on the loan. Either you or your money partner, and possibly both of you, will likely be required to sign personal guarantees on the loan. The LLC operating agreement or LP agreement can dictate who gets the depreciation. I typically allocate the depreciation to the investor.

As to question 2, everyone on title has to be on the loan.  If the property is owned by an entity as I outlined above, only the entity will be on the loan.  But as I mentioned you and perhaps your partner will probably have to sign personal guarantees.