Did I mess up when establishing this LLC for my wife and I?

Question

Hello everyone,

In July 2024, I created a partnership LLC with my girlfriend to buy a rental property. We are now married and I expect we'll file our 2024 taxes jointly. We live in Texas, a community property state, and are 50/50 owners. I assumed we would be able to file taxes for this LLC as a disregarded entity since we are married and in a community property state. However, when I requested our EIN the letter stated, "Based on the information received from you or your representative, you must file the following forms by the dates shown. Form 1065 03/15/2025."

So I think I messed up when establishing this LLC and chose for it to be treated as a partnership. Do I now need to change our elected status or tax classification to be a disregarded entity? Or am I just SOL and need to file a partnership return and issue K-1's to each of us? Or can I do nothing and file it on Sch E since we are married in a community property state?

Any guidance is appreciated and I know it's not tax nor financial advice, just your thoughts.

Michael Plaks · Answer

You're in luck! It's a perfect excuse to divorce her before too late.  :)   Just kidding of course.

Call the IRS business line 800-829-4933, put it on speaker and do something while holding for an hour. When they pick up, explain that you meant for your LLC to be a disregarded entity and you HAVE NOT filed any tax returns yet. Skip the gf->wife part, it is now irrelevant, just say "with my wife." And congrats on your marriage.

Natalie Kolodij · Answer

An LLC with 2 +members does normally require a 1065 filing. The exception is: When the 2 members are married spouses who reside in a community property state. As Michael mentioned you just need to respond to the IRS and state this is what you're doing. It's in the form instructions for the 1065.

Michael Plaks · Answer

No, channeling it through a partnership will not change your tax situation at all. It will only create unnecessary hassle and cost.

Ashish Acharya · Answer

Since you and your spouse live in Texas, a community property state, you are eligible to treat your 50/50 LLC as a disregarded entity for federal tax purposes. This allows you to report rental income and expenses directly on Schedule E of your joint tax return, avoiding the need for Form 1065 and K-1s.

For Question #3 on Form 8832, you are correct that it asks whether the entity has more than one owner. Since you are married and live in a community property state, the IRS treats your joint ownership as a single owner for tax purposes, meaning you can answer "No" and proceed with disregarded entity classification.

If you want to eliminate confusion going forward, you could dissolve the current LLC and set up a new single-member LLC under one spouse’s name, ensuring automatic disregarded entity treatment without needing to file Form 1065 in the future.

Cameron Marmon · Answer

Thank you, Ashish. I was thinking Form 8832 is the one, but I am confused when I get to question #3 since this entity is technically owned by more than one individual. So I dont think I can say No here, or can I since we are married in a community property state?

3. Does the eligible entity have more than one owner?Yes. You can elect to be classified as a partnership or an association taxable as a corporation. Skip line 4 and go to line 5.No. You can elect to be classified as an association taxable as a corporation or to be disregarded as a separate entity. Go to line 4.

Ashish Acharya · Answer

@Cameron Marmon Since you’re married and living in Texas, a community property state, you have the option to treat your 50/50 LLC as a disregarded entity for federal taxes. This allows you to report the rental income and expenses directly on Schedule E of your joint tax return, simplifying your tax filing process. The IRS automatically classified your LLC as a partnership when you requested the EIN, which requires filing Form 1065 and issuing K-1s to both of you. However, you can file Form 8832 (Entity Classification Election) to change the LLC’s status to a disregarded entity, provided you act promptly.

If you don’t make the election, you’ll need to file Form 1065 by March 15, 2025, adding complexity but retaining the same tax benefits, such as deductions for depreciation and repairs. Electing disregarded entity status avoids additional filings while achieving the same tax outcome.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Cory St. Esprit · Answer

Then it should be easy enough to have your attorney just change it and pay any required taxes/fees.

Cameron Marmon · Answer

Thank you, Michael! Just curious, is there any tax benefit to filing as a regular partnership and issuing k-1s to ourselves that show a loss? Would that lower our tax liability from other income we receive or no because this is purely RE and not an operating business?

Cameron Marmon · Answer

Hi, Cory. Yes, we still own the asset in the entity and the deed reflects that. Yes, we will have a loss for 2024.

Cameron Marmon · Answer

Thank you, Sharon! Do you know what form they used? I thought it may be Form 8832, but it doesn't appear to be the right one based on the questions it asks.

Did I mess up when establishing this LLC for my wife and I?

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