Taxes and how to structure a "Partnership"

Tax, SDIRAs & Cost Segregation
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Taxes and how to structure a "Partnership"

Daniel J.
Conroe, TX · Member since 2016 · 237 posts · 43 votes

Hey All,

I have two different questions but they are ultimately linked. I'm super confused at this point on the tax advantages of buy and hold RE. I have been talking with my aunt who is a CPA here in the Houston, Texas area and frankly that is what is getting me confused. What I have been hearing from CPA people around BP and on the podcasts don't seem to line up with what she is telling me. Could someone please explain it a bit clearer for me or point me in the direction of some resources that would.

As well I am in the process of forming a "partnership" with my father in law to buy rental properties. He is going to be the money partner and I will be doing the sweat equity/operations. If it matters he is located in Colorado, and I am in Texas. I'm not necessarily worried about the liability protection from an LLC at this point, but I do want to figure out the best possible way to set up our "partnership" or whatever legal form it takes to benefit us both the best. Once again can someone point me in the right direction please.

Disclaimer: Yes I am working on finding a good RE lawyer to discuss these topics with as well and get their official legal opinion. I also understand the dangers of doing business with family. It is a calculated risk I am willing to take.

Thanks for all the input!

Daniel

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  • Travis Sperr
    Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
    9y

    @Daniel J. taxes, partnerships and entity structure - some of the most important pieces of investing and often over looked. Leave these burning questions to your lawyer rather than people in the internet. LLC is likely your easiest way to create an entity for a buy and hold partnership, but could be difficult to obtain financing in an entity outside of local banks.

    Keep in mind that just because your family member is a CPA doesn't mean they understand the tax law around rental real estate. The biggest tax advantage in buy and hold real estate is depreciation, which is a phantom loss (meaning you take it as an expense but no money actually trades hands). 

    Keep researching so you will have additional great questions for your lawyer. 

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  • Account Closed
    Professional · Bothell, WA · Member since 2016 · 89 posts · 17 votes
    9y

    @Daniel J., there are two issues. One is the taxation of specific assets on issues as depreciation, expenses and income. The other issue is who owns the asset. Real estate as an asset type can have advantages over other types of assets. Persons, as an owner type, are taxed differently than partnerships or corporations. 

    Another issue of confusion could also be the difference between state and federal tax rules. Texas is in a league of its own on certain legal and tax issues. Advice on this website is typically federal in nature. 

    LLCs can be pass through entities for federal income tax purposes, or they can elect to be taxed as an independent responsible taxpayer (like a corporation). 

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  • Cameron Skinner
    Investor · Panama City, FL · Member since 2015 · 378 posts · 183 votes
    9y

    If you set up an LLC with more than one member, (other than your spouse)* IRS automatically makes you file a partnership return form 1065, unless you make a special election for the LLC to be treated as a Corporation for Tax purposes.

    * depending on your states marital property laws a married couple may or may not have to file a separate partnership return if they co-own an LLC and can just report LLC income on schedule E or C on their Joint 1040 tax return.

    Hope this helps 

    Good luck!

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  • Daniel J.
    OP
    Conroe, TX · Member since 2016 · 237 posts · 43 votes
    9y

    @Travis Sperr Thanks!

    @Account Closed Thanks!

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  • Dave Toelkes
    Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
    9y
    Originally posted by @Cameron Skinner:

    If you set up an LLC with more than one member, (other than your spouse)* IRS automatically makes you file a partnership return form 1065, unless you make a special election for the LLC to be treated as a Corporation for Tax purposes.

    Cameron,

    The IRS treats a multi-member LLC as a partnership unless the LLC has elected to be treated for tax purposes as a corporation. Only for the nine community property states, the IRS will allow an LLC to elect to be treated as a disregarded entity when husband and wife are the only members.

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  • Cameron Skinner
    Investor · Panama City, FL · Member since 2015 · 378 posts · 183 votes
    9y

    @Dave Toelkes, yes your partly correct that's why I put the "*" and disclosure at bottom of my post, but it gets even more complicated than that because some of the non-community property states you can also treat a multi member LLC with only spouses, as owners, as a disregarded entity if they are structured property. Florida where I live is an equitable distribution state, but when the LLCs Organizational Documents have been set up properly IRS will allow you to treat as a Disrguarded Entity but it takes Legal Expertise that specializes in these type structures, and possibly an Advisory Opinion from IRS, again depending on the individuals State Law. Usually, over kill, unless you have a huge portfolio and are working on Asset protection and estate planning.

    Hope this helps, Good Luck!

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