Buy & Hold Partnership Taxes

[Christopher Lee]

My partner and I are getting close to buying our first buy & hold property and I wanted to know how we should handle paying Uncle Sam his cut. 

At first I was sure setting up an entity would be the most logical route for protecting ourselves and paying our taxes. 

But after spending some time doing some research I've found that doing a partnership agreement along with having an umbrella insurance policy could possibly be less expensive to get started.

I also feel it would cause less initial headaches than trying to figure out how to structure the entity, we're both doing long distance investing across states and we both live in different states from one another.

For our first property and subsequent properties each would be in one of our names and my basic understanding is that both of us would report rental income and expenses on Schedule E, Supplemental Income and Loss. Schedule E would then be filed with our Form 1040.

If a single property is solely in my partner's name am I able to take any deductions on that property? If so do we just add up all the deductions and split them evenly and report that on our taxes? Are there deductions only the borrower can take?

Ideally any profit or loss we would like to split 50/50.

Thanks in advance for your help.

Christopher Lee

[Michael Plaks]

@Christopher Lee

You may be worrying about the wrong things, or rather the less important things: finding something "less expensive" and "protecting ourselves."

First and foremost, you need to define who does what and who is responsible for what, and how it is enforced when things go wrong. Which they will, at least from time to time. In other words, how to protect yourselves from each other.

I recommend that you discuss as much what-ifs as possible and put them  in writing while nothing bad happened yet.

Then sit down with a lawyer and an accountant to discuss the best business practices for your partnership.

Partnership is a marriage. On the wedding day, everything is rosy. There is a reason why pre-nuptials exist.