Legal Structure for a Partnership paying cash for Rental Property

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Legal Structure for a Partnership paying cash for Rental Property

Mario Nacev
Contractor · Dallas, TX · Member since 2016 · 11 posts · 2 votes

Hello All,

A  friend and I will be paying Cash for a Rental property 50/50 outlay & split.

What is the best Structure for us assuming No Banks will ever be involved. 

Regards,

Mario

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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
9y

A multi member LLC reports its profits and losses on Schedule 8825 of a Form 1065. Those amounts flow through to a K-1 which is given to each member of the LLC.

W-2/Salary would not be applicable in this scenario as this is not Earned Income.  (It's passive).

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  • Ibn Abney
    Rental Property Investor · Chicago, IL · Member since 2016 · 318 posts · 307 votes
    9y

    @Mario Nacev Congrats!!

    Several ways to structure. Any exit strategies? or is this a long term hold? 

    If the latter, put the property in a LLC and make both partners managing-members. Its a legal entity protection wise and you can outline the details in the operating agreement. If anyone want outs, they sell their share of the LLC. Good Luck!

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  • Mario Nacev
    OP
    Contractor · Dallas, TX · Member since 2016 · 11 posts · 2 votes
    9y

    Thanks! any tips regarding taxes? 

    Should the cashflow be passed thru on a 1099, paid as a W2 Salary or distributed as a K1? what about claiming depreciation?

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    A multi member LLC reports its profits and losses on Schedule 8825 of a Form 1065. Those amounts flow through to a K-1 which is given to each member of the LLC.

    W-2/Salary would not be applicable in this scenario as this is not Earned Income.  (It's passive).

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  • Mario Nacev
    OP
    Contractor · Dallas, TX · Member since 2016 · 11 posts · 2 votes
    9y

    Thank you Linda!

    So as  an example using simple #s lets say the property cashflows $500/month, $6000/yr

    Would that $6000 first be taxed as Income to the LLC and then again on the K1 level? Or, is it simply distributed as K1s to the partners $3000 a piece which is then taxed at 15%?

    Also how often should the K1 be distributed? Monthly, Quarterly, or Yearly, is there an advantage to holding it a certain amount of time?

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    9y

    A K-1 is an annual form that is generated when the Partnerships Annual 1065 tax return is filed. 

    Partnerships do not have taxation at the partnership level, instead the money is reported on the k-1 and you are taxed on your 1040. 

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  • Mario Nacev
    OP
    Contractor · Dallas, TX · Member since 2016 · 11 posts · 2 votes
    9y

    Thank you Natalie! 

    That seems very good, what is the downside?

    How are depreciation and business expense deductions handled in this scenario?

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    9y

    Everything is handled in the partnership. 

    All income, expenses (including depreciation ect)

    Then at the end of the year you get a k-1 basically (some exceptions) for the new profit, and you report that on your 1040 and pay tax at that level. 

    I would suggest working with a CPA to set everything up and maybe handle the filings. 

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    The K-1 is not filled out based on the cash flow, it's filled out based on the income.  So depreciation and all your other business expenses are reported on the 8825.

    I highly suggest you turn this over to a CPA or other qualified tax professional and perhaps pay for an hour of consulting.  It's pretty clear you're starting from scratch and having a couple of CPAs tag-team your answers in an on-line forum is really not going to be efficient or effective.

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