Partnership LLC Taxes

5 Replies

If I were to form a multi-member LLC as a partnership, with a 50/50 stake in the LLC, it should be regarded as a pass through entity.

Does this mean that buying House A in this LLC is equivalent to buying House B on my own, as far as taxes go? Are there any pros or cons between these two scenarios?

Thanks!

House A

Purchase price: $100,000

Income: $24,000

Deductible expenses: $12,000

House B

Purchase price: $50,000

Income: $12,000

Deductible expenses: $6,000

As far as your personal income tax return is concerned, you have the same amount of taxable income from each of the two houses.  With the partnership, you are adding complexity to your income tax filing requirement because the partnership has to file a partnership return and issue each partner a Schedule K-1.  The Schedule K-1 tells you what share of the partnership income has to be reported on your personal 1040.

I am not an accountant and I strongly advise you to get one and discuss the pros and cons with him/her.

That being said, while @Dave Toelkes is correct above, filing a partnership return and issuing a K-1 to the partners is really no more difficult or costly that filing a corporate return for an S-Corp (I just had a partnership return done by a CPA and it cost $200). My point being, the complexity of the tax return should not be the deciding factor in how you structure your entity for tax purposes.

A partnership gives you more flexibility in how the income is split between partners. If one partner does more work or invests more time or capital, it's pretty simple for them to just take a bigger distribution - my accountant calls this "eat what you kill". Whereas an LLC taxed as an S-Corp will pay corporate taxes of it's own based on its income and expenses, with no pass through to your personal return.

Which option is right for your situation depends on a number of factors.

Updated over 5 years ago

Please note my third paragraph above should have said an "an LLC taxed as an S-Corp will file a corporate return of it's own based on its income and expenses, which will pass through to your personal return". Sorry for any confusion!

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@Brandon Hall - No, that certainly was not a quote, and I see now that I misspoke (and I'm regretfully unable to edit the post). Thanks for pointing out the error. As I stated in my first sentence, "I am not an accountant and I strongly advise you to get one". 

I'm sure the original poster would love for you to share your accounting knowledge in the thread.

@Tony Otis - Please note my third paragraph above should have said an "an LLC taxed as an S-Corp will file a corporate return of it's own based on its income and expenses, which will pass through to your personal return". Sorry for any confusion!

The LLC is going to provide you liability protection. Side note an LLC is not necessarily the best entity to hold assets in. Yes, an LLC is an flow-through entity meaning your share of the income or loss is passed through to your individual return Schedule E on 1040.

If you buy a house in a partnership then you would receive your share of income or loss.  I am not sure if we are answering your questions.

Updated over 5 years ago

Sorry, typo, it should say an S-Corp is not necessarily the best entity to hole an assets.