Do I need to file a Partnership Tax Return if I am a co-owner?

7 Replies

So long story short, myself and another person co-own a property 50/50.  We hold the property in our individual names.  We have one property and after getting a rather large CPA bill ($1600+) for the 1065 Partnership Returns and K-1 forms (along with a bit, not a lot, of correspondence on phone and email about quickbooks, which we use).  I talked to my CPA about electing this year to be the final year to file these Partnership returns and K-1s and just move forward by splitting everything on our Schedule E's between the two co-owners.  He told me that we can't do that and that it is a partnership.

In looking at the IRS definitions it states:

Partnership

A partnership is the relationship between two or more persons who join to carry on a trade or business, with each person contributing money, property, labor, or skill and each expecting to share in the profits and losses of the business whether or not a formal partnership agreement is made.

The term "partnership" includes a limited partnership, syndicate, group, pool, joint venture, or other unincorporated organization, through or by which any business, financial operation, or venture is carried on, that is not, within the meaning of the regulations under section 7701, a corporation, trust, estate, or sole proprietorship.

A joint undertaking merely to share expenses is not a partnership. Mere co-ownership of property that is maintained and leased or rented is not a partnership. However, if the co-owners provide services to the tenants, a partnership exists.



It appears to me that my CPA may be wrong on this.  The main reason I care is I don't want to have to spend $1000 or more every year on the tax prep when all I probably need to do is file on the Schedule E (especially with just one or two properties).  What do you all think? 

@Seth Row

Just a small disclaimer: there may be aspects of your agreement with the other person that makes it appear more like a partnership than your post would show on the surface, so be sure to have the conversation with your CPA regarding the code you researched.

This has been my understanding as well. Co-Ownership of a rental does not constitute a partnership if there isn't participation in the ways you quoted above.

This is why it's important to have a CPA who specializes in RE and can do more than file your return (like help with tax planning- something that saves you money rather than costing you). 

Best of luck as you hash this out with him/her!

@Seth Row - How was the property purchased? Is it in the name of the partnership? If so that's probably why you can't do a final k-1 and 1065 return. If the partnership purchased and is the owner of the property, you would probably need to dissolve the partnership and have you and your "partner" own the property in your names individually. Maybe as a tenant in common. If there is debt on the property, I'm not sure how that would transfer title, etc. I also think might be on the high side if there in not much activity in the partnership. You may want to consider finding another CPA or consult an attorney about dissolving the partnership. You may be better off leaving as is. 

Originally posted by @Alan Rohrer :

@Seth Row

Just a small disclaimer: there may be aspects of your agreement with the other person that makes it appear more like a partnership than your post would show on the surface, so be sure to have the conversation with your CPA regarding the code you researched.

This has been my understanding as well. Co-Ownership of a rental does not constitute a partnership if there isn't participation in the ways you quoted above.

This is why it's important to have a CPA who specializes in RE and can do more than file your return (like help with tax planning- something that saves you money rather than costing you). 

Best of luck as you hash this out with him/her!

 Thanks for the great input.  Yeah I think next year I may shop my business around. Thanks!

@Seth Row

Usually, that sentence that you copies has created various private revenue ruling from IRS to a various taxpayer. You can imagine as it can get confusing. 

No one here is going to take a stand with you saying yes this is not a partnership. Your CPA needs to be confident enough to take a stand with all the information you have provided with you. I personally agree with you. ( but consult your CPA) 

Before getting into the detail, you might not able to take 20% Qualified business income ( 20% passthrough deduction) if you do not treat this as the profit sharing. I have to be honest, we are still waiting on some clarification from IRS on that area, but you claiming this is just a co-ownership of the property might not bring your rental activity up the level of the "qualified Trade or business level" that is required for 20% deduction. 

Regarding your question: The court in the past have looked at these intents: 

  • The agreement between the parties and their conduct in executing its terms; 
  • The contributions, if any, that each party makes to the venture;
  • Control over income and capital and the right of each party to make withdrawals;
  • Whether the parties are co-proprietors who share in net profits and have an obligation to share losses;
  • Whether business was conducted in the joint names of the parties;
  • Whether the parties held themselves out as joint venturers; and
  • Whether separate books of account were maintained for the venture.

In more complicated cases, the court has ruled what you are expecting, but there were some significant differences. 

In one of ruling  IRS stated that 

  • The participants must reserve the right separately to take the property or dispose of their shares but may not jointly sell the property produced. 
  • The participants in the organization must also be able to compute their own income without having to compute partnership taxable income. 

In your case, you should be able to because I am sure you dont have a separate bill under a partnership name or partnership is not earning interest in its own bank account and so forth.

But your argument loses some strength where it is clear that the investors have jointly negotiated the terms of the transactions and would be unable to separately use their interests in the property without significant cooperation and joint efforts among the co-owners. Meaning  If you have a partnership agreement that has special allocation and other terms that more like a business, than this more likely be considered a partnership. 

Good luck. 

@Seth Row

As @Ashish Acharya explained, this issue is far more controversial than it seems. 

You're quoting the IRS instructions that have exactly zero legal weight. There're enough reasons to hold an opposite opinion, too - the one your CPA holds. In other words, he is not necessarily wrong.

Unfortunately, a week before the IRS deadline, I do not have time to elaborate. I will try to continue this discussion in couple weeks.  

Originally posted by @Michael Plaks :

@Seth Row

As @Ashish Acharya explained, this issue is far more controversial than it seems. 

You're quoting the IRS instructions that have exactly zero legal weight. There're enough reasons to hold an opposite opinion, too - the one your CPA holds. In other words, he is not necessarily wrong.

Unfortunately, a week before the IRS deadline, I do not have time to elaborate. I will try to continue this discussion in couple weeks.  

 Thanks to the both of you for looking into this and providing your explanations.  It has been very helpful.  Thanks!

@Seth Row

If you and your colleagues have a tenants in common agreement in place and you and your colleagues own the property in both of your names - you and your colleague should be entitled to report each person's share of income and expenses on your individual tax return instead of filing a form 1065.

There are some benefits with this method such as not having to file a partnership return which can cost $$
Furthermore - you don't have to wait for the partnership return to be completed before you can complete your individual return.

The only possible downside is that you may have to calculate depreciation separately.

$1600 a year for a partnership return - I hope that didn't wipe out all your cash-flow!

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here