Legal / Tax question regarding "partnership"

5 Replies

Hello everyone, I am a new real estate investor. I am currently on contract to purchase a condo in College Station, TX. My sister and I will purchase the condo on both our names and have agreed to be "partners" in the deal. I also have established a TX LLC (as a partnership with a different person); however, we were not able to purchase the property under the LLC due to the lack of financial history. My question is, do we have to file paperwork to register the partnership, or can we just document on a partnership agreement and file our respective share on our taxes?

Thank you so much in advance for your input.

@Rudy Estrada

A Partnership is not filed with the State or IRS, in contrast with a State formed entities (Corporations, LLCs) that require a filing to create. 

A partnership must file a Form 1065 with the IRS and issue Forms K-1 to the partners. The info on the Forms K-1 is then transferred to the Individual 1040 tax returns of the partners.

Are you truly in a partnership requiring a partnership tax return? In all likelihood, the answer is yes. However, It's worth noting that mere joint ownership of real estate and rent collections does not necessarily rise to the level of joint business activity that constitutes a partnership.

@David Lichtenstadter Appreciate the tag and glad to chime in.

@Bernard Reisz @David Lichtenstadter Thanks a lot for your input on this topic. The way I understand it is that I will have to file a Form 1065 with the IRS and issue K-1s to my sister and I so we can both transfer that information when filing our individual taxes (I presume that information will go in our schedule E). We are dividing the expenses/profits 66.6%/33.3%

No offense, but this is why CPAs feed my law practice...

You can file a general partnership (GP) or not.  If you don't file with the Tx SoS, you operate under the default rules of the Texas Business Organizations Code. General partnerships are the focus of BOC Title 4, chapter 152.  The same is true if you file, but don't have a written partnership agreement.  It is better to have a written partnership agreement. There are a lot of reasons, but a GP is disfavored way to do business in most cases.

If all you and your sister do is put your names on the deed, you will be considered tenants in common. Not the best, but better than each being an agent and principal for the other under a GP.

The overwhelming majority of people use the LLC to hold property. Care and feeding is relatively simple, and the duties are defined in contract instead of fiduciary duties. Fairly cheap to set up. You should have an operating agreement.

For the tax implications, by all means seek out a CPA.  For legal advice, talk to an attorney (licensed in the state).