General Partnership or LLC

6 Replies

For purchasing properties (buy and hold) with a business partner (not my spouse) is a general partnership or an LLC the better choice?

I've always thought an LLC was the way to go, but we were chatting with a lawyer and they mentioned that an LLC would cause us to have to pay Franchise and Excise Tax of 6.5% plus an additional $2500 for every $1M in equity. They advised us to consider a General Partnership with an insurance policy instead. We are in Tennessee.

I've read that in a GP, you are unable to take advantage of depreciation if you are involved in the management or operation of rental properties, so that would be a pretty big hit depending on how that works in practice.

What is the best business structure for minimizing personal risk and maximizing the tax benefits of owning real estate?

Thanks for any help you can provide!

Jon, I disagree with the advice. Yes, you will pay the F&E tax in Tennessee but a GP has no entity protection and if the liability exceeds the insurance policy you expose your personal assets to the liability. 

As an investor, and tax lawyer myself, I have utilized the LLC structure to achieve the liability protections I seek, and still achieve the pass through treatment of the P&Ls. We are cost segregating our properties to achieve the maximum depreciation possible under Section 179s bonus depreciation regime.

Good Luck!!

@Jon Mason

There are a few different exemptions from the TN F&E out there even if you have an LLC. The FONCE is a popular one for LLCs holding rental real estate that are family owned. You may not qualify for it if you have partners. Good to run by your CPA.

@Eamonn McElroy yeah I read up a bit on the family exemption, but I don’t think we would qualify. Perhaps there are others we could look into as well.

@ JonMason I use Series LLCs in two of the three markets I am in. While it seems cumbersome, I have explained the rationale to my CPA and my book keeper and once they saw it, it made perfect sense to them. From a book keeping perspective, it really made no difference and since my Series LLCs flow up to my holding company, the tax return really doesn't get overly complicated since the Series LLCs are DEs for purposes of tax. 

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