We (husband and wife filing jointly) are looking for a CPA. While interviewing CPAs to file our 2012 taxes we are trying to determine if we should file a partnership return or listed all of our properties on our schedule E.

Currently we have titled our 16 properties in 4 LLCs and we have a 5th LLC where we manage our properties. One CPA is telling us that we need to file a partnership return for all LLCs and the other CPA is telling us that we can place all properties on our Schedule E and use Schedule C for our property management activities

We like the Schedule E and C approach because it's cheaper.

What approach is correct? Or is both approaches okay?

Originally posted by Tony Bc:
We (husband and wife filing jointly) are looking for a CPA. While interviewing CPAs to file our 2012 taxes we are trying to determine if we should file a partnership return or listed all of our properties on our schedule E.
Currently we have titled our 16 properties in 4 LLCs and we have a 5th LLC where we manage our properties. One CPA is telling us that we need to file a partnership return for all LLCs and the other CPA is telling us that we can place all properties on our Schedule E and use Schedule C for our property management activities

We like the Schedule E and C approach because it's cheaper.

What approach is correct? Or is both approaches okay?

@Tony Bc ,

Since you live in Missouri and both you and your wife are members of the LLC, YOU MUST file a partnership return. If it was a community property state you could file them on Schedule E as a Qualified Joint Venture. Being that the LLC is two member it defaults to a partnership. Here is what the IRS says on the subject: Election for Husband and Wife Unincorporated Businesses

A business owned and operated by the spouses through a limited liability company does not qualify for the election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states.

I'm happy to answer or confirm any tax/accounting questions if you'd like

@Tony Bc You are getting some great advice from one of the sharpest posters on BP. I would strongly advise you listen to him. @Steven Hamilton II I just want to say how impressed I am with your knowledge and professionalism. There are some excellent posters on BP but occasionally some go beyond what I think is appropriate for lay persons.

@Jerry W,

Thank you. Not sure if everyone here knows, but I represent taxpayers before the IRS. That is my day job. I prepare an extensive number of tax returns.

A big niche of my clientele is made up of real estate investors. My family has been investing for many years.

I'm just always happy to help.

Steve,

thanks for the comments and the reference to the IRS documentation to clear up this matter for me!

Most real estate strategies suggest that I hold one to several properties in an LLC. Therefore, it sounds as if this also goes hand in hand with creating a new partnership return for every LLC unless they are single member LLCs. I could see this as being very cumbersome. Any suggestions on how others handle this?

Also, what if I hold financing in my personal name on some of these properties and I have simply moved them to the LLC for additional libiliaty protection where as I have to move them in and out of the LLC when I refinance? any thoughts?

I know some of these questions are outside of tax... but any thoughts? anyone?

Originally posted by Steven Hamilton II:

@Tony Bc ,

Since you live in Missouri and both you and your wife are members of the LLC, YOU MUST file a partnership return. If it was a community property state you could file them on Schedule E as a Qualified Joint Venture. Being that the LLC is two member it defaults to a partnership. Here is what the IRS says on the subject: Election for Husband and Wife Unincorporated Businesses

A business owned and operated by the spouses through a limited liability company does not qualify for the election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states.

I'm happy to answer or confirm any tax/accounting questions if you'd like

Just to clarify what Steven is telling husband-wife business owners,

• If you have not created a business entity, you are operating as a partnership (not a sole proprietorship) and should file a partnership tax return. You can choose to report your income and expenses on Schedule C by electing to file as a Qualified Joint Venture instead of filing a partnership return.
• If you have created an LLC that is not in a community property state, and as husband-wife you are the only members, then you are a partnership and must file a partnership tax return unless you have elected to treat your LLC as a corporation for tax purposes.
• If you have created an LLC in a community property state, and husband-wife are the only members, then you are a partnership and must file a partnership tax return unless you have elected to treat your LLC as a disregarded entity or corporation for tax purposes. Qualified Joint Venture reporting is not available in this situation. Only in community property states, can an LLC with only husband and wife as members elect to treat their LLC as a disregarded entity, which means all LLC income and expenses are reported on either Schedule C or Schedule E (as appropriate) as if the LLC did not exist.

Originally posted by Dave T:

Originally posted by Steven Hamilton II:

@Tony Bc ,

Since you live in Missouri and both you and your wife are members of the LLC, YOU MUST file a partnership return. If it was a community property state you could file them on Schedule E as a Qualified Joint Venture. Being that the LLC is two member it defaults to a partnership. Here is what the IRS says on the subject: Election for Husband and Wife Unincorporated Businesses

A business owned and operated by the spouses through a limited liability company does not qualify for the election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states.

I'm happy to answer or confirm any tax/accounting questions if you'd like

Just to clarify what Steven is telling husband-wife business owners,

• If you have not created a business entity, you are operating as a partnership (not a sole proprietorship) and should file a partnership tax return. You can choose to report your income and expenses on Schedule C by electing to file as a Qualified Joint Venture instead of filing a partnership return.
• If you have created an LLC that is not in a community property state, and as husband-wife you are the only members, then you are a partnership and must file a partnership tax return unless you have elected to treat your LLC as a corporation for tax purposes.
• If you have created an LLC in a community property state, and husband-wife are the only members, then you are a partnership and must file a partnership tax return unless you have elected to treat your LLC as a disregarded entity or corporation for tax purposes. Qualified Joint Venture reporting is not available in this situation. Only in community property states, can an LLC with only husband and wife as members elect to treat their LLC as a disregarded entity, which means all LLC income and expenses are reported on either Schedule C or Schedule E (as appropriate) as if the LLC did not exist.

Dave NA ,

Non LLC and non corporation husband-wife holders of rental properties do not have to file a partnership return; They can file Schedule E.

The problems comes if it is held by an LLC(Two-member) in a non-community property state.

For the management activities I would still recommend using an S-election or C-corp if applicable.

@Tony Bc ,

Since you live in Missouri and both you and your wife are members of the LLC, YOU MUST file a partnership return. If it was a community property state you could file them on Schedule E as a Qualified Joint Venture. Being that the LLC is two member it defaults to a partnership. Here is what the IRS says on the subject: Election for Husband and Wife Unincorporated Businesses

A business owned and operated by the spouses through a limited liability company does not qualify for the election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states.

I'm happy to answer or confirm any tax/accounting questions if you'd like

Steven,

I know this post is a little old, but I think my husband and I have been doing this incorrectly. We joint own 4 rental properties but we have only put his name on the Schedule C when we file. Do I understand correctly that we are required to elect to be a qualified joint venture or to file a partnership return? If that is the case, do we need to go back and correct the last 6 years of taxes, or can we just start doing it right this year. Also, I am really the only active partner in our real estate investing. My husband's name is on everything and he occasionally gives advice, but for the most part I do the work. If that is the case, would you still split the number 50/50 on the two Schedule C's or would you try to do a different split.

Thanks in advance for your help on this. It can get quite confusing.

Danae

I meant to say Schedule E not Schedule C.

Just figured out how to tag @Steven Hamilton II

Originally posted by @Danae Meurer :

@Tony Bc ,

Since you live in Missouri and both you and your wife are members of the LLC, YOU MUST file a partnership return. If it was a community property state you could file them on Schedule E as a Qualified Joint Venture. Being that the LLC is two member it defaults to a partnership. Here is what the IRS says on the subject: Election for Husband and Wife Unincorporated Businesses

A business owned and operated by the spouses through a limited liability company does not qualify for the election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states.

I'm happy to answer or confirm any tax/accounting questions if you'd like

Steven,

I know this post is a little old, but I think my husband and I have been doing this incorrectly. We joint own 4 rental properties but we have only put his name on the Schedule C when we file. Do I understand correctly that we are required to elect to be a qualified joint venture or to file a partnership return? If that is the case, do we need to go back and correct the last 6 years of taxes, or can we just start doing it right this year. Also, I am really the only active partner in our real estate investing. My husband's name is on everything and he occasionally gives advice, but for the most part I do the work. If that is the case, would you still split the number 50/50 on the two Schedule C's or would you try to do a different split.

Thanks in advance for your help on this. It can get quite confusing.

Danae

Are the properties held through an LLC?

If NO What was said above does not apply. You do not have to change anything.
If Yes, Are both of you members of the LLC? See next question.

If no, no change is needed.
If yes, you need to be filing a partnership.

If you have been doing it incorrectly, we can go from there.

@Steven Hamilton II

We do not hold anything through an LLC. So it is fine for us to just list the property under my husbands name on the Schedule E even though we both own it, and I manage it?

Originally posted by @Danae Meurer :
@Steven Hamilton II
We do not hold anything through an LLC. So it is fine for us to just list the property under my husbands name on the Schedule E even though we both own it, and I manage it?

Correct. Schedule E it is! Most software will let you put joint.

Hi @Steven Hamilton II,

I have this same question (1065 vs Schedule E)  However the partnership is between Me (as a person) and my partners LLC (which consists of him and his wife).  We are in Texas

He normally uses schedule E with properties and his CPA told us to do a Schedule E for this one. This site makes me believe that we should use a 1065 however since I am involved in the partnership.  Is that correct?

https://answers.yahoo.com/question/index?qid=20120...

@Steven Hamilton II  -  link did not work last time

You technically CAN break it up on Schedule E; however, it is not the best thing to do for audit purposes or an actual breakdown.

You should have an operating/partnership agreement together and you should have a dedicated bank account for the property.  Proper bookkeeping will help keep track of who has what dollar amount invested into the property in case of a buyout or a death.  This is not just to make sure that no one is ever feeling like they are getting cheated. Yes a partnership tax return will probably run roughly $500; however, it ensures everyone is claiming the correct amount and not drawing the others for audit. It keeps everyone honest.

A partnership is MUCH less likely to be audited. 

Steven, 

i know this is an old thread but I hope you are still monitoring and will reply.

I hold 11 rental properties in my own name but to reduce liability risk am thinking of placing them into LLCs. I was further thinking of using 2-person LLCs (my wife and me), due to the greater liability protection they afford over 1 person LLCs. From your previous comments, these would be deemed partnerships and I would need to file a 1065, each LLC is a separate partnership needing its own 1065, correct?

If I move to a partnership, what happens to my accumulated passive losses?  Are they lost or can they be split (as we file jointly) to be used against partnership gains?

Many thanks

Konrad

Yes, it would be a partnership. Your PALs would be suspended upon your contribution of the property. You most likely would not get access to them until disposition of the entire property/partnership interest of not handled correctly.

Originally posted by @Steven Hamilton II :

Originally posted by Tony Bc:
We (husband and wife filing jointly) are looking for a CPA. While interviewing CPAs to file our 2012 taxes we are trying to determine if we should file a partnership return or listed all of our properties on our schedule E.
Currently we have titled our 16 properties in 4 LLCs and we have a 5th LLC where we manage our properties. One CPA is telling us that we need to file a partnership return for all LLCs and the other CPA is telling us that we can place all properties on our Schedule E and use Schedule C for our property management activities

We like the Schedule E and C approach because it's cheaper.

What approach is correct? Or is both approaches okay?

@Tony Bc ,

Since you live in Missouri and both you and your wife are members of the LLC, YOU MUST file a partnership return. If it was a community property state you could file them on Schedule E as a Qualified Joint Venture. Being that the LLC is two member it defaults to a partnership. Here is what the IRS says on the subject: Election for Husband and Wife Unincorporated Businesses

A business owned and operated by the spouses through a limited liability company does not qualify for the election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states.

I'm happy to answer or confirm any tax/accounting questions if you'd like

Steven, Quick question. So, generally speaking husband/wife-owned LLC in a non-Community property state, must file a partnership return (ie, the LLC is not considered a single member LLC disregarded entity). Question is: if I have one of these LLC (owned husband and wife, in a non-community property state), but it's a just a passive LLC - such that all it does is owns public securities (ie, our brokerage accounts are titled in the name of the LLC), does the same rule apply? Would the LLC need to prepare a partnership return for the dividend income and capital gains? I can't just put the LLC's income directly into my joint personal tax return, right?

Originally posted by @David Taylor :

Originally posted by @Steven Hamilton II:

Originally posted by Tony Bc:
We (husband and wife filing jointly) are looking for a CPA. While interviewing CPAs to file our 2012 taxes we are trying to determine if we should file a partnership return or listed all of our properties on our schedule E.
Currently we have titled our 16 properties in 4 LLCs and we have a 5th LLC where we manage our properties. One CPA is telling us that we need to file a partnership return for all LLCs and the other CPA is telling us that we can place all properties on our Schedule E and use Schedule C for our property management activities

We like the Schedule E and C approach because it's cheaper.

What approach is correct? Or is both approaches okay?

@Tony Bc ,

Since you live in Missouri and both you and your wife are members of the LLC, YOU MUST file a partnership return. If it was a community property state you could file them on Schedule E as a Qualified Joint Venture. Being that the LLC is two member it defaults to a partnership. Here is what the IRS says on the subject: Election for Husband and Wife Unincorporated Businesses

A business owned and operated by the spouses through a limited liability company does not qualify for the election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states.

I'm happy to answer or confirm any tax/accounting questions if you'd like

Steven, Quick question. So, generally speaking husband/wife-owned LLC in a non-Community property state, must file a partnership return (ie, the LLC is not considered a single member LLC disregarded entity). Question is: if I have one of these LLC (owned husband and wife, in a non-community property state), but it's a just a passive LLC - such that all it does is owns public securities (ie, our brokerage accounts are titled in the name of the LLC), does the same rule apply? Would the LLC need to prepare a partnership return for the dividend income and capital gains? I can't just put the LLC's income directly into my joint personal tax return, right?

It is considered to be a partnership in all of those situations. You ARE required to file Form 1065. You will then use the K-1 generated to prepare your tax return. 

@Steven Hamilton II Thanks Steve. One last follow-up question.On one of the IRS forms, I found the language pasted below. Does this not suggest that I can opt for the LLC (that holds only public securities - ie, is passive/not a real business) not to be considered a partnership? Again, the LLC does nothing except own public securities.

Here is the relevant language:

Exclusion From Partnership Rules

Certain partnerships that do not actively conduct a business can choose to be completely or partially excluded from being treated as partnerships for federal income tax purposes. All the partners must agree to make the choice, and the partners must be able to figure their own taxable income without figuring the partnership's income. 

Originally posted by @David Taylor :

@Steven Hamilton II Thanks Steve. One last follow-up question.On one of the IRS forms, I found the language pasted below. Does this not suggest that I can opt for the LLC (that holds only public securities - ie, is passive/not a real business) not to be considered a partnership? Again, the LLC does nothing except own public securities.

Here is the relevant language:

Exclusion From Partnership Rules

Certain partnerships that do not actively conduct a business can choose to be completely or partially excluded from being treated as partnerships for federal income tax purposes. All the partners must agree to make the choice, and the partners must be able to figure their own taxable income without figuring the partnership's income. 

That would not be referring to an LLC. That would be a situation where you have a joint brokerage account with a family member(brotheror sister, etc) or for example you own a piece of real estate with another party. The LLC is what makes that difference.

@Steven Hamilton II

Hi Steve,

My husband and I started an LLC in 2016 and currently the llc has 2 properties in Ohio. It is my understanding that we will need to report our tax with form 1065 and 8825. Is it correct? Thank you in advance!

Yes, you will have to file the partnership tax return. Do not forget to prepare the balance sheet, track distributions etc. Basis is extremely important in these entities and if audited can and will come into question. 

Hi @Steven Hamilton II .  Great information you provide here.  I have a client that I just picked up that should have been filing a partnership return since 2006 but filed on Schedule E.  How far back would you recommend going and filing partnership and amended 1040 returns?