Filing a 1065 Partnership return Husband/Wife vs Schedule E
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
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
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 C. ,
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
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
42 Replies
- Member since 2019 · 15 posts · 1 vote5y
Hello Steve! I hope you are well! I know this thread is years back but I am finding it very helpful and have a few questions if you are willing to help.
My husband and I own multiple rentals some only in his name on the deed and some only on mine and a couple with both of our names. We have been filing a Schedule E with both of our names listed (I now think this is wrong and it should have been split according to who is on the deed?). If I understand correctly, we can file a schedule E if these properties are in our personal names on the deed correct? but both of our names should not be listed if we are not on that deed together. Therefore the four in his name only would specify his name only on the Schedule E correct? (where as today it lists us both)
If we choose to move all of these into an LLC for all of the deeds. Can the LLC be a single member or must it be a multi member even if it is spouses? We live MI so I understand this is a Non community state. Would this require a partnership tax return? Would filing a partnership tax return be very difficult or change any of our listed unallowable losses, incentives, etc?
Thank you in advance!!!
- 5ySteven Hamilton IIPro MemberAccountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
Many people take the cost of an LLC and funnel it towards more insurance and an umbrella policy. Check for transfer costs before doing so.
Since you are in a non CM state, You are EACH considered a member. Your LLC should only be owned by one of you otherwise you will need to file a partnership tax return. It is more complex and has added requirements such as a formal set of books just like a corporation. That means no more spreadsheet.
Your Schedule C at the top will typically list both of you since you are filing a joint return. The IRS doesn't care which of you is on title. You and Him are filing one joint tax return.
- Member since 2019 · 15 posts · 1 vote5y
Originally posted by @Steven Hamilton II:
Many people take the cost of an LLC and funnel it towards more insurance and an umbrella policy. Check for transfer costs before doing so.
Since you are in a non CM state, You are EACH considered a member. Your LLC should only be owned by one of you otherwise you will need to file a partnership tax return. It is more complex and has added requirements such as a formal set of books just like a corporation. That means no more spreadsheet.
Your Schedule C at the top will typically list both of you since you are filing a joint return. The IRS doesn't care which of you is on title. You and Him are filing one joint tax return.
@Steven Hamilton II
Thank you, this is very helpful. Currently, our properties are in our personal name, and we are both listed on the Schedule E with all properties.. Would you recommend leaving this as is for 2020 taxes? (unless in the future we decide to move them into a Multi-member LLC then we will file as a partnership?)
We are closing on a property next week in the single member LLC, therefore that one property will be filed on a Schedule C correct or will this also be on the schedule E? I just don't like the idea of single member LLC because then what if something God forbids happens to one of us or when we have a family how do we ensure that this is legally theirs? We live in MI and my understanding is a husband and wife are not looked at as one and a single member LLC is for that member listed only.While the others remain on Schedule E unless we decide to move them into a Multi-member LLC then we will file as a partnership.
- 5ySteven Hamilton IIPro MemberAccountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
I think you may be over complicating it. I can tell from your questions that you are in a bit over your head and before you make an incorrect decision you should STRONGLY consider a consultation with someone. This is both a legal and tax question.
A LLC that holds rental property is NOT reported on schedule C. Take the money you would be spending on filing and additional costs and put it toward an umbrella policy. Maintain good business practices an carry a decent insurance company. If you moved it to an LLC that both of you own it will be a partnership and that has its own consequences and costs.
The scope of what you asked covers a broad area from estate planning, to tax planning and forward.
- 5yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Hi, @Steven Hamilton II. In this thread, you repeatedly highlight the IRS position that a Husband-Wife LLC does NOT have an option to file as a Qualified Joint Venture (QJV) and must therefore file a partnership return. The IRS indeed states here: https://www.irs.gov/faqs/small...
"...Requirements for a qualified joint venture:.. The spouses own and operate the trade or business as co-owners (and not in the name of a state law entity such as an LLC or LLP),.."
A similar statement is repeated here: https://www.irs.gov/businesses... and in multiple IRS publications and forms instructions. I've told it to many clients myself over the years.
I wonder, however, whether it is true. The IRS cites the Small Business and Work Opportunity Tax Act of 2007 when making their assertion. That Act did create Section 761(f) for QJVs, but... it does NOT have an exclusion for state entities like LLCs. Neither do the Regulations 1.761, from what I can tell.
Further, in the 2018 Argosy case where the taxpayer was a H/W LLC, the Tax Court said:
"...Petitioner contends that a Mr. and Mrs. Petitio were one partner. However, there is no evidence of an election pursuant to section 761(f)."
The court did not say that the LLC could not make such election. The court seemingly implied that they could but simply failed to do so.
At this point, without a more thorough research, I tend to conclude that the IRS excluded H/W LLCs from the QJV treatment arbitrarily, without statutory support. And once they announced so, everybody simply followed the IRS opinion without questioning it. Are you aware of some actual legal authority that validates the IRS opinion on this issue?
@Lance Lvovsky? @Nicholas Aiola? @Ashish Acharya? what do you guys know/think? - 5yAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
Originally posted by @Michael Plaks:
Hi, @Steven Hamilton II. In this thread, you repeatedly highlight the IRS position that a Husband-Wife LLC does NOT have an option to file as a Qualified Joint Venture (QJV) and must therefore file a partnership return. The IRS indeed states here: https://www.irs.gov/faqs/small...
"...Requirements for a qualified joint venture:.. The spouses own and operate the trade or business as co-owners (and not in the name of a state law entity such as an LLC or LLP),.."
A similar statement is repeated here: https://www.irs.gov/businesses... and in multiple IRS publications and forms instructions. I've told it to many clients myself over the years.
I wonder, however, whether it is true. The IRS cites the Small Business and Work Opportunity Tax Act of 2007 when making their assertion. That Act did create Section 761(f) for QJVs, but... it does NOT have an exclusion for state entities like LLCs. Neither do the Regulations 1.761, from what I can tell.
Further, in the 2018 Argosy case where the taxpayer was a H/W LLC, the Tax Court said:
"...Petitioner contends that a Mr. and Mrs. Petitio were one partner. However, there is no evidence of an election pursuant to section 761(f)."
The court did not say that the LLC could not make such election. The court seemingly implied that they could but simply failed to do so.
At this point, without a more thorough research, I tend to conclude that the IRS excluded H/W LLCs from the QJV treatment arbitrarily, without statutory support. And once they announced so, everybody simply followed the IRS opinion without questioning it. Are you aware of some actual legal authority that validates the IRS opinion on this issue?
@Lance Lvovsky? @Nicholas Aiola? @Ashish Acharya? what do you guys know/think?In General:
The statutory exception applies only to joint ventures (but not a separate entity) between spouses and also requires that
- Each spouse materially participate in the business of the joint venture and
- That both spouses elect disregarded entity (DE) treatment.
QJV treatment is available to spouses in any jurisdiction (community law state or not) provided the requirements of the statute are satisfied.
Regarding LLC:Non-community:
LLC with husband and wife cannot elect to be taxed as qualified joint venture
Community State:
Husband and wife LLC
Per Rev. Proc. 2002-69 and 2002 C.B. 831, a husband and wife who are the sole owners of an LLC and reside in a community property state can choose whether they are treated as a partnership or disregarded entity. In either case, since the husband and wife are joint owners of the LLC, tax information related to the LLC can be discussed with either spouse.
Where spouses are the only owners of an unincorporated business entity and hold their interests as community property under state law, they may choose between partnership or DE status.
The community property exception does not require that the operations rise to the level of a trade or business or that either spouse materially participate in the operations.
It also applies if the spouses establish a separate entity such as a limited liability company (LLC).
INVESTOR FRIENDLY CPA®5241 Reviews - 5yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
You're merely reproducing the IRS position, the one I specifically challenged. I asked if you know of the statutory support for it or court cases.
QJVs were born in 2007, after Rev Proc 2002-69, and that procedure is not relevant to QJVs. My challenge is specific to QJV. The IRS say that LLCs cannot make the QJV election under 761(f). I'm not sure they are correct.
- Baltimore, MD · Member since 2018 · 2 posts · 0 votes4y
@Michael Plaks I was wondering if you’ve gotten any insight regarding this in the recent months?
I am in a situation where my wife and I operate rentals through an LLC and was hoping to avoid partnership return (non community property state)My reading of the 2007 small business and work opportunity act is that spouses may elect out of partnership filing rules and there is no mention of different rules if within an LLC.
However, as you said the IRS instructions for QJV seem to throw in a LLC exclusion somewhat arbitrarily and goes against the language of this law.
If you or any of your accounting colleagues has any additional insight, that would be very helpful. Thank you
- 4yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Originally posted by @Jonathan W.:
@Michael Plaks I was wondering if you’ve gotten any insight regarding this in the recent months?
No, Jonathan, nothing new. I still believe that the IRS is wrong. Multiple professional references, when addressing this issue, carefully state: "the IRS position is..." - which to me indicates the same doubts that I have about the legality of the IRS position.
Until the IRS is challenged in court over this position and loses, I choose to comply with their position. Do you want to be the guinea pig?
- Baltimore, MD · Member since 2018 · 2 posts · 0 votes4y
Haha no not trying to be a Guinea pig for this! But was able to find rev proc 84-35 which would allow for a waiver of any penalty to file 1065 in this situation at least. Since there wouldn’t be any additional tax due and penalty wouldn’t apply if the properties were reported on 1040/schedule E, in addition to what you mentioned regarding the 2007 law I think it would be a strong case.
- Member since 2023 · 2 posts · 0 votes2y
Hi, @Steven Hamilton II my husband and I live in California, a community property state. We own 100% of LLC that is in AR. Do you suggest file 1065 or be treated as disregarded entity on schedule E. I also would like to reduce the audit risk due to large bonus depreciation. If we file 1065, do my husband and I need two separate k-1 or we can have the same k-1. thank you.
- 2ySteven Hamilton IIPro MemberAccountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votesYou will need to file a 1065 as AR is not a community property state. You will have two separate K-1s as you are each individual owners.
Quote from @Christina Weaver:
Hi, @Steven Hamilton II my husband and I live in California, a community property state. We own 100% of LLC that is in AR. Do you suggest file 1065 or be treated as disregarded entity on schedule E. I also would like to reduce the audit risk due to large bonus depreciation. If we file 1065, do my husband and I need two separate k-1 or we can have the same k-1. thank you.
- Member since 2023 · 2 posts · 0 votes2y
Thank you.@Steven Hamilton II I want to mention that My husband and I both reside in California, and I manage the property remotely from California via Zoom calls, and also physically visits the property. Whether To file a 1065 partnership return or being treat it as a disregarded entity, Is the determination based on the location of the property or the owners' residence state?
Additionally, for the AR llc, do I need to register the LLC in California as a foreign company? I heard there's an $800 franchise fee yearly.
Thank you.
- 2ySteven Hamilton IIPro MemberAccountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
Quote from @Christina Weaver:
Thank you.@Steven Hamilton II I want to mention that My husband and I both reside in California, and I manage the property remotely from California via Zoom calls, and also physically visits the property. Whether To file a 1065 partnership return or being treat it as a disregarded entity, Is the determination based on the location of the property or the owners' residence state?
Additionally, for the AR llc, do I need to register the LLC in California as a foreign company? I heard there's an $800 franchise fee yearly.
Thank you.
Doesn't matter as AR is not a community property state.
Yes, you need to register it in CA.
- Member since 2021 · 1 post · 0 votes1y
@Steven Hamilton II
I reached out by email to arrange a consultation with you about the information below, but I also post it here in case you want to reply publicly so the response may also help others.
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Context:-My wife and I file taxes jointly and own 4 long term rentals in NJ and 3 rentals in FL (1 long term, 2 short/medium term). The plan is to put the rentals in SCH E of our joint return and file with TurboTax
-We live in Florida
-Leases under my wife's name, Airbnb app under my name, dedicated bank account for all rentals activity in the name of both
-We have umbrella policy for liability protection for the rentals
-We leverage some contractors (for example cleaning lady for the Airbnbs or lawn maintenance guy) that we pay >$600 for their services in a year and they are not our employees.
-Up to March 2024 we were operating as an LLC, but we closed it in 2024, so previous years we were not filling SCH E instead we were issuing to ourselves K1s. We closed the LLC because it was not giving us protection since the properties and mortgages are under our names instead of the LLC, so it was extra work and cost for no benefit
Questions:
1-I assume we need to issue 1099 for these contractors even though we are not incorporated, right?
2-If we need to issue 1099's, we can use my wife's SSN, but would it be better for privacy if we use EIN?, but if so I assume we would need to do a partnership and file partnership returns?
3-Any red flag in our current structure?
4-Not sure if need to do the election of Qualified Joined Venture
- 1yJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 897 votes
Hi @Tony C.!
In Missouri, a married couple jointly owning LLCs is generally required to file partnership returns for each LLC, necessitating Form 1065 at the federal level and Form MO-1065 for the state.
However, the IRS offers a Qualified Joint Venture (QJV) election for married couples, allowing them to avoid partnership classification by treating the business as a joint sole proprietorship. This enables reporting income and expenses directly on their joint tax return, using Schedule C for active business income and Schedule E for rental income. To qualify, both spouses must materially participate in the business, and the venture must be jointly owned and operated.
However, It's important to note that the QJV election is available only to businesses that are not formed as LLCs in states that do not recognize community property laws. Since Missouri is not a community property state, your LLCs would not qualify for QJV treatment. Therefore, you would need to file partnership returns for each LLC.Given these considerations, both approaches could be correct, depending on the specific circumstances of your LLCs and state laws. It's crucial to consult with a tax professional who understands the nuances of your situation to determine the most appropriate and cost-effective method for your tax filings.
Malabute & Company CPAs525 Reviews - Investor · Richardson, TX · Member since 2017 · 63 posts · 7 votes1y
@Steven Hamilton II and anyone else who can help, I'd appreciate your opinion on my situation.
In July 2024, I created a partnership LLC with my girlfriend to buy a rental property. We are now married and I expect we'll file our 2024 taxes jointly. We live in Texas, a community property state, and are 50/50 owners. I assumed we would be able to file taxes for this LLC as a disregarded entity since we are married and in a community property state. However, when I requested our EIN the letter stated, "Based on the information received from you or your representative, you must file the following forms by the dates shown. Form 1065 03/15/2025."
So I think I messed up when establishing this LLC and chose for it to be treated as a partnership. Do I now need to change our elected status or tax classification to be a disregarded entity? Or am I just SOL and need to file a partnership return and issue K-1's to each of us? Or can I do nothing and file it on Sch E since we are married in a community property state?
Any guidance is appreciated and I know it's not tax nor financial advice, just your thoughts.
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