LLC - real estate hot held by LLC

[Bill Tubbs]

LLC formed in 2011 to be a rental real estate partnership, and is following the default election of filing Form 1065. LLC has 4 members (each 25%), which is two husband/wife couples. The 2 husbands are the managing members.

Each real estate parcels is legally titled in the 2 husbands' names. Does that pose any problem with listing them as LLC assets for income tax purposes on Form 1065? Wisconsin is community property state, so wouldn't that in effect make the legal ownership to be both husbands and both wives?

Bill

[Gary2]

Doesn't titling them that way defeat the purpose of the LLC?

Is there a reason for treating this as a partnership and not simply co-ownership of rental real estate?

[Bill Tubbs]

legal vs. taxes

Doesn't titling them that way defeat the purpose of the LLC?

If you're speaking from the liability standpoint, I was wondering that myself. I will convey that concern to them as well, but does this pose any problem with listing the buildings on the 1065 of the LLC?

Is there a reason for treating this as a partnership and not simply co-ownership of rental real estate?

There are currently multiple properties involved with the anticipation of adding more properties. So, the clients preferred to form a partnership to keep their personal returns simpler... all the expenses would get calculated and reported once (on the 1065) and then K-1'ed to each partner vs. adding multiple columns on Sch E to each partner's return.

[Gretel]

Here is my two cents.

Forming an entity (Corp or LLC) makes a business a separate entity from the individual(s). Any property used for business needs to be titled in this business name to have valid expenses.

Just having a partnership is different from forming a LLC.

[Bill Tubbs]

disregarded entity

Here is my two cents.

Forming an entity (Corp or LLC) makes a business a separate entity from the individual(s). Any property used for business needs to be titled in this business name to have valid expenses.

Just having a partnership is different from forming a LLC.

But, the default (tax-wise) for an LLC is a disregarded entity; so a multi-member LLC is a de facto partnership, eh? So, does it matter tax-wise if the partners jointly own the property or if the LLC owns the property?

Bill

[Gretel]

But, the default (tax-wise) for an LLC is a disregarded entity; so a multi-member LLC is a de facto partnership, eh? So, does it matter tax-wise if the partners jointly own the property or if the LLC owns the property?

Bill

Yes, it does. LLC does not equal partnership even though they file a partnership tax return. If ones forms an entity on the state level that creates exactly that - a separate entity - titles must follow this. I don't know what other words to use since I feel I am repeating myself, which does help much to understand this concept.

Maybe someone else can explain better than I.

[JoshinNC]

I'll try Gretel

Yes, it does. LLC does not equal partnership even though they file a partnership tax return. If ones forms an entity on the state level that creates exactly that - a separate entity - titles must follow this. I don't know what other words to use since I feel I am repeating myself, which does help much to understand this concept.

Maybe someone else can explain better than I.

An LLC is created by law, a partnership is created by action.

An LLC is a separate legal entity from the Members of the LLC. The LLC is recognized by the state in which it is organized. An LLC with more than one Member, is, by default, a Partnership FOR TAX PURPOSES>

A Partnership is created by action. When two or more individuals (not married) engage in an activity for profit they have created a Partnership, whether they intended to do so. There is no filing at the state level to create a Partnership, it is just is there once it's there.

A Partnership is NOT a separate legal entity from the individuals partners, so property and contracts may be entered into in the names of the partners, and it will bind the partnership.

Real property titled to an individual is owned by that individual, not the LLC. It is not an asset of the LLC, the income is not income of the LLC, the expenses are not expenses of the LLC.

If you/they can't understand this, hire a lawyer.

[JG EA]

...A Partnership is created by action. When two or more individuals (not married) engage in an activity for profit they have created a Partnership, whether they intended to do so. There is no filing at the state level to create a Partnership, it is just is there once it's there....


.

And may I add that unmarried people also can be exempt from a partnership. Pub 541

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 compute their own taxable income without computing the partnership's income. However, the partners are not exempt from the rule that limits a partner's distributive share of partnership loss to the adjusted basis of the partner's partnership interest. Nor are they exempt from the requirement of a business purpose for adopting a tax year for the partnership that differs from its required tax year.

Investing partnership. An investing partnership can be excluded if the participants in the joint purchase, retention, sale, or exchange of investment property meet all the following requirements.
They own the property as co-owners.

They reserve the right separately to take or dispose of their shares of any property acquired or retained.

They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. Each separate participant can delegate authority to purchase, sell, or exchange his or her share of the investment property for the time being for his or her account, but not for a period of more than a year.


Operating agreement partnership. An operating agreement partnership group can be excluded if the participants in the joint production, extraction, or use of property meet all the following requirements.
They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights.

They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used.

They do not jointly sell services or the property produced or extracted. Each separate participant can delegate authority to sell his or her share of the property produced or extracted for the time being for his or her account, but not for a period of time in excess of the minimum needs of the industry, and in no event for more than one year.

However, this exclusion does not apply to an unincorporated organization one of whose principal purposes is cycling, manufacturing, or processing for persons who are not members of the organization.

Electing the exclusion. An eligible organization that wishes to be excluded from the partnership rules must make the election not later than the time for filing the partnership return for the first tax year for which exclusion is desired. This filing date includes any extension of time. See section 1.761-2(b) of the regulations for the procedures to follow

.

[Bill Tubbs]

Thank you everyone

The reason I asked the question in the first place is because I figured how the land was titled would make all the difference, but I was hoping I was wrong on that. Now I have to read to see if I can just split the numbers down the middle and report on each person's 1040 Sch E, or if a 1065 is required for the partnership [with a separate 1065 being required for the LLC]. The rents were received by the LLC, and the LLC made the mortgage payments, but everything (repairs/improvements, legal title, etc.) else was done by the partners.

If anyone wants to chime in on the Sch E vs. 1065, I would welcome those comments.

Thanks again,
Bill

[Gretel]

I don't know who is more stubborn, Bill, you or me. With a LLC you do not have a choice any longer to file schedule E. ....I repeat: It is a separate entity just like a corporation.

[Bill Tubbs]

clarification

I don't know who is more stubborn, Bill, you or me. With a LLC you do not have a choice any longer to file schedule E. ....I repeat: It is a separate entity just like a corporation.

Well, I am 3/4ths German, so I can be a tad stubborn ;-)

I think you misunderstood my last comments...
1) The small activity that actually happened within the LLC will be on its own 1065 (once they get an EIN)
2) Most of the activity though (buying, fixing up, and renting the buildings), since the buildings are not titled in the LLC, cannot go on the LLC's 1065. So, I was planning to split that activity 50/50 and put on each of the two member's personal Sch E.

Does that clear it up?
Bill

[Gretel]

Yes, it does clear it up. Thank you.

I have no clue if transactions can be split. If they can, I see no reason why you couldn't do it the way you suggested.

Going forward I suggest to have the Operating Agreement state that members are required to pay for ...expenses and that there is no reimbursement available through LLC (then expenses would go on pg2 of Schedule E). ...and of course transfer building to LLC.