Partnership Activity

[MarkCTX]

Client is a partnership owning only land with "no activity." The plan is for another partnership to construct a building and together operate a nursing home. There is a mortgage, so interest and principal payments are being made plus real estate taxes are paid. One partner sold out to two of the others. Is this "activity"? Reg 1.6031(a) says a partnership need not file if there is no activity. The question becomes is this partnership required to file? Any other official guidance on this issue or practical experience?
Thanks for any help.

Mark

[Roland Slugg]

This subject has come up several times in recent days. There seems to be a widespread misunderstanding about the need for such "partnerships" to file an actual partnership return ... F-1065. Unless there is an actual business being operated by such partnerships, and the real estate is part of that business, then a partnership return need not ... and should not ... be filed. This is clearly stated in the instructions for F-1065. Joint ownership of property is not a partnership for tax purposes unless services are provided to the tenant(s).

So all those partnership returns that people have been filing, when all the owners do is collect rents and pay the mortgage, taxes, insurance and repairs ... and not even some of those in the case of a net lease ... are unnecessary and should not be filed. Instead, each co-owner should just report his pro-rata share of rents, taxes, interest, etc. on Schedule E, page 1, of his own income tax return.

[Gretel]

Roland

This subject has come up several times in recent days. There seems to be a widespread misunderstanding about the need for such "partnerships" to file an actual partnership return ... F-1065. Unless there is an actual business being operated by such partnerships, and the real estate is part of that business, then a partnership return need not ... and should not ... be filed. This is clearly stated in the instructions for F-1065. Joint ownership of property is not a partnership for tax purposes unless services are provided to the tenant(s).

So all those partnership returns that people have been filing, when all the owners do is collect rents and pay the mortgage, taxes, insurance and repairs ... and not even some of those in the case of a net lease ... are unnecessary and should not be filed. Instead, each co-owner should just report his pro-rata share of rents, taxes, interest, etc. on Schedule E, page 1, of his own income tax return.

I have a follow up question, Roland. What you said above applies to non-LLC's only, right? Besides of liability protection one reason for having a LLC and filing form 1065 could be separation of taxpayers. F.e. Husband/Wife each operate a Schedule C business. They also own commercial property that rents office space to each of them and others. My understanding is that they can rent to themselves if it is a separate legal entity. Otherwise they would have to follow the rules for self-rentals. What is your opinion on this?