Investment interest or rental interest

[Gretel]

I have another twist with my refinance, and after first being sure that the part of the interest I will outline below, is investment interest, I am not so sure anymore.

My client (1) used the cash out portion of the mortgage to buy out the other member (2) (it's more complicated but I keep it simple for discussion purpose). The mortgage is in the name of the LLC. To preserve 1065 status a new member (3) bought into the LLC.

Now, since this is rental property, can the purchase of the membership interest from member 1 be construed as having bought an interest in the property? What else would he have bought? In the strictest sense I know he bought a membership interest and not a building but maybe with rental property it is the same?

Any thoughts?

[Golden Rocket]

Not a partnership at all

Gretel, the entity may not need to be reported as a "partnership" at all. Check the 1065 instruction under "Who Must File" with respect to owners who simply operate rental property.

I don't know that this buys you out of some of the reporting problems or not...but keep it in mind that if it works to everyone's advantage, a 1065 partnership return is NOT required.

[Gretel]

Thanks, Golden Rocket, this entity is filing form 1065 since over 10 years and is required to do so since it is a LLC.