inherited

[gman]

Taxpayer and siblings equaly inherit lake lot that has been rented. They will continue to rent property, but would like to just divide the income and expense and not form any kind of entity. Any problem with just reported their shares on sch e?

[Burke]

No, they can split 4 ways. It's helpful if the same preparer does all four returns, or if not, at least they should be cautioned to claim the same income and expenses/depreciation each year. There should only be one bank account for all income and expenses. Whoever handles this should be the one to furnish the info to the other 3.

[gman]

property tax

I am thinking the property tax should be in all 4 names? Any suggestion on that? Taxpayer suggested estate, but if they already own it, I did not think that would work. They would like to keep it simple.

[Burke]

The property should be retitled in all 4 names of the owners if that is how it passed either by law or under the will. It should not remain in the Estate unless they wish to keep the estate open and keep filing returns for it (as well as local accountings). That can be expensive, and is unnecessary. The real estate taxes will be owed by the 4 owners, but the bill can be sent to one address. Would recommend a Post Office box which can be a location where all rents and expenses can be sent.

[taxea]

One sibling should be named as property manager of record for all issues including bank account and recordskeeping. This party can then issue monthly or yearly reports and payments to the others. The deed and property tax should be in all four names, likewise the mortgage if there is one.
I see no problem with not having a partnership since a rental is not considered a business. However, I strongly suggest a meeting of the four to document in writing specifics of the manager's responsibilities as well as terms of reporting and distributions to the other three. i.e.-will mgr have authority to make repairs, upgrades without consulting with others? will there be a limit on funds that mgr can disburse for repairs without consulting with others? will all have to agree on renter? basically all the things a normal property mgr would handle. Each should sign and be given a copy of the document.

[Gary2]

See a lawyer. Perhaps four lawyers. They're going to want more things than just property management, such as right of first refusal on a sale, prohibition against mortgaging an individual share, how to break ties, etc. They may well want to put each share into its own LLC, separate from the other shares (depending on the state and the annual LLC costs).

I'd worry that creating a single account might give the appearance of a partnership. Granted, the case familiar to me is different, because it's commercial property with a triple-net lease, so the only shared expense was the legal fees for the lease. But the tenant direct deposits the appropriate share of the monthly rent into separate accounts for each of the owners. If you put everything into a single account, how would the account be titled? Under just one individual? Or a four-way joint account with everyone having signature authority (so that any one could abscond with all of the funds)? Wouldn't you have to worry about each person taking the same draw each month? And so on.

[gman]

partnership or trust

What is your thoughts about forming a partnership or trust. I just found out they have a CD that will earn interest as well. Nothing substantial.

[Gary2]

What is your thoughts about forming a partnership or trust. I just found out they have a CD that will earn interest as well. Nothing substantial.

My initial concern is that if they form a partnership or trust, and if there's ever friction to cause them to want to go their separate ways, they won't be able to get 1031 treatment.

[Roland Slugg]

This is now simply jointly owned property ... probably as tenants in common. Each sibling/owner should report his share of the annual rental income and expenses on his own tax return (on Schedule E), along with his respective share of the depreciation. There is no need to form a partnership or file a partnership return, in fact the filing of such a return would be improper.

[Bees Knees]

in fact the filing of such a return would be improper.

I agree there is no need to file as a partnership, but filing as a partnership is certainly not improper.

A partnership does not have to be a trade or business. It can also include a financial operation where profits are divided, such as investment clubs and other investing arrangements. A rental activity may not be a trade or business, but it certainly is a financial operation, and it appears the 4 family members are dividing the profits from that financial arrangement.

In reality, with 4 family members each owning a share, property tax issues, and LLC issues to limit liability, it may very well be advisable to form an LLC and file as a partnership. That way there would be consistency in reporting income, deductions, depreciation, and credits between each family member, and it would make life easier on the accountant when the property is eventually sold and someone has to calculate depreciation recapture and other gains.

[Burke]

I like the idea of one LLC with 4 members in this case, for all the reasons Gary mentions plus the tax aspects that Bees Knees brought up. Things may be just dandy between the owners right now, but there may be spouses, children, etc who would inherit their share in the case of one's death, not to mention disability with POA's to who knows who. And then things can get dicey. An LLC/membership agreement can have all that sorted out up front. And is well worth the peace of mind, not to mention the liability aspect.

[Gary2]

I like the idea of one LLC with 4 members in this case, for all the reasons Gary mentions plus the tax aspects that Bees Knees brought up. Things may be just dandy between the owners right now, but there may be spouses, children, etc who would inherit their share in the case of one's death, not to mention disability with POA's to who knows who. And then things can get dicey. An LLC/membership agreement can have all that sorted out up front. And is well worth the peace of mind, not to mention the liability aspect.

It wasn't my intent to propose an LLC with 4 members. In my personal case, I own a share of property held in my SMLLC, as do each of my relatives, while the one non-relative share is in a MMLLC, I believe. In our case, the difference between the annual state fees for several SMLLCs versus one MMLLC is negligible, but in some states (CA comes to mind), they could be significant.

I had a very specific reason for insisting on this form of ownership. If I ever get tired of dealing with the co-owners, I can put my share through a 1031 exchange for other rental property. You can't do that with partnership ownership.

[Burke]

Yes, I understood that. An LLC with 4 members was my own opinion, but for the same reasons. It would depend on what the current owners wish to do, and the 1031 aspect regarding type of ownership should be addressed with them, so they have a full understanding of what type of entity would best suit.

[Roland Slugg]

I agree there is no need to file as a partnership, but filing as a partnership is certainly not improper.

Bees, if you're going to quote someone's post, you should not take half a sentence, out of context, as that will often change the meaning.

What I actually wrote was:

There is no need to form a partnership or file a partnership return, in fact the filing of such a return would be improper.

In the context of my entire post I believe it was clear that this meant that unless an actual partnership exists, it is improper to file a partnership return, and that the mere co-ownership of real estate does not constitute a partnership. The IRS makes this clear in its own instructions ...

Mere co-ownership of property that is maintained and leased or rented is not a partnership. However, if the co-owners provide services to the tenants, a partnership exists.

If the owners of the just-inherited rental property want to formalize things via the signing of a written partnership agreement, that is certainly all right, of course, and many co-owners would want to do this. But even if they do, they still won't have to file a partnership return ... and should not file one.

Tax prep software ... at least the one I use ... can handle this by allowing the input of 100% of a property's income and expenses, along with the T/P's ownership percentage. The software will then apply that ownership percentage to everything and enter his pro-rata share of all income and expenses (except depreciation) onto Schedule E.

[Bees Knees]

What I actually wrote was:In the context of my entire post I believe it was clear that this meant that unless an actual partnership exists, it is improper to file a partnership return, and that the mere co-ownership of real estate does not constitute a partnership.

Sorry, but I do not believe that was clear in your original post. I took it to mean you can't file a partnership return for investment activities such as rental properties.

If the owners of the just-inherited rental property want to formalize things via the signing of a written partnership agreement, that is certainly all right, of course, and many co-owners would want to do this. But even if they do, they still won't have to file a partnership return ... and should not file one.

Well, again, recognizing the fact that they are not required to file as a partnership, I again disagree with the issue that they have to formalize a partnership with a written agreement, or that they should not file as a partnership.

A partnership can be an oral agreement. No paperwork is required, although a written agreement is advisable if they do want to form a partnership.

And the idea that they should not file as a partnership absent a formal written agreement is also a matter of opinion. Nothing in IRS instructions claim that a rental activity cannot file as a partnership. The instructions simply state that one is not required. But even though one is not required, an informal rental activity CAN file a partnership return absent a formal written agreement. All they need to do is ask IRS for an EIN. The advantage of doing this is it makes income and deduction reporting consistent between the co-owners, and provides an easier way to calculate gain and depreciation recapture when the property is eventually sold.

All of the work needed to file a 1065 is already being done when someone has to go through the checkbook and add up all income, categorize all expenses, figure depreciation, etc. so that the correct amounts can be divided up and reported by the co-owners. The filing of a 1065 is simple once all of that other work is done. And like I said before, the 1065 forces all the co-owners to report these items consistent with each other, without having to worry about one of the co-owners going off and making up facts about the rental activity on his/her own.