Two couples buy a rental; partnership?

[Ross]

I have a married couple who bought a rental w/ another couple. I suggested they form a partnership and each report the K1 activity on their 1040s. However, they want to know if it is acceptable to each pay 50% of the expenses and claim 50% of the revenue directly on Schedule E. Is this acceptable? TIA.

[Lion]

Yes. As long as they each paid 50% of the expenses and received 50% of the revenue.

[Burke]

Fine, as long as they remain friendly. But I think it is a dumb idea. Partnership agreement & LLC would take care of a lot of contingencies, i.e, death of one of the owners, other partners' first refusal on a buyout, divorce, lawsuits against one of the parties, liabilities, etc, etc

[mactoolsix]

I have a married couple who bought a rental w/ another couple. I suggested they form a partnership and each report the K1 activity on their 1040s. However, they want to know if it is acceptable to each pay 50% of the expenses and claim 50% of the revenue directly on Schedule E. Is this acceptable? TIA.

We have several clients that report this way. Has never been a problem as long as they do quality documentation.


The first step in making your friends an enemy: Form a partnership without a complete partnership agreement.

[Gary2]

I certainly agree that having a written agreement between the co-owners is a wise move. However, the mere existence of such an agreement doesn't necessarily create a tax partnership, e.g. if it formalizes the obligation to pay expenses based on ownership percentage or just creates a right of first refusal.

Putting it into an LLC will create a tax partnership unless they're multiple SMLLCs (or spousal LLCs in community property states). Other than the overhead of maintaining individual SMLLCs, there's nothing preventing a property from being owned by multiple SMLLCs as tenants in common.

[taxea]

the IRS doesn't look at a rental as a business so a partnership is not needed however, a detailed written agreement among the parties is a must.

[Roland Slugg]

I concur with everything others have suggested above. It would be wise to have a written "partnership" agreement, but it is not necessary to file a partnership tax return. In fact it would be improper to do so. See page 2 of the instructions for F-1065, and read the third paragraph under "Definitions -- Partnership." This rental will be "jointly owned property."

I would also advise the owners to open and maintain a separate, dedicated bank account for depositing all the rent received and for paying all the bills.