Does these heir need to file a 2014 tax return?

[AZ-Tax]

5 heirs equally inherited a farm in mid 2014 via last parent death via a Warranty Deed/Life Estate naming all 5 heir. Estate tax return has yet to be filed but its my understanding the Farm has and will not be part of the Estate. No tax entity has been elected and from talking to one heir, has not even been discussed. Correct me if I am wrong, doesn't this default to a Partnership tax return for calendar tax year 2014?

[Burke]

Your scenario has two different issues. Farm is probably not an Estate asset for probate due to how it was titled. Whether an Estate tax return (706) needs to be filed depends the value of the overall estate, and on when this transfer was done, as there is a 3-yr lookback. Whether an income tax return for a partnership (1065) needs to be done with K-1's to the beneficiaries depends on whether the farm had income and expenses. The heirs own it as of the date of death. Due to the way it was titled, it would not flow through the estate, so no 1041 (at least involving that particular asset.)

[AZ-Tax]

The Farm did generate income BUT...............

The Farm is cash rented per month, paid twice a year. Tenant paid rent for 2nd half of 2014 in 4th quarter of 2014 BUT rent was paid to heirs and tenant issued a 1099-misc to each heir.

[Burke]

The Farm is cash rented per month, paid twice a year. Tenant paid rent for 2nd half of 2014 in 4th quarter of 2014 BUT rent was paid to heirs and tenant issued a 1099-misc to each heir.

I suppose he divided it 5 ways? Were there any expenses? What about real estate taxes, etc. I suppose in the absence of any partnership agreement (they really do need to have one), each can report 1/5 on their own Sche E's.

[AZ-Tax]

Exactly Burke

I suppose he divided it 5 ways? Were there any expenses? What about real estate taxes, etc. I suppose in the absence of any partnership agreement (they really do need to have one), each can report 1/5 on their own Sche E's.

Exactly Burke and no property taxes & no insurance were paid from Jan 1, 2014 thru date of the last parents death. I need to check but I don't think any landlord expenses were paid thru the same period. Can the IRS penalize these heirs for failure to file a Partnership return?

[Burke]

It would not matter, as far as the heirs are concerned, about anything prior to the parent's death. That income and expense would go on the final 1040 of the parent. It's only the income and expenses paid AFTER the date of death. Hopefully, the renter did not 1099 the entire year's rent payments to the children. If so, you will have to divide it and adjust on their returns.

The IRS cannot penalize them for not filing a partnership return if there is no formal partnership and no EIN was ever applied for. If they did get an EIN, then I would highly recommend a partnership return be filed as the IRS would be looking for one. Having a partnership agreement formally written would help them down the road, as all manner of things could happen which could be addressed in such an agreement. ESPECIALLY for a family-owned property. Most people in this situation would set up an LLC for the farm, and file a partnership return. Without a partnership agreement in place and such an entity, they are holding themselves out for all kinds of liabilities from creditors. And lawsuits involving themselves and possibly their minor children for whom they may be held responsible. What happens when one dies or wants out? Or sells his interest to an outside party? Etc, etc.