Partner Living in Partnership Property

[kdhill]

There is no partnership agreement.

[Lion]

Who is deciding how to split the profits? Loss? Capital?

[kdhill]

Well, they prepared a P & L and Balance Sheet for me. The equity section of the balance sheet clearly indicates that they're splitting profits & capital three ways.

[Lion]

They = all three signed off on the BS? Or, only one? Don't risk getting in the middle of a disagreement or all out fight.

[kdhill]

Good point.

[Rapid Robert]

Since this will be the initial partnership return, I'd advise them that they still have time to set up a written partnership agreement before the return is filed.

"It was just three brothers that inherited a house from their mother and one brother decided he wanted to live in it."

I completely understand why the other two brothers might want a more formal arrangement (such as a partnership). Not only does it allow for enhanced accounting related to the annual activity tax returns, but it also formalizes what might happen if/when one partner wants to be bought out by the partnership or sells their interest or leaves it to an heir. Or, if/when the partner-occupant moves out, for any number of reasons (you did mention an S.O., didn't you?) Depending on the value of the property, it might well be advised to consult an attorney. Or, if feeling competent, use an online service like LegalZoom or RocketLawyer.

It may well be feasible to set it up so the partner-occupant only shares in capital transaction, not profit or loss. Something more or less tax-neutral for that one. To repeat, paying tax on partnership profits, assuming no distributions of property, increases basis in the partnership, which will come in handy for tax purposes some day down the road.

From a practice management viewpoint, with whom have you engaged? Only the partnership, or the partner-occupant on his individual return, or both? There could be conflict of interest here, so watch for that and give notice or get waivers of same.

[TaxGuyBill]

It may well be feasible to set it up so the partner-occupant only shares in capital transaction, not profit or loss.

That makes sense. In my opinion, that is what could make this weird situation much more logical.

[Dude]

Is the title of the property in the name of the LLC now?

[kdhill]

Yes. The property is in the LLC's name.