Partner Living in Partnership Property

[Rapid Robert]

so you can read the whole thing: https://www.thetaxadviser.com/issues/2012/may/hagy-banner-may2012.html

You forgot to add the most relevant part after what you quoted: "The only exceptions to the personal use allocation rules are where the partnership rents the property to a partner or related party for use as that person’s principal residence. The following discussion does not pertain to this type of rental arrangement. "

[Rapid Robert]

I partially agree with TaxGuyBill (and don't disagree with him, just seeking more info and checking my assumptions). I agree the "partnership agreement" must be consulted.

An EIN generated for a federal partnership will most likely require a return filing. Also, for California at least, a state LLC tax return would need to be tied to a federal filing of some kind. The question now is, for legal purposes, is this a SMLLC or MMLLC? Makes a big difference, and I think it is a matter of what is recorded at the state level, not what the taxpayer wishes it would be.

I initially asked about prior year returns for this very reason -- does this really need to be reported as a partnership? Like TaxGuyBill said, I could see this just being reported as expense and income sharing on individual Form 1040 Schedule E page 1. But, again, I see nothing wrong with actually treating it as partnership, and in a lot of ways, that would be more tax-accurate for all concerned.

I don't see "personal use" as a problem. If the tenant is paying FMR (fair market rental) and the partnership can document same, then it is business use. Maybe a self-rental, but what does that mean - non-passive treatment (have not bothered to look it up).

QBI deductions? Sec 1250 gain and Sec 121 exclusion? Non-passive losses? So many possibilities! ??

[TaxGuyBill]

Unfortunately, if the LLC owns the house, the brothers can't report it on page 1 of Schedule E. But you may want to check if the LLC actually does own it.

Just because they have a LLC and an EIN doesn't automatically mean it is something that needs to be filed on a tax return. I think I would ask more questions to the client about WHY they set up this situation. Is there really a profit motive? Or are the other two brothers just helping out their other brother?

Is the one brother paying Fair Market Rent?

[kdhill]

Why do you say this is even a Partnership and a Partnership return should be filed?

They formed an LLC and received a federal ID number for a partnership.

It certainly does not seem like a business. Is it owned by their multi-member LLC or something? Yes

My first thought it is merely co-owned by three brothers. The person living there would not report anything, and the two other brothers MIGHT report rental income on page 1 of Schedule E. Even that is debatable if that would be required.

Yes, it's debatable and not clear to me which is why I'm posting this question. So, maybe the other two brothers will treat this like they own 1/3 of a rental property, depreciate 1/3 each and report it on schedule E instead of reporting it on a partnership return? That does make the most sense.

[TaxGuyBill]

This partnership is brand new in 2019 and so has not generated any prior losses or profits.

Why do you say this is even a Partnership and a Partnership return should be filed? It certainly does not seem like a business. Is it owned by their multi-member LLC or something?

My first thought it is merely co-owned by three brothers. The person living there would not report anything, and the two other brothers MIGHT report rental income on page 1 of Schedule E. Even that is debatable if that would be required.

[kdhill]

Hi Robert, This partnership is brand new in 2019 and so has not generated any prior losses or profits. From what I can tell so far, it will generate net income because there is no mortgage. If there is $2,000 of net income for 2019, do they each pay tax on 1/3 of that? The personal use of the property really muddies things up. Most of the information that I've found pertains to property used part of the time for personal use and part of the time as a rental property. This is property used 100% of the time for personal use, but only by one of the partners.

[terryats]

This is from the tax adviser: The only exceptions to the personal use allocation rules are where the partnership rents the property to a partner or related party for use as that person’s principal residence. Here is the link, so you can read the whole thing: https://www.thetaxadviser.com/issues/2012/may/hagy-banner-may2012.html

[Rapid Robert]

I don't think there is anything wrong in principle with the partnership return, so I wouldn't try to eliminate it (I assume you are taking over an entity which filed in a previous year?). I haven't thought it through all the way and have not had such a client, but a few things come to mind.

• The partner-occupant has a self-rental situation. I would not advise anyone to put their S.O. instead of themselves (as partner) on an important business lease of real estate owned by the partnership. That's a legal question, not a tax question.
• It is a rental to a related party (but if paying FMR rate, not a problem)
• Is the partnership typically profitable or generating a loss? Can make certain issues less important than others.
• Is the partner-occupant losing the opportunity for a partial Sec 121 exclusion upon sale? (whatever the sale plans may be) Still generating Sec 1250 gain upon sale, right? (assuming price increase on property)

I'd start saying more things about Schedule A vs. Schedule E (for partner-occupant) but better stop now since I haven't researched any of it yet.

[kdhill]

I have a client that is a partnership that owns a residential property. The partners in the partnership are three brothers. One of the brothers is living in the property and paying FMV for the personal use of the property. I'm supposed to prepare a partnership tax return for the partnership. Since one of the partners is living there, I believe this becomes personal and not business use and so I don't even know if a partnership return should be filed at all. Would it change anything if the brother living in the house had his significant other on the lease instead of him? Thanks in advance.