Rental Partnership

[quicksam]

Have 2 clients that are going to start buying rental houses together. What would be the best entity for them to do this as.

Partnership ?
LLC?
Corporation?

[Jiggers]

Rental Partnership

Definitely not a corporation, C or S.

The entity could be an LLC taxed as a partnership.

An LLC is not an entity for tax purposes with the IRS.

[wv112]

I have a few of this set-up. All are set up as partnerships. The biggest problem has been they buy property and use their social security number instead of the partnership number. Make sure they understand that they have to use the partnership number on all paper work. Saves a lot of work later.

[JAinNC]

It does seem that partnerships can get themselves into a mess. Even though you advise the partners to use their fed id no. they receive 1099s issued to a partners SSN.

I try to make sure I put it where IRS wants to see it when they match it up.

[Matt Sova]

Llc

Actually the best situation is each property or a couple of properties in separate LLC's. And the LLC's are taxed as partnerships.

[Roland Slugg]

A simple but unpopular solution

In my opinion the best and by far the easiest and least expensive way to handle such joint ownership is simply to hold title as tenants in common, then each owner reports his share of each property's income and expenses on his own tax return ... on Schedule E. No LLCs ... no partnerships ... no partnership returns.

[Chief]

Rental Partnerships

Roland, I like your suggestion best.

[Golden Rocket]

State Tax Effect

Chief - good to see you posting. Hope you've been OK.

Sluggo's approach bears even more importance if you live in one of the states that do not impose a personal income tax. I believe there are seven such states, and all but one of them assess a corporate tax.

Thus, creating an LLC creates state taxation and filing, whereas division of the income on personal returns would not.

[Gretel]

The only reason one would want to have a LLC and not a simple partnership is liability protection. It's not about keeping it simple alone.

[Roland Slugg]

The liability illusion

The limited liability argument is a joke. Who are you gonna stiff? The guy who mows the lawn?

If it's debt liability you want to shield yourself from, an LLC won't help, as any major lender will insist on the LLC member(s) being on the loan. No liability protection there. If it's lawsuit protection you want, get a good insurance policy.

Some states impose taxes on LLC's. In California, for example, the minimum tax on each LLC is $800 per year. Why pay that?

[Joe Btfsplk]

LLC advantages

As Sluggo points out, an LLC won't help if the members guarantee the loan, but there are other reasons for forming an LLC. If you have numerous LLC members, it is easier to prepare one Form 1065 and give every member a K-1 than it would be to split all the income and expenses into each investor's share.

Also, an LLC or partnership agreement spells out the terms which could help in the case of future disputes or other unforseen events.

[Bees Knees]

The limited liability argument is a joke. Who are you gonna stiff? The guy who mows the lawn?

... In California, for example, the minimum tax on each LLC is $800 per year. Why pay that?

In some states like Minnesota, the only additional cost for LLC status is the one time $25 filing fee at formation (I believe that is still the amount). $25 is cheap and worth it if it scares off those who would try to file a frivolous lawsuit; such as the lawn mowing guy who ran over his own foot and decided to sue you because he was distracted by one of your tenants sunbathing herself on her deck.

I agree, however, that there is very little limited liability will do for you in an LLC or a corporation that liability insurance can't do better. If nothing else, it is simply a status symbol.

[Gretel]

Of course the banks are not stupid and neither a corporation nor a LLC replaces liability insurance. I don't think you can find any insurance, which will cover having your partner coming after you because you (not personally) did something stupid. Rack up vendor bills and then disappear. I do believe the LLC gives protection here.

I also do believe that, if you have several real estate ventures and have more than one LLC, it will give you some asset protection if a tenant sues you.

Roland, don't yell at me again. Your comments are appreciated, yelling is not.