Husband/Wife Rental Partnership

[Jesse]

What if you continued to file on a schedule E and applied the rules for the partnership w/ 10 or few members? As long as H & W file on a timely basis would this avoid the penalty?

[joanmcq]

This doesn't make any sense??!!! Any RE joint venture was allowed on the E, not just husband/wife ones. Like I own half a rental house with my ex. I file half on my E, and he files half on his. How about siblings or unrelated people owning a rental jointly? That's always been on an E, in accordance with ownership percentages.

[S T]

Schedule E H/W

Jesse, I don't think what you are suggesting will work, isn't that only for the late file penalties for a form 1065.

Seems like what was posted, specifically states, that a h/w will either have to file a form 1065 on rental properties, or a Schedule C, and subject to SE tax.

I for one, as an owner with my husband of rental property do not want to pay SE tax!

Seems also, we have elections to deal with as well.

I have about 50 clients that are going to get placed into this situation, and I guess I need to know how to file pretty soon, as it seems it is effective for the 2007 tax year!

Bees, Armando, or someone else have any insight into this?

[JG EA]

I think this is just saying that "if" it is a qualified joint venture (like in a Sch C) then thus and so. Otherwise everything is the same as last year. My software does it the same as last year when you put joint into the program.

You're reading way too much into this.

[S T]

JG you might be right

let's take a look at what Bee's posted earlier on this thread

Schedule E instructions, page 3, are very clear that the H&W election is NOT allowed on Schedule E. You can only do it on Schedule C, and that it thus causes SE tax.

The reason is a Schedule E rental is not considered a trade or business activity. It is considered an investment activity for the production of income. The common example is a hotel, which although it is the rental of real estate (room rental), the added services (maid service, room service) make it a trade or business, subject to SE tax.

When Congress wrote the new law on H&W businesses, they wrote it in the context of a trade or business activity, not an investment activity for the production of income.

If h/w is not considered a trade or business activity for Schedule E, then the rules don;t apply, okay that makes sense, we are back to a Simple Schedule E form for the h/w that own a rental. Whew!! What a relief that will be.

The Schedule E instructions telling H&W to use Schedule C rather than Schedule E is written in the context of a joint business activity, not a joint investment activity.

Once again, rules designed to simplify things keep getting more complicated. One election allows H&W to elect out of partnership treatment, another allows all investment activities to elect out of partnership treatment, another allows community property H&W to elect out of partnership treatment, and so on and so on...

so it would seem the definition is "business" as opposed to "investment" activity.

All of my h/w schedule E forms are "INVESTMENT" so if the above is correct, I then file accordingly on Schedule E and not worry about form 1065 or elections.

More comments would be appreciated before the filing of these forms.


Sandy

[Jesse]

I'm continuing with the schedule E's.

[Bees Knees]

Do I have to get Armando back to argue partnership tax law?

I don't care what the instructions say...any partnership with 10 or fewer partners is exempt from the failure to file penalty....period....end of story.

That is still true under these new rules. That is still true even with the new rule that increases the $50 per partner penalty up to $85. (coming soon in an update near you...)

Plus, you are miss-reading the Schedule E and 1065 instructions. Both are talking about husband and wife businesses. If the Schedule E activity is not a business, no election to file as a joint venture is required. Investment activities have always had the ability to elect out of partnership treatment.

The new rules haven't changed that. Just continue to file Schedule E and don’t lose any sleep over it.

[winnie]

This is not making sense to me. If i have a partnership (usually LLC) with rental real estate, I am filing form 8825 with that to make clear that is rental real estate and that is NOT a business. That flows through to Sch. E on 1040 with no SE tax.

I think we may be misreading this because real estate rental without substantial personal services,.... is NOT a business.

Certainly I have h/w owners of rental real estate, plus there is the more complex h/w members of LLC that own real estate.

[les grans]

*Almost* all the problems just disappeared...

In my limited experience, both Congress and Treasury have spent decades *avoiding* the not-very-simple-at-all-now-is-it question of *exactly* when a rental activity becomes a trade or business. If you go to "your resources" I believe that you'll *not* find a definition of the criteria that make a rental real estate activity into a rental real estate trade or business activity.

In the context of the legislative changes to section 761, I think this ambiguity *still* exists, but it's been highlighted with a *very bright* spotlight now, and we're now revisiting an issue that has been considered many times - but never resolved - in the past. An issue that is *still* not resolved.

Clearly, it's only "trade or business" rental activities that are eligible for this *election* and - note also - it's only available to those in which both the husband and the wife are *each* material participants. If that doesn't get 99.44% of what we thought were problem cases to disappear, I'm very very surprised.

[And, just an aside to show that I'm paying attention, I believe that SE *losses* could easily arise in this context, too... Did anybody go down that road yet?]


Now, how about those *software* questions...! For starters: If your software won't let you put a "Joint" real estate rental activity on Schedule E, what's the *correct* solution?