Client & wife have a partnership which they now have only have a building that is rented. They want to disolve the partnership and have the rent from the building reported on their personal (Sch E). Can the building be carried to a Sch E and a final 1065 filed or will they have a tax conquence on the 1065. Haven't looked at the return as this is a new client. He called and wanted to know if this could be done.
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Good question.
No, you cannot make the election to be taxed as a qualified joint venture on Schedule E. The Schedule E instructions, page 3 say:
You can make the election on Schedule C to be taxed as a qualified joint venture for your rental activity. However, as mentioned in the instructions, any profit would thus be subject to SE tax.Husband-wife qualified joint venture. Do
not use Schedule E to report income and
expenses from a rental real estate business
that is a qualified joint venture conducted
by you and your spouse, if you file a joint return
for the tax year.
Generally, if you and your spouse
jointly own and operate a business and
share in the profits and losses, you are
taxed as a partnership. However, your busi-
ness is a qualified joint venture if you and
your spouse materially participate as the
only members of a jointly owned and oper-
ated business and you jointly elect to be
taxed as a qualified joint venture instead of
a partnership. For an explanation of “mate-
rial participation,” see the instructions for
Schedule C, line G, that begin on page C-2.
To make the election, each of you must
Report, on a separate Schedule C or C-EZ,
His or her share of income and deductions
in accordance with your respective inter-
ests in the venture. See the instructions for
Schedule C or C-EZ and Publication 527
For more details.
As long as you remain qualified, your
election cannot be revoked without IRS
consent.
Note. Rental income reported on Schedule
E is not taxable for self-employment tax
purposes. However, if you and your spouse
make the election described above, each of
you may also be subject to self-employ-
ment tax figured on Schedule SE.
Having quoted the instructions to you, I do not agree that a husband and wife cannot report a joint rental activity on Schedule E. The rules above apply to a business activity. The regulations are clear that you do not have to report a joint investment activity on Form 1065. TTB, page SB4-2 says:
That doesn’t just apply to a husband and wife rental activity. Any two or more persons who jointly own rental property can report their share of income and expenses on their individual Schedule E. The 1065 reporting requirement only applies when significant services are provided to the tenants, which generally means your average rental real estate activity can go on Schedule E.Co-ownership. Co-ownership of property maintained and rented
or leased is not a partnership unless the co-owners provide
services to the tenants.
As far as your question concerning the final 1065, there is no gain or loss when partnership assets are distributed to the partners in a complete liquidation, unless individual partners receive cash in excess of basis. If the rental building is the only asset, the individual partners simply pick up the partnership's adjusted basis in the building and continue the same depreciation schedule on Schedule E as was used on the 1065.Last edited by Bees Knees; 04-09-2008, 07:17 AM. -
I think if this is a LLC and not just a partnership they are required to file form 1065, rental or not. Is this correct?Comment
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Yes, if it is a 2 or more member LLC, they would have to file as a partnership.
I missed the LLC thing in the original post.Comment
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