Passive Partnerships, the right choice for you!

I have had several conversations this week with investors who are considering getting into a partnership but were confused as to the best options as far as structuring goes.

Option 1, do nothing as far as a legal structure goes and invest as two sole proprietors otherwise known as a general partnership.  Operating without any true asset protection is extremely risky and counting on insurance to cover all liabilities is a bit credulous.  The upside, simple accounting, the Schedule E on the 1040 is utilized and the step up in cost basis is automatic.  Loading up your Schedule E with too many properties can eventually draw scrutiny from the IRS. 

Option 2, each partner forms their own disregarded LLC to hold their percentage of ownership of the investment directly in the LLC or better yet a land trust.  There is now a presence of a corporate veil based on the state of formation, possibly charging order protection and indemnification of members, managers, and employees.  Keep in mind all states are not created equally when looking at these benefits in addition to the reverse pierce protection and business or chancery court.  The upside, simple accounting, the Schedule E on the 1040 is utilized and the step up in cost basis is automatic.  Loading up your Schedule E with too many properties can eventually draw scrutiny from the IRS. 

Option 3, a multi-member LLC or also known as a partnership LLC.  Again, their percentage of ownership of the investment can be held directly in the LLC or better yet a land trust.  There is now a presence of a corporate veil based on the state of formation, possibly charging order protection and indemnification of members, managers, and employees.  Keep in mind all states are not created equally when looking at these benefits in addition to the reverse pierce protection and business or chancery court.  In this structure there is an additional tax return required form 1065.  The good thing about this is with multiple properties all the minutia that would normally land on your 1040 Schedule E are now on a separate return that simply issues a clean K-1. PAY ATTENTION to this, a partnership LLC (or multi-member LLC) does NOT automatically receive a step up in cost basis!!!  A 754 election must be attached to the 1065 and filed by the deadline of April 15^th and or September 15^th with an extension.  The step up in cost basis is very important when considering generational wealth and eliminating capital gains on the increase in value which would be passed to your beneficiary.

It’s good to have choices but make sure to have both legal and tax guidance to cover all of the bases!

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DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.