Yardley CPA Posted December 12, 2015 Report Share Posted December 12, 2015 Newer client. He and his wife were in a Pennsylvania partnership with one other individual (we'll call the individual, Joe). They have one rental property. A small amount of income and expenses are paid through the partnership for the property. All income is distributed and expenses paid equally to each partner (1/3 to Client, 1/3 to Client Wife, 1/3 to Joe.) All the partners equally contributed $100,000 each ($300,000 in total) to purchase the rental property. They would like to dissolve the partnership and continue renting the property in the same fashion outlined above. I assume they would both attach a Schedule C to their respective returns when that happens? I have very little experience with partnerships and would appreciate any input. I have found the forms needed to obtain a tax clearance certificate from Pennsylvania. It indicates that a distribution of assets schedule and a copy of the federal Schedule D must accompany the application of tax clearance. Since they would like to continue renting the property together after dissolving the partnership, what assets are being distributed? What would be on Schedule D? Thanks for your input! Appreciate anything you can share to help me. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted December 12, 2015 Report Share Posted December 12, 2015 If Joe will still be involved in this rental then it seems to me that you would still have a joint venture, and as such, the activity would be properly reported as a partnership on Form 1065. Only when the only parties involved are husband and wife, only then might it be possible for each to report on Sch C IF they each meet the requirements of being a qualified joint venture by each of them meeting the material participation test. Otherwise, even if only H & W are the property owners and one or both fail to meet material participation, then they are merely a joint venture, not a QJV, and again should be reporting on Form 1065, not Sch C or even Sch E. I could be wrong, but I think you are stuck with reporting as a partnership. 2 Quote Link to comment Share on other sites More sharing options...
Lee B Posted December 12, 2015 Report Share Posted December 12, 2015 Some years ago, one of my new clients was a commercial rental property, equally owned by 3 brothers. The previous accountant, a CPA, had been reporting the activity on each individual's Schedule E as a Joint Venture. The first year I reported that same way as a Joint Venture. The IRS rejected this approach and forced us to file as a Partnership Form 1065. Quote Link to comment Share on other sites More sharing options...
Yardley CPA Posted December 12, 2015 Author Report Share Posted December 12, 2015 My apologies. I meant to say the husband/wife would include a schedule E showing 2/3 ownership on their personal return and Joe would include a schedule E on his showing 1/3 ownership. Based on CBSLEE's post it sound like that can't be done? Thank-you again. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted December 12, 2015 Report Share Posted December 12, 2015 4 hours ago, jklcpa said: If Joe will still be involved in this rental then it seems to me that you would still have a joint venture, and as such, the activity would be properly reported as a partnership on Form 1065. Quote Link to comment Share on other sites More sharing options...
Yardley CPA Posted December 12, 2015 Author Report Share Posted December 12, 2015 Thanks, JKL...we will continue with the partnership. Quote Link to comment Share on other sites More sharing options...
Lion EA Posted December 13, 2015 Report Share Posted December 13, 2015 Don't have any rentals owned by more than one (or more than just H/W) right now, so haven't looked this up lately; but, I was taught that joint ownership of a rental property in personal names (not owned by an entity) does not mean a partnership. Although, the owners can choose to be a partnership. I do know the regs have penalty relief for partnerships with 10 or fewer (fewer than 10?) partners for not filing a 1065 as long as all is reported on the individual returns. If your clients prefer filing Schedules E, I'd go to the IRC and research. Also haven't dissolved a partnership with real property, so hope someone answers that question for you. Doesn't the partnership distribute assets at FMV to partners? (Or, book value?) Might partnership then show gain or loss that passes through on final K-1s? Partners receive assets at book value for depreciation? Just moving this up so someone who knows will jump in! 2 Quote Link to comment Share on other sites More sharing options...
Abby Normal Posted December 14, 2015 Report Share Posted December 14, 2015 How is the real estate titled? Quote Link to comment Share on other sites More sharing options...
Abby Normal Posted December 14, 2015 Report Share Posted December 14, 2015 On 12/13/2015, 8:04:13, Lion EA said: Might partnership then show gain or loss that passes through on final K-1s? No. Distributing assets to partners is not a taxable event. That's just for corporations. Quote Link to comment Share on other sites More sharing options...
Lion EA Posted December 14, 2015 Report Share Posted December 14, 2015 Thank you, Mr. Davis. Then is the adjusted cost basis in the hands of the partner receiving the asset the same as the book value to the corporation when it distributes the asset? Holding period for depreciation? Glad I don't have any partnerships holding real property now. I brush up by taking classes when I get something new in my practice. You and this board help me know what I need to study! 2 Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted December 14, 2015 Report Share Posted December 14, 2015 1 minute ago, Lion EA said: Thank you, Mr. Davis. Then is the adjusted cost basis in the hands of the partner receiving the asset the same as the book value to the corporation when it distributes the asset? Holding period for depreciation? Glad I don't have any partnerships holding real property now. I brush up by taking classes when I get something new in my practice. You and this board help me know what I need to study! How did a corporation get into this? Yardley said it was a partnership. While it might have been set up as a Joint Venture at the beginning, it was set up as a partnership, so I'm assuming the property is titled to that partnership. Thus they can not just convert it to any other form of entity without taking the proper legal steps to dissolve that partnership. 1 Quote Link to comment Share on other sites More sharing options...
Lion EA Posted December 14, 2015 Report Share Posted December 14, 2015 I was typing while eating a bowl of soup and didn't proofread. I meant Then is the adjusted cost basis in the hands of the partner receiving the asset the same as the book value to the partnership when it distributes the asset? Quote Link to comment Share on other sites More sharing options...
Abby Normal Posted December 14, 2015 Report Share Posted December 14, 2015 2 minutes ago, Lion EA said: Then is the adjusted cost basis in the hands of the partner receiving the asset the same as the book value to the partnership when it distributes the asset? Yes. Think of partnerships as a collection of sole-proprietors. They can pick up their marbles and go home, anytime. 1 Quote Link to comment Share on other sites More sharing options...
Lee B Posted December 14, 2015 Report Share Posted December 14, 2015 Assets in a Partnership can have outside basis and inside basis which are not the same, so the basis of asset in the hands of a partner can easily be different from the Partnership's Book Basis. 5 Quote Link to comment Share on other sites More sharing options...
jklcpa Posted December 14, 2015 Report Share Posted December 14, 2015 Thank you, KC. jmdavis mentioned "corporation" as it differs from partnership handling of property distributions. I was typing all of this immediately after KC answered and then I had a lengthy interruption: To answer Lion, partnership taxation is one of the most complex of entities, so I'll answer only in a general sense as it relates to property distributed in non-liquidation as opposed to retirement, death of a partner, etc. If property (other than money) is distributed to a partner from the partnership not in complete liquidation, then the partner's basis is the adjusted basis of the property in the partnership immediately prior to the distribution, but that adjusted basis can NOT exceed the partner's basis. From the discussion so far you probably have a good idea of areas you'd like to brush up on, so in that regard if you'd like to start a separate topic on partnership taxation or sources of good research materials or CPE on the subject, perhaps you should start a separate topic. I'd like to get this thread back to the OP's subject and try to keep it on point. Thanks. 2 Quote Link to comment Share on other sites More sharing options...
Lion EA Posted December 14, 2015 Report Share Posted December 14, 2015 I thought I was asking questions re Yardley's OP about what happens when the partners of a partnership want to dissolve the partnership and distribute all the assets and continue, perhaps, as individuals/sole proprietors/Schedule Es. If the properties, as the OP asks, are still rented or produce income for the former partners, well what? Do they appear on the individual Schedule Ds, he asked? At what "sales proceeds"? Judy says the cost basis would be the basis in the partnership, but not more than the former partner's basis. I was hoping to see what you experts tell Yardley about how the numbers flow and where to, with this dissolution but the "activity" of renting continues. I'll start a new topic if you think that's best, but I want to hear all your guidance to Yardley. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted December 14, 2015 Report Share Posted December 14, 2015 I said adjusted basis, not cost basis. Yardley's real issue is whether or not the rental can be reported directly on the 1040, and asked specifically about Sch C reporting. To me that indicates that the client intends that this is a business undertaking, and as such and with the unrelated partner, Joe, still continuing on as an owner, I feel that it's still still in fact a partnership. If that is the case, there would be no dissolution. Quote Link to comment Share on other sites More sharing options...
Lion EA Posted December 14, 2015 Report Share Posted December 14, 2015 On 12/12/2015, 10:43:20, Yardley CPA said: They would like to dissolve the partnership and continue renting the property in the same fashion outlined above. I assume they would both attach a Schedule C to their respective returns when that happens? So, the answer is that they cannot dissolve the partnership and continue renting the property? Does it make a difference if they want to use Schedules C or if Schedules E? Does it remain on a 1065 no matter that his clients want to dissolve? On 12/12/2015, 5:04:31, Yardley CPA said: the husband/wife would include a schedule E showing 2/3 ownership on their personal return and Joe would include a schedule E on his showing 1/3 ownership. Based on CBSLEE's post it sound like that can't be done? Can't be done? Partnership continues as long as the property is rented, or is a business? I'm just trying to understand what you're telling Yardley. Where does the Schedule D come in in his OP? Quote Link to comment Share on other sites More sharing options...
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