Rental Property

[grandmabee]

I have 4 siblings who inherited a house and want to keep it and rent it out.   Can they just each file a Schedule E and report their 25%  income and expense?  Or do they have to set up an partnership?  TIA

[ILLMAS]

Both are options

[Lion EA]

Either way. Will one keep the spreadsheet or other records, collect rent, pay the bills (please open up a separate bank account), etc.? And, if one performs all the administrative duties, how will he be compensated? Will decisions be made by all four? What happens in a tie? What happens when one wants out? Or, the others want one out? I suggest an operating agreement even if they don't form a partnership. And, liability insurance.

[Lee B]

Clients that I used to have, 3 brothers owned some commercial property, 2 restaurant buildings.

Prior accountant, a CPA Firm filed as 1/3 each joint ventures, then I took over and followed the same joint venture pattern.

After 2 years, each brother received a letter from the IRS telling them that had to file as a Partnership and that if they didn't they would be subject

to the monthly PTS failure to file penalty. Needless to say we then filed a 1065.

 

[Medlin Software, Dennis]

My advice would be to treat as a business in all aspects.  Representation, insurance, succession (no sale without permission of others, buy out, set price, etc.), personal protection (corporate veil?), etc.  Sibs will be happy receiving checks, but not if something comes up requiring defense, or if one or more wants out.

In my case, there are three sibs (not me) who will inherit, and the current thought is to keep and rent.  There is management in place.  Problem is, the three sibs are in much different financial places in their lives, and common sense says the one in a tougher position will likely want to sell (and likely should) their interest, and only one of the other sibs can afford the buyout, and does not want to carry the other sib.  Having multiple sibs agree on things is not always smooth, but neither is deferring to one (without protection in place, such as corp responsibility).

[DANRVAN]

On 3/26/2021 at 2:39 PM, grandmabee said:

do they have to set up an partnership?

No they do not.  Co ownership and rental of real estate property does not meet the definition of a partnership per case law,  unless an attorney talks them into filling forming an LLC.

Your role is to inform them of the cost and tax filing requirements, the decision is theirs.

[DANRVAN]

On 3/26/2021 at 2:44 PM, Lion EA said:

Either way. Will one keep the spreadsheet or other records, collect rent, pay the bills (please open up a separate bank account), etc.? And, if one performs all the administrative duties, how will he be compensated? Will decisions be made by all four? What happens in a tie? What happens when one wants out? Or, the others want one out? I suggest an operating agreement even if they don't form a partnership. And, liability insurance.

Those are good points, but be careful to distinguish between management advice and legal advice.

 

[DANRVAN]

23 hours ago, cbslee said:

received a letter from the IRS telling them that had to file as a Partnership

That would depend on facts and circumstances, there are a list of factors looked at by case law.  

For instance the joint venture could have risen to the level of a trade or business providing services to to the tenants. 

In some cases joint ventures are preferred by real estate investors.  For instance they can 1031 out of their fractional shares where as their interest in the partnership are not eligible for 1031.

[Lee B]

14 minutes ago, DANRVAN said:

No they do not.  Co ownership and rental of real estate property does not meet the definition of a partnership per case law,  unless an attorney talks them into filling forming an LLC.

Your role is to inform them of the cost and tax filing requirements, the decision is theirs.

I guess I have a problem with ignoring the legal ramifications of a business/tax scenario which would potentially affect my client's business and personal financial well being.

If you have employee's in Oregon,  state law mandates the employer to maintain Worker's Compensation Insurance, which is not a tax issue.

My practice is mostly a monthly write up/payroll/tax all inclusive service where for my larger clients I am their unofficial controller/CFO

 once every month.meeting with them at a minimum. So if my client's heeded for a brick wall, I am going to say something

[DANRVAN]

2 minutes ago, cbslee said:

the legal ramifications of a business/tax scenario which would potentially affect my client's business and personal financial well being.

Agree, but was referring to the post here in regards to legal advice on operating agreements, forming LLC....etc.

 

[Lion EA]

I don't tell them what to put in an operating agreement. I tell them to work with a lawyer so they can have an operating agreement that meets CT state law. I don't think anyone mentioned an LLC except for your mention of an attorney and an LLC. Lawyers have a strong lobby in CT, so I suggest a legal advisor to every biz who isn't a sole proprietorship. I also suggest a biz develop a good relationship with a friendly, local banker. And, a broker or someone who can administer a retirement plan. And, an insurance agent(s) for health, liability, etc. And, a professional organization in their industry. But most importantly, to keep me in the loop!