Tax Classification for Multi-Member LLC for Co-Ownership of Property

[Elaine15]

My two siblings and I inherited a small commercial property from our mother.  The property has a triple net lease, so it requires no active management.  I have set up an LLC to hold the property.  Now I am completing the online request for an EIN, and the tax organization selection section says the following:

"An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. However, a joint undertaking merely to share expenses is not a partnership. For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants."

So it says that it is not a partnership, but I can't find any further information on the correct classification for this scenario.  Can anyone point me to instructions regarding the correct tax classification for a multi-member LLC whose only activity is ownership of a commercial property with lease income and no services provided to the tenant?  Thank you!

[MaryK4]

You can elect to be taxed as a Partnership or Corporation.  

[Elaine15]

Thank you, Mary.  However, classification as a partnership looks to contradict the irs.gov statement that our scenario is not a partnership.  Are there other IRS documents that explain this?

[MaryK4]

I am not sure why you do not think it qualifies as a partnership- are you not collecting rent or do you intend to sell it for less than market price?

You can  see the IRS guidance at LLC filing as a corporation or partnership and Limited liability company (LLC).  @Elaine15

[Elaine15]

We are collecting rent and intend to sell it for market price.  We don't provide services to the tenants because it is a triple net lease. My concern is the IRS statement quoted above, including "For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants."  

Does this statement about partnerships not apply within an LLC?

[Elaine15]

Wondering if anyone can help with clarifying this statement from IRS Publication 541. 

"An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. However, a joint undertaking merely to share expenses is not a partnership. For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants."

Does this not apply if we form an LLC?  In other words, if we form an LLC with three members who own and lease a commercial property but don't provide and services for the property, can it still be a partnership organization for tax purposes?  Thank you!

[PatriciaV]

Is the property held in the name of the LLC? If so, then the business is not a "co-ownership."

If the property is still titled to the three members of the LLC, you may consider transferring title to the LLC so you can file as a partnership. Consult a local tax attorney to discuss the advantages of filing as a partnership.

[Elaine15]

Yes, the property is held in the name of the LLC, so your first sentence answers my question.  Thank you for your help!