Investors & landlords

Who Must File
Domestic Partnerships
Except as provided below, every domestic
partnership must file Form 1065, unless it
neither receives income nor incurs any
expenditures treated as deductions or
credits for federal income tax purposes.

A qualifying syndicate, pool, joint venture,
or similar organization may elect under
section 761(a) not to be treated as a
partnership for federal income tax purposes
and will not be required to file Form 1065
except for the year of election. For details,
see section 761(a) and Regulations section
1.761-2.  especially look at 1.761-2(a)(2)(iii) 

the election must be attached to the first return under REG 1-761-2(b)(2)

under code section 761

(a)PartnershipFor purposes of this subtitle, the term “partnership” includes a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a corporation or a trust or estate. Under regulations the Secretary may, at the election of all the members of an unincorporated organization, exclude such organization from the application of all or part of this subchapter, if it is availed of—
(1)for investment purposes only and not for the active conduct of a business,

you also have to look at state laws.   they may require their own partnership return even if you aren't required to file for federal

under certain circumstances the conduct of real estate rental can be deemed a trade or business for purposes of section 199A  the 20% Qualified Business Income Deduction.      The calculation of QBI and therefore, the benefits of section 199A, are limited to taxpayers whose real estate activity rises to the level of a trade or business. 

By the way? The one special case situation where direct real estate investment automatically counts as a trade or business? When someone rents property to another trade or business they own at least 50 percent of.

For example, say you own an office building. Further, say you rent the office building to a corporation or partnership. If you own at least half that entity and it operates a trade or business, your rental property by law counts as a trade or business

what isn't determined if you request to be exempt as an investment partnership do you qualify for the 199A 

so I would say if you don't qualify for the 199A, your probably safe in not filing a partnership return after making the proper election.   

The Rental Real Estate Safe Harbor
The safe harbor says that if a rental investor maintains separate books and records to reflect income and expenses for each rental real estate enterprise and then also maintains contemporaneous records to document that the investor and other workers spend 250 or more hours a year on the rental, that counts as good enough.

The IRS wrote strict rules about the contemporaneous time records. The records need to document the “hours of all services performed,” describe the services, supply the dates, and then identify who performed the services. (Services can be performed by the investor or someone else he or she hires like a repair person or property manager.)

Another wrinkle here? Only certain hours “count” toward the 250 hours requirement: advertising, verifying tenant information, rent collection, repairs and maintenance, daily operations stuff, property management, purchasing, and then supervision of employees and independent contractors.

Unfortunately, much other real estate work doesn’t count: arranging financing; procuring property; studying and reviewing financial statements, business planning, constructing improvements, and then hours spent traveling to and from properties.

Note: If you want to use the safe harbor, you need to carefully read then reread the roughly 10-page document. You have a bunch of complicated rules to follow.

Sizing Up the Rental Real Estate Safe Harbor
So, what to make of the safe harbor? Does it clear the fog? Absolutely not.

Most tax CPAs I’ve talked with think the rental real estate safe harbor is problematic for small investors.

Why?

Well, when you look at the safe harbor rule and then ponder the way the Treasury and IRS hedge or hedged their language about the “Section 162 trade or business” standard in the final regulations and the tax form filing instructions, you get a distinct impression. That impression? It sure seems like having your real estate activity rise to the level of a “mere” Section 162 trade or business isn’t actually good enough.

To use quote a word from the final regulations, an investor’s activity needs to also be “considerable.” So this would be in addition to the investor showing regularity, continuity and a profit motive.

To quote another word from the draft IRS Publication 535 instructions, the IRS also wanted an investor’s activity to be “extensive.” So this would be in addition to the investor showing regularity, continuity and a profit motive. (In the final version of IRS 535 Publication, pointedly, the IRS removed the language requiring the investor’s activity to be “extensive.”)

In any case, in the end, small real estate investors who before the safe harbor notice seemed to qualify easily for Section 199A now don’t easily qualify