Investors & landlords

I've edited my original post to reflect the fact that property was transferred from Estate to Beneficiaries in 2020, and that the previously outlined tax plans for the family were but an assumption of what would be proper for tax year 2020.

Thats good. At least you don't have to deal with the $200 per month, per owner late filing fee. But do be aware that the partnership return is due March 15th every year. One day late, and the late filing penalty applies.

Re: your opinion that we have a partnership: Does this apply even while (for now) we split income/expenses strictly according to ownership interest as recorded in the county records?

Yes, and really it's more of a "strongly urged suggetion" and not an opinion per-se. Without a partnership, each partner runs a high risk of finding themselves in a tax hell in the future. I won't even get started on the other potential legal issues that could arise *outside* of taxes.

In the event that we do wish to split income/expenses differently, should we change the way we hold title to the property from tenancy in common to holding as a partnership?

I'm not a legal professional by any stretch of the imagination. Laws differ state to state, and sometimes even county to county. That's why you *need* to seek legal advice in your locale from a qualified, certified and licensed tax professional, as well as a real estate professional.  But consider this.

There are currently four owners of the property. Without a partnership that means each one of you has to report your share of income/expenses on page 1 of the SCH E of each of your individual tax returns. None of you have 100% ownership so a mistake on any one of the four SCH E's will throw things "out of balance" with the IRS, which could possibly result in all of your being audited. A partnership negates that possibility quite significantly.

Then there's the question of cooperation. What happens when one partner gets tired of dealing with it and stops paying their share of the expenses? What legal right does any other partner have to cut off their income from the property? Remember, in the eyes of the law two wrongs don't make a right.

Worse yet, what happens if one of the partner's is killed in an automobile accident tomorrow? More than likely his surviving widow will inherit their percentage of ownership. What if the window can't stand one of you? They can literally drive your rental business into the ground.

What if that parnter was divorced and his three kids inherit equal shares of his share of the property? Now you have 6 partners. What if one of those kids is underage and still a minor?

I can go on forever writing a multi-volume encyclopedia on all the "possibilities" here. This is why you folks need to set up a formal, legal partnership. It's not just to make taxes simpler. It will also make your lives simpler. With a partnership, the partnership agreement outlines, covers and deals with the ramifications of all possible scenarios that you can think of that my apply to "this" "specific" "partnership". To set up the partnership I suggest the use of a business lawyer that is well versed and hopefully experienced with partnerships. This will not cost you an arm and a leg either. Besides, any expenses incurred in the partnership setup process can be paid by the partnership anyway.

I'm urging you to "please" seek legal advice and get things set up not only for tax purposes, but also for the family as a whole. Money is the number one thing that can and usually will tear a family apart, and that split will be unrepairable, even at the funeral where regrets get you nothing.

With a partnership, only ONE IRS form 1065 partnership return is filed with the IRS each year. A K-1 is issued to each partner showing their share of the income and expenses. Each partner enters the K-1 data into their personal 1040 tax return, and they're done. Also makes things simpler with splitting the proceeds when the property is sold, not to mention that the partnership agreement already addresses what happens if a partner "wants out", or a partner can no longer participate for valid reasons (such as death, or long term hospitalization).