Evaluating and Making a Choice of No Entity for Real Property Held for Investment or Lease

A tax co-tenancy is an investment structure for real estate that offers some tax advantages. It doesn’t require a separate tax return, allows for separate like-kind exchanges, and provides a step-up in basis when a co-tenant dies. This can be a good option for investors who want to simplify their taxes and have more flexibility in managing their investments. When it comes to taxes on gifts and estates, figuring out how much a minority share in a business or property is worth can be tricky. It’s not a clear-cut calculation, and different factors have to be considered. Some people think that forming a limited partnership can get you the biggest tax break, but courts have also allowed discounts for joint ownership. However, if you have survivorship rights under state law, those discounts might not help you as much. So, it’s important to be careful about how you own property if you want to get a tax discount. In order to be classified as a tax co-tenancy for federal tax purposes, the form of ownership under state law must be chosen carefully. For federal estate and gift taxes, the rights under state law control the valuation of transferred interests. However, for federal income tax purposes, it is more complicated and requires an independent inquiry to determine if the state law co-tenancy is also a tax co-tenancy or a tax partnership. A tax partnership is defined as a group of people carrying on a business or similar activity and sharing profits. If either of these conditions is not met, the classification of a state law co-tenancy as a co-tenancy for federal income tax purposes is preserved. Basically, when it comes to taxes, courts look at a bunch of different things to figure out if people are in a partnership. Even if they don’t meet all the specific requirements, if they act like they’re in a partnership, they might be considered one for tax purposes. If people share property just to make money from it going up in value, they probably won’t be seen as partners for taxes. But if they share property to rent it out, they most likely will be seen as partners for taxes, unless they can show that they’re not really running a business together. Simply owning property with someone else and renting it out doesn’t automatically make you a tax partnership. However, if you and the other owners also provide services to the tenants, like maintenance or utilities, then you might be considered a tax partnership. In a specific case, the IRS ruled that co-owners of an apartment building who hired a management company to handle everything, including providing services to the tenants, were not considered a tax partnership because the management company did not act on behalf of the co-owners and did not share its profits with them. So, just owning property together and renting it out doesn’t necessarily mean you’re in a tax partnership. If you and a friend want to buy property together to rent out, you can avoid being taxed as a business partnership by following certain rules. You can also protect your personal assets from lawsuits by setting up a special type of company called a single-member limited liability company (SMLLC). This allows you to get tax benefits and protect your money at the same time. If you and some other people want to buy property together, it can be complicated to do it in a way that doesn’t make you all have to pay business taxes. Some people think about setting up separate companies to own the property, but that can be hard to manage. Instead, it might be better to set up one company to own the property, and then make a special tax election so that you don’t have to pay business taxes. This might not always work, but it’s worth thinking about before you make a decision. Basically, Florida law limits what creditors can do if they want to get money from someone who owns a certain type of business. But if the business is set up a certain way, the creditors might be able to argue for more options to get their money. However, as of now, there hasn’t been a successful argument like this.

Also, there isn’t a clear rule allowing a certain type of election for just one business. The IRS has said they usually don’t allow it for certain types of businesses, and even if they do, the tax consequences might not be what the owner wants.

So, it’s important for business owners to really think about whether this election is the best choice for them and if it will give them the benefits they want. In simple terms, the article discusses how different types of business entities can affect the taxes and discounts for owning property. It also mentions that the IRS is planning to issue new guidance on this issue. This can make things complicated for taxpayers, so they should be careful. For this article, “state law co-tenancies” means owning property together, and it includes tenants-in-common and joint tenants with rights of survivorship. Tenancies-by-the-entirety have similar characteristics, but we won’t talk about them here. When it comes to estate tax, special rules may apply to co-tenancies with survivorship rights. The IRS has a two-step process for determining if a co-tenancy is taxed as a partnership, but it’s generally based on the same principles as before. Courts have made decisions about whether co-tenancies should be taxed as partnerships or not. These are court cases and laws about whether co-owners of property are considered a partnership for tax purposes. The rules can be different depending on the state and the type of business activities the co-owners are involved in. In Florida, limited liability companies have the same protections as corporations. The federal tax regulations also have rules about when co-owners are considered a partnership. If you own property for investment or lease, you usually can’t choose to be taxed as a partnership unless the property is only for investment and not for a business. Even if you meet the requirements, it’s unlikely that choosing to be taxed as a partnership would change anything for property owned under state law. To qualify, the entity must not be classified as a corporation and the owners must have certain rights and not be actively conducting business. The default classification for noncorporate entities is a partnership under the rules, and the owners can set up their agreements to have the necessary rights. This all applies to Florida laws as well. This passage is written by two lawyers who specialize in business and tax law. They are discussing concerns about the liability protection of SMLLCs and referencing specific tax laws and regulations. They both earned advanced law degrees from reputable universities and have experience in their field. The passage is submitted on behalf of the Tax Section of the Florida Bar.

Source: https://www.floridabar.org/the-florida-bar-journal/evaluating-and-making-a-choice-of-no-entity-for-real-property-held-for-investment-or-lease/