WEBVTT NOTE This file was generated by Descript 00:00:08.209 --> 00:00:11.840 Speaker: Welcome to Real Estate is Taxing, where we talk about all things real estate 00:00:11.870 --> 00:00:16.869 tax and break down complex concepts into understandable, entertaining tax topics. 00:00:17.440 --> 00:00:21.259 My name is Natalie Kalady, I'm your host, and I am so excited 00:00:21.259 --> 00:00:22.670 that you've decided to join me. 00:00:23.748 --> 00:00:24.918 Microphone (Shure MV7): Hello everyone. 00:00:24.918 --> 00:00:27.318 And welcome to today's episode. 00:00:27.978 --> 00:00:31.278 So every single year, Without fail. 00:00:31.728 --> 00:00:34.728 There is at least one circumstance. 00:00:35.208 --> 00:00:38.328 Where I run across a partnership return. 00:00:38.748 --> 00:00:40.548 After the partnership deadline. 00:00:41.178 --> 00:00:43.038 That is there because they client. 00:00:43.428 --> 00:00:45.618 Accidentally created a partnership. 00:00:46.008 --> 00:00:48.798 They didn't realize they made this. 00:00:49.278 --> 00:00:50.508 And I know what you're thinking. 00:00:51.078 --> 00:00:51.768 Natalie. 00:00:52.068 --> 00:00:53.208 How does that happen? 00:00:53.268 --> 00:00:55.998 How does someone accidentally create an entire partnership? 00:00:56.388 --> 00:00:57.558 Well, we're going to talk about it. 00:00:58.338 --> 00:01:02.298 Let's first start with a few key facts about partnerships. 00:01:03.198 --> 00:01:06.738 So a partnership is filed on form 10 65. 00:01:07.368 --> 00:01:10.608 It is a completely different tax return from your 10 40, 00:01:10.608 --> 00:01:12.228 from your personal tax filing. 00:01:12.708 --> 00:01:18.168 And as a whole, it requires a lot more information then reporting the same 00:01:18.168 --> 00:01:20.628 activities would on your personal return. 00:01:21.258 --> 00:01:26.268 So if you have a partnership, if you're reporting a 10 65, You have to track 00:01:26.448 --> 00:01:29.538 more things, including a capital account. 00:01:29.748 --> 00:01:30.978 You have to track basis. 00:01:30.978 --> 00:01:32.538 You have to keep a balance sheet. 00:01:33.138 --> 00:01:35.328 And to really do all of that correctly. 00:01:35.808 --> 00:01:39.828 You pretty much need to have actual books and you need to have correct 00:01:39.888 --> 00:01:41.898 bookkeeping done in bookkeeping software. 00:01:42.318 --> 00:01:45.018 Not just sort of pulling together your receipts at your end. 00:01:45.348 --> 00:01:49.308 It's really hard to do that and have everything tie out correctly 00:01:49.308 --> 00:01:53.358 with all of the information needed on an entity tax return. 00:01:53.858 --> 00:01:57.368 So when you have a 10 65, a partnership tax return. 00:01:58.208 --> 00:02:00.368 Everything gets reported on that return. 00:02:00.458 --> 00:02:00.728 Right? 00:02:00.758 --> 00:02:02.108 So if you have a rental. 00:02:02.738 --> 00:02:06.308 The rental goes on the 10 65, all of the income and expenses. 00:02:06.308 --> 00:02:08.678 Everything goes on to that partnership tax return. 00:02:09.578 --> 00:02:11.468 And then once that return is finished. 00:02:12.008 --> 00:02:15.938 A K one is generated for each partner in the partnership. 00:02:16.298 --> 00:02:19.238 This is kind of like receiving a W2 from your job. 00:02:19.838 --> 00:02:22.298 It is each partner's recap. 00:02:22.328 --> 00:02:23.648 It is their summary. 00:02:24.398 --> 00:02:26.798 Of income or loss for the year. 00:02:27.458 --> 00:02:29.858 And any other kind of little details that matter. 00:02:29.858 --> 00:02:31.778 It will have a few other pieces of information. 00:02:32.348 --> 00:02:35.648 But so the partnership is where everything is reported and it calculates, 00:02:35.648 --> 00:02:38.138 and it figures out the end number. 00:02:38.918 --> 00:02:40.808 And then each partner receives a K one. 00:02:41.138 --> 00:02:43.088 That says, Hey, here's your share. 00:02:43.238 --> 00:02:46.118 This is your amount of income, or this is your amount of loss. 00:02:46.748 --> 00:02:48.338 So that K one. 00:02:48.908 --> 00:02:51.908 Is then entered on the personal tax return. 00:02:52.328 --> 00:02:54.998 On the 10 40 and that's where it's accounted for. 00:02:55.298 --> 00:02:59.048 So partnership itself, you don't pay tax on the partnership. 00:02:59.528 --> 00:03:00.938 It then creates a form. 00:03:01.478 --> 00:03:03.728 And you reported on your personal return and that's where 00:03:03.728 --> 00:03:06.278 any net tax impact happens. 00:03:06.908 --> 00:03:09.578 So here's where things get a little squirrely. 00:03:10.078 --> 00:03:12.598 Is a personal tax return, right? 00:03:12.598 --> 00:03:14.398 Your personal 10 40 tax return. 00:03:15.028 --> 00:03:16.588 Is due April 15th. 00:03:17.088 --> 00:03:18.138 A partnership. 00:03:18.798 --> 00:03:20.448 Is due March 15th. 00:03:21.018 --> 00:03:24.078 This makes sense, because to finish your personal return. 00:03:24.468 --> 00:03:27.438 You would need that K one from your partnership. 00:03:27.468 --> 00:03:29.358 So the partnership has to be done first. 00:03:30.078 --> 00:03:32.118 So what happens pretty frequently? 00:03:32.688 --> 00:03:35.658 Is if someone doesn't know where, like, if you don't realize that 00:03:35.658 --> 00:03:37.728 you had created a partnership. 00:03:38.418 --> 00:03:41.358 And it's now April tax. 00:03:41.358 --> 00:03:44.928 Repair's going to do your personal taxes that aren't due for a few more weeks. 00:03:45.318 --> 00:03:48.528 And when going through your documents, What they find. 00:03:49.038 --> 00:03:50.778 Is the setup of this LLC. 00:03:50.778 --> 00:03:52.248 And it turns out to be a partnership. 00:03:52.998 --> 00:03:55.278 Well, shoot, this is problematic. 00:03:55.728 --> 00:03:57.558 Because now we have a partnership. 00:03:58.428 --> 00:04:00.948 And we learned, it takes a lot more information. 00:04:00.948 --> 00:04:01.968 There's a lot more you have to do for it. 00:04:01.968 --> 00:04:03.828 We don't have any of that because we weren't expecting it. 00:04:04.398 --> 00:04:05.268 And it's late. 00:04:05.838 --> 00:04:07.488 So what can we do? 00:04:08.068 --> 00:04:11.638 So there are a few things we can do when we run into this situation, 00:04:11.998 --> 00:04:16.918 because I am telling you guys, it happens far more often than you think. 00:04:17.728 --> 00:04:19.528 Before we get into the solutions. 00:04:19.978 --> 00:04:23.248 Let's walk through some of the more common ways that this comes up. 00:04:23.278 --> 00:04:24.268 Like, how does this happen? 00:04:24.268 --> 00:04:26.368 How do people create an accidental partnership? 00:04:26.868 --> 00:04:27.828 At a starting point. 00:04:28.458 --> 00:04:29.478 An LLC. 00:04:29.958 --> 00:04:33.468 That has two or more members creates a partnership. 00:04:34.048 --> 00:04:38.158 So if you create an LLC with just your name, It's disregarded. 00:04:38.728 --> 00:04:39.538 To the IRS. 00:04:39.538 --> 00:04:40.438 It doesn't exist. 00:04:40.558 --> 00:04:41.878 Betterly it does nothing. 00:04:42.238 --> 00:04:43.588 It doesn't change your taxes at all. 00:04:43.588 --> 00:04:45.268 It doesn't change where you file at all. 00:04:45.628 --> 00:04:47.698 It just creates this legal separation. 00:04:48.268 --> 00:04:52.498 The rental or the business, whatever it was, gets reported, the exact same way 00:04:52.648 --> 00:04:54.718 as it would, if you did not have the LLC. 00:04:55.618 --> 00:04:57.238 Once you add a second person. 00:04:57.988 --> 00:05:02.488 It's a partnership and we have that whole separate return on form 10 65. 00:05:02.988 --> 00:05:07.428 So one of the most common ways we have an accidental second person. 00:05:08.118 --> 00:05:09.438 Is with a married couple. 00:05:10.008 --> 00:05:13.428 It is incredibly common for a married couple to just think like they're so 00:05:13.428 --> 00:05:14.778 used to doing everything together. 00:05:15.048 --> 00:05:17.598 So they set up the LLC and they just put both of their names on it. 00:05:17.808 --> 00:05:20.208 Like that seems like a totally reasonable thing to do. 00:05:20.658 --> 00:05:21.678 And it's not wrong. 00:05:22.248 --> 00:05:24.948 But most of the time we've created a partnership. 00:05:25.518 --> 00:05:29.418 So that I would say is one of the most common ways I see an 00:05:29.418 --> 00:05:31.008 accidental partnership come up. 00:05:31.548 --> 00:05:35.418 When it wasn't the intention right there, wasn't a goal of creating a partnership. 00:05:35.448 --> 00:05:37.458 They didn't know they were going to have another tax return. 00:05:37.788 --> 00:05:42.108 It was just a, did not realize that was the outcome of putting both 00:05:42.108 --> 00:05:43.398 of their names on the paperwork. 00:05:43.968 --> 00:05:48.618 So here is solution number one, if you've got an accidental partnership. 00:05:49.118 --> 00:05:52.448 So if this is the circumstance that applies to you. 00:05:52.868 --> 00:05:54.308 Or applies to your client, right? 00:05:54.308 --> 00:05:56.618 We have a taxpayer and spouse. 00:05:56.978 --> 00:05:58.988 Accidentally put both their names on the LLC. 00:05:58.988 --> 00:05:59.618 What do we do? 00:06:00.098 --> 00:06:01.358 Solution number one. 00:06:02.168 --> 00:06:04.298 In a community property state. 00:06:05.018 --> 00:06:10.388 If there's an LLC where the only members are the taxpayer and spouse. 00:06:11.018 --> 00:06:15.368 They can instead choose to be treated as disregarded. 00:06:15.868 --> 00:06:19.258 Because of those unique state laws and community property states. 00:06:19.708 --> 00:06:21.598 Where everything is sort of shared. 00:06:22.498 --> 00:06:24.328 The way this is handled. 00:06:24.778 --> 00:06:30.958 Is that in a community property state, only a taxpayer and spouse who are both 00:06:30.958 --> 00:06:35.188 members on an LLC can instead choose to have it treated as disregarded. 00:06:35.638 --> 00:06:37.348 So they can be viewed as one unit. 00:06:37.618 --> 00:06:40.468 So it's treated the same way as if there was only one owner. 00:06:40.948 --> 00:06:42.208 Of that LLC. 00:06:42.658 --> 00:06:44.698 And you would file it exactly the same way. 00:06:45.448 --> 00:06:50.368 What allows you to do this is rev proc 2002 dash 69. 00:06:50.878 --> 00:06:54.658 And what happens here is that instead of having a file that's 00:06:54.658 --> 00:06:56.668 separate partnership tax return. 00:06:57.538 --> 00:06:58.978 If we have an LLC. 00:06:59.478 --> 00:07:02.958 Only two members are the taxpayer and the spouse, and they're 00:07:02.958 --> 00:07:04.608 in a community property state. 00:07:04.788 --> 00:07:09.798 We can use this rev proc and file it as though it was a single member LLC. 00:07:09.798 --> 00:07:10.338 Instead. 00:07:10.818 --> 00:07:12.258 So that's your first solution. 00:07:12.708 --> 00:07:14.118 But this really only helps. 00:07:14.568 --> 00:07:17.208 For community property states, right? 00:07:17.778 --> 00:07:21.948 So let's talk about some of the other ways this happens that this 00:07:21.948 --> 00:07:24.768 comes up accidentally and other solutions and what we can do about it. 00:07:25.268 --> 00:07:28.178 The next most common accidental partnership. 00:07:28.178 --> 00:07:28.748 I see. 00:07:29.248 --> 00:07:32.758 Is the accidental partnership that can happen without an LLC. 00:07:33.568 --> 00:07:37.558 So two people who are just carrying on a trader business together, you're 00:07:37.558 --> 00:07:41.728 just running a business like a shared business together, an active business. 00:07:42.328 --> 00:07:44.098 That creates a partnership. 00:07:44.818 --> 00:07:50.308 So if you and a friend are renovating properties together, You're flipping 00:07:50.308 --> 00:07:53.698 houses together, buying it in both of your names, fixing it up, selling it, splitting 00:07:53.698 --> 00:07:55.228 the profit, doing it over and over. 00:07:55.768 --> 00:08:00.958 That can create a partnership and that would require a 10 65 tax return. 00:08:01.438 --> 00:08:03.778 So even though there wasn't an LLC. 00:08:04.468 --> 00:08:06.568 Even though there wasn't a multi-member LLC. 00:08:07.228 --> 00:08:10.078 Two people carrying on an active trader business together, it 00:08:10.078 --> 00:08:13.528 can create a partnership and require a partnership filing. 00:08:14.278 --> 00:08:16.558 But again, I have good news. 00:08:17.008 --> 00:08:18.868 And I have some potential solutions for you. 00:08:19.648 --> 00:08:21.538 First option for a solution. 00:08:21.778 --> 00:08:23.548 There's an exception to this. 00:08:24.088 --> 00:08:27.058 Specifically for rental properties. 00:08:27.808 --> 00:08:31.768 It is stated in the code that the mere co-ownership of a property. 00:08:32.458 --> 00:08:35.908 For the reason of it being held for lease or for rent. 00:08:36.418 --> 00:08:38.398 Does not create a partnership. 00:08:39.298 --> 00:08:41.548 Unless there are also services provided. 00:08:42.048 --> 00:08:43.578 So if you and a friend. 00:08:44.058 --> 00:08:46.878 Buy a property together that you're going to just rent out. 00:08:47.268 --> 00:08:49.908 And then each year you're going to each report your half 00:08:49.908 --> 00:08:51.408 on your personal tax return. 00:08:51.918 --> 00:08:52.758 That's totally. 00:08:52.758 --> 00:08:53.268 Okay. 00:08:53.988 --> 00:08:55.158 On a rental property. 00:08:55.158 --> 00:08:58.008 We've got this exclusion, you and someone else. 00:08:58.008 --> 00:09:01.068 So two people can own a property together. 00:09:01.308 --> 00:09:02.568 That's held for rent. 00:09:03.198 --> 00:09:04.938 And not create a partnership. 00:09:05.928 --> 00:09:10.758 If you and someone else buy a property together to renovate flip sell, and 00:09:10.758 --> 00:09:12.468 you're doing that over and over again. 00:09:13.098 --> 00:09:17.688 We might have a partnership, so active trader business partnership. 00:09:18.078 --> 00:09:20.538 If all you're doing is coning a rental together. 00:09:21.048 --> 00:09:22.518 We don't have a partnership. 00:09:22.908 --> 00:09:24.678 So that's the first piece of good news, right? 00:09:24.678 --> 00:09:26.298 That's the first solution is. 00:09:26.598 --> 00:09:30.468 If it's a rental, we don't have to worry about this same problem. 00:09:30.968 --> 00:09:32.588 The next option. 00:09:33.088 --> 00:09:33.928 Is if. 00:09:34.528 --> 00:09:37.258 We are operating an active trader business, right? 00:09:37.258 --> 00:09:40.288 Again, if two people are operating an active trader business together, 00:09:40.288 --> 00:09:41.878 it normally creates a partnership. 00:09:42.778 --> 00:09:43.498 Unless. 00:09:44.278 --> 00:09:48.328 It is a taxpayer and spouse who are operating this business together. 00:09:48.748 --> 00:09:52.348 And there are no other members of the business, right? 00:09:52.348 --> 00:09:54.178 It is only the taxpayer and spouse. 00:09:54.838 --> 00:09:58.558 So in this circumstance, we have a nother option here. 00:09:58.588 --> 00:10:00.568 We have something else we can do for a solution. 00:10:01.138 --> 00:10:04.468 So if it's only a taxpayer and spouse who are operating an active business 00:10:04.468 --> 00:10:10.198 together, they have the option of instead filing a qualified joint venture. 00:10:10.948 --> 00:10:14.308 So instead of having a file on form 10 65, instead of having 00:10:14.308 --> 00:10:15.868 to report like a partnership. 00:10:16.588 --> 00:10:19.888 They can report a qualified joint venture, which qualifies 00:10:19.888 --> 00:10:22.108 for any unincorporated business. 00:10:22.768 --> 00:10:25.378 And what happens in that case is that each spouse. 00:10:25.948 --> 00:10:27.988 Reports their own schedule C. 00:10:28.018 --> 00:10:30.958 So like if they're flipping houses, they each report their own schedule, 00:10:30.958 --> 00:10:33.388 see their own business on the return. 00:10:33.898 --> 00:10:35.938 And they each report half of everything. 00:10:36.778 --> 00:10:40.528 Both spouses do have to be participating in the business. 00:10:41.098 --> 00:10:45.598 And it does have to be split up between the two forms that way on the one personal 00:10:45.598 --> 00:10:47.638 return, they file a 10 40 together. 00:10:47.938 --> 00:10:49.348 But we have two different businesses. 00:10:49.348 --> 00:10:51.238 They each have pretty much half of the business. 00:10:51.838 --> 00:10:55.168 And they each get credit paid in toward social security for 00:10:55.378 --> 00:10:56.818 that self-employment income. 00:10:57.418 --> 00:10:58.918 So that's your second solution. 00:10:59.188 --> 00:10:59.518 Right? 00:10:59.548 --> 00:11:00.778 First solution is. 00:11:01.408 --> 00:11:04.138 If what is being operated together is a rental. 00:11:04.198 --> 00:11:05.428 We don't have a partnership. 00:11:05.938 --> 00:11:09.928 Second one is if the people operating an active business together. 00:11:10.318 --> 00:11:12.208 Our taxpayer and spouse. 00:11:12.688 --> 00:11:16.468 We have the option of instead reporting as a qualified joint venture. 00:11:16.968 --> 00:11:17.418 Okay. 00:11:18.078 --> 00:11:21.558 So now what you guys are thinking as well, Natalie, none of those things apply to me. 00:11:21.648 --> 00:11:21.918 Right? 00:11:21.918 --> 00:11:25.788 What if I just created an LLC with my spouse or with a friend we're 00:11:25.788 --> 00:11:27.528 not in a community property state. 00:11:27.918 --> 00:11:31.488 We bought some rentals, like, what is the solution here? 00:11:31.578 --> 00:11:32.748 Like what do I do? 00:11:32.748 --> 00:11:34.098 I didn't realize we did this. 00:11:34.458 --> 00:11:35.508 How do we fix it? 00:11:35.568 --> 00:11:37.428 Do we have to file this 10 65? 00:11:37.428 --> 00:11:38.478 What are my options? 00:11:39.348 --> 00:11:41.538 Now we're going to go into a series of questions. 00:11:42.198 --> 00:11:45.618 To see how to best fix this, to see what your options are. 00:11:46.368 --> 00:11:47.388 First question. 00:11:48.058 --> 00:11:50.698 So you and someone else created a two person, LLC. 00:11:50.698 --> 00:11:52.708 You put both of your names on the LLC. 00:11:53.248 --> 00:11:54.028 You're now learning. 00:11:54.028 --> 00:11:55.138 This is a partnership. 00:11:55.948 --> 00:11:56.668 What happens? 00:11:57.418 --> 00:11:58.648 Did that partnership? 00:11:59.148 --> 00:12:02.448 Actually own the rentals or did you. 00:12:03.318 --> 00:12:03.678 Right. 00:12:03.708 --> 00:12:07.128 So the first kind of get out of jail free card. 00:12:07.158 --> 00:12:11.898 I would be, if you and someone else created this LLC together, which would 00:12:11.898 --> 00:12:13.968 normally require a partnership tax return. 00:12:14.388 --> 00:12:17.178 You set it up because you're going to, you know, purchase 00:12:17.178 --> 00:12:18.828 rentals and run rentals together. 00:12:19.288 --> 00:12:21.028 But you never put the rentals in the LLC. 00:12:21.538 --> 00:12:21.838 Right. 00:12:21.868 --> 00:12:24.628 If that LLC doesn't actually own those properties. 00:12:25.228 --> 00:12:28.168 You do not have to file that partnership like that partnership 00:12:28.168 --> 00:12:29.458 is not an actual partnership. 00:12:29.458 --> 00:12:30.298 If it is not. 00:12:30.908 --> 00:12:31.928 Owning the assets. 00:12:31.928 --> 00:12:33.008 It is not functioning. 00:12:33.008 --> 00:12:34.808 It is not actually doing something. 00:12:35.208 --> 00:12:39.768 So your first option here for something to look at, to see if you really have 00:12:39.768 --> 00:12:41.988 to file this partnership tax return. 00:12:42.588 --> 00:12:47.568 Is that if you set up that multi-member LLC to operate these rentals in, were 00:12:47.568 --> 00:12:50.238 the rentals actually ever put in the LLC? 00:12:50.928 --> 00:12:54.348 A partnership shouldn't report assets and report the rental 00:12:54.348 --> 00:12:55.938 income and report rentals. 00:12:55.968 --> 00:12:57.078 It doesn't own. 00:12:57.468 --> 00:13:01.788 So if those were never moved into there, You've got an option to look at there. 00:13:01.848 --> 00:13:05.898 Talk about it with a tax professional, or if you're a tax professional, look over 00:13:05.898 --> 00:13:07.278 this and discuss it with your client. 00:13:07.778 --> 00:13:09.788 If that partnership doesn't actually own the rentals. 00:13:10.208 --> 00:13:11.078 We might be good. 00:13:11.288 --> 00:13:11.648 Right? 00:13:11.678 --> 00:13:13.928 You guys own these rentals, you co-owner rental. 00:13:13.928 --> 00:13:17.048 And like we learned earlier, More than one person. 00:13:17.378 --> 00:13:21.158 Co owning a property for the sake of rental or leasing it. 00:13:21.788 --> 00:13:23.558 Does not by default bank a partnership. 00:13:23.588 --> 00:13:24.458 So you might be good. 00:13:24.488 --> 00:13:26.288 That could be totally fine. 00:13:26.768 --> 00:13:29.678 Because you didn't actually take the second step of putting the 00:13:29.678 --> 00:13:32.918 properties, titling them into the LLC. 00:13:33.878 --> 00:13:35.018 Second question. 00:13:35.978 --> 00:13:41.468 Did the partnership have any income or deductions or credits during the year? 00:13:42.278 --> 00:13:46.358 So if you dive in to the code section on this and to CFR 00:13:46.418 --> 00:13:48.458 one dot 6 0 3, I think it is. 00:13:49.238 --> 00:13:50.678 It specifically states. 00:13:51.458 --> 00:13:52.928 That a partnership. 00:13:53.378 --> 00:13:57.068 That does not have any income or deductions or credits for the year 00:13:57.338 --> 00:13:59.978 does not have a requirement to file. 00:14:00.728 --> 00:14:02.468 This comes up pretty often as well. 00:14:02.948 --> 00:14:06.908 If you set up this LLC with yourself and your spouse or yourself and a friend, 00:14:06.908 --> 00:14:08.348 you're going to buy rentals together. 00:14:08.618 --> 00:14:10.088 You set it up in November. 00:14:10.568 --> 00:14:11.768 Nothing has happened. 00:14:11.828 --> 00:14:13.388 You haven't bought a property yet. 00:14:13.898 --> 00:14:16.328 You maybe bought a property. 00:14:16.688 --> 00:14:18.758 But it's not in services or rental yet. 00:14:18.788 --> 00:14:21.848 All of those costs before you're in service, just get added to the 00:14:21.848 --> 00:14:23.468 basis of the property typically. 00:14:23.768 --> 00:14:27.788 So there are a lot of circumstances where if you've created a partnership. 00:14:28.268 --> 00:14:31.748 But if it didn't actually have any income or expenses or reportable 00:14:31.748 --> 00:14:35.348 things for that year, You might not have a filing requirement. 00:14:35.768 --> 00:14:37.868 So that is kind of your second thing to check. 00:14:38.018 --> 00:14:40.598 First one, does this partnership actually on the properties? 00:14:40.958 --> 00:14:43.658 Second one, does it actually have income or expenses? 00:14:43.658 --> 00:14:44.588 Because if it doesn't. 00:14:45.068 --> 00:14:47.138 You might not need to file. 00:14:47.638 --> 00:14:51.418 if none of those come into play, we do actually have to file a partnership. 00:14:51.838 --> 00:14:52.618 But now it's late. 00:14:52.618 --> 00:14:54.088 We found out about it after the fact. 00:14:54.118 --> 00:14:54.838 Now, what do we do? 00:14:55.198 --> 00:14:59.368 Microphone (Shure MV7)-1: Well, If your partnership has less than 00:14:59.368 --> 00:15:03.568 10 people, 10 or less partners, and you meet a few other criteria. 00:15:04.138 --> 00:15:10.048 There is a rev proc that allows us to not incur that late file penalty. 00:15:10.738 --> 00:15:16.438 So this is late file relief under rev proc eight four dash three five. 00:15:17.068 --> 00:15:17.638 And. 00:15:18.328 --> 00:15:22.648 If your partnership is going to be filed after that deadline, if you 00:15:22.648 --> 00:15:27.538 meet these criteria, you can cite this rev proc you can reference back to 00:15:27.538 --> 00:15:29.218 this to have the penalties removed. 00:15:29.938 --> 00:15:32.488 Your partnership has to have 10 or fewer partners. 00:15:33.268 --> 00:15:36.868 Each partner has to either be an individual. 00:15:37.168 --> 00:15:39.088 Or the estate of a deceased partner. 00:15:39.588 --> 00:15:44.118 Each partner's items of income, deductions and credits have to be allocated in 00:15:44.118 --> 00:15:49.128 the same proportion as all other items of income, deductions and credits. 00:15:49.128 --> 00:15:51.318 So we can't have a bunch of special allocations. 00:15:51.818 --> 00:15:55.868 And the partnership has to have not elected to be subject to the 00:15:55.868 --> 00:16:00.968 consolidated audit procedures under IRC 6 2 2 1 and 6 2 3 3. 00:16:01.268 --> 00:16:04.838 So this relates to the centralized partnership audit regime. 00:16:05.288 --> 00:16:08.378 Which most partnership should probably elect out of. 00:16:08.408 --> 00:16:09.668 We'll talk about that in a sec. 00:16:10.208 --> 00:16:13.478 So as long as you're not opted in, you've elected out of 00:16:13.528 --> 00:16:14.698 the centralized partnership. 00:16:14.758 --> 00:16:15.208 Audigy. 00:16:15.838 --> 00:16:17.728 And this last one is key. 00:16:18.228 --> 00:16:19.248 Each partner. 00:16:19.518 --> 00:16:23.508 Reported his or her share of partnership income on his or her 00:16:23.538 --> 00:16:26.328 timely filed income tax return. 00:16:27.288 --> 00:16:28.578 So what this means. 00:16:29.238 --> 00:16:33.588 Is if you're a tax professional or if you're a client of your tax professional 00:16:33.618 --> 00:16:34.698 is looking through your stuff. 00:16:34.698 --> 00:16:38.088 It's April 10th and that's when they find this partnership. 00:16:38.508 --> 00:16:41.058 Your 10 40 isn't due till April 15th. 00:16:41.118 --> 00:16:43.278 It's not late yet, but your partnership is. 00:16:43.998 --> 00:16:46.368 As long as this late partnership. 00:16:46.878 --> 00:16:48.528 Met these other criteria. 00:16:48.918 --> 00:16:54.018 And you reported the correct income and expenses on each partner's 10 40. 00:16:54.048 --> 00:16:56.748 That was filed by that April 15th deadline. 00:16:57.198 --> 00:16:59.058 Or you had extensions in place. 00:16:59.688 --> 00:17:01.308 You've meet these criteria. 00:17:01.848 --> 00:17:06.888 So if a surprise partnership, an accidental partnership. 00:17:07.308 --> 00:17:10.068 Is discovered late, which happens all the time. 00:17:10.518 --> 00:17:14.328 There is a good chance you can use rev proc 84 dash 35 00:17:14.328 --> 00:17:16.818 to remove that late filing. 00:17:17.238 --> 00:17:19.008 If you meet these criteria. 00:17:19.878 --> 00:17:22.338 The last item that I will touch on. 00:17:22.908 --> 00:17:25.878 Is that C par centralized partnership audit regime. 00:17:26.498 --> 00:17:27.908 again, most things in tax. 00:17:28.358 --> 00:17:30.278 Based on your specific circumstance. 00:17:30.278 --> 00:17:31.988 So check with your tax professional. 00:17:32.858 --> 00:17:35.948 Or if you're a tax professional, you should know that this is going 00:17:35.948 --> 00:17:37.028 to be different for everyone. 00:17:37.598 --> 00:17:42.998 But what this allowed, a partnership to make changes and pay tax on those 00:17:42.998 --> 00:17:44.408 changes at the partnership level. 00:17:44.408 --> 00:17:46.388 If there was an error or change discovered. 00:17:46.898 --> 00:17:48.128 Because otherwise, right? 00:17:48.128 --> 00:17:49.898 Like if a partnership had. 00:17:50.408 --> 00:17:51.848 500 partners. 00:17:51.898 --> 00:17:52.888 Something is wrong. 00:17:52.888 --> 00:17:54.508 It needs to be changed in the partnership. 00:17:54.958 --> 00:17:58.108 Every one of those 500 partners gets a new K one. 00:17:58.168 --> 00:18:01.768 That means they also have to all change their personal tax returns and 00:18:01.768 --> 00:18:03.538 amend their personal returns also. 00:18:04.168 --> 00:18:05.728 So that's where this came into play. 00:18:06.298 --> 00:18:07.828 And when that happens. 00:18:08.188 --> 00:18:11.638 The change happens at the partnership level, the partnership pays the tax. 00:18:12.028 --> 00:18:15.808 There can be some downside to this, because if it was at the partnership 00:18:15.808 --> 00:18:19.558 level, based on the highest rate that they could put their, well, there 00:18:19.558 --> 00:18:22.678 might be partners whose tax rate personally would have been much lower. 00:18:23.008 --> 00:18:25.828 So effectively they're paying more tax than they would of. 00:18:26.278 --> 00:18:28.558 But as a, as a starting point. 00:18:29.278 --> 00:18:30.748 Most small partnerships. 00:18:31.168 --> 00:18:34.108 If you qualify to elect out of this treatment. 00:18:34.588 --> 00:18:36.868 There's a good chance that that's what you'll want to do. 00:18:37.228 --> 00:18:42.028 Because if you did not elect out of this, you can't use that late file relief. 00:18:42.658 --> 00:18:46.318 If you did not elect out of this, you can't amend your return. 00:18:46.888 --> 00:18:51.058 So if you find something wrong in a prior year partnership tax return. 00:18:51.448 --> 00:18:54.118 It can't just be amended the same as always. 00:18:54.118 --> 00:18:56.818 There's an entirely different form. 00:18:56.818 --> 00:19:01.388 There's a entirely different procedure for submitting for this change. 00:19:01.418 --> 00:19:03.338 And then it happens at the partnership level. 00:19:04.148 --> 00:19:05.618 So talk to your professional. 00:19:05.858 --> 00:19:08.678 See if that's what's best for you, but ask about this. 00:19:08.678 --> 00:19:10.208 If you have a partnership tax return. 00:19:10.838 --> 00:19:12.338 Ask your tax professional. 00:19:12.338 --> 00:19:13.898 If they elected out. 00:19:14.288 --> 00:19:16.688 Of this centralized partnership audit regime. 00:19:17.188 --> 00:19:19.198 So you are allowed to elect out. 00:19:19.228 --> 00:19:21.328 As long as a few criteria are met. 00:19:22.048 --> 00:19:25.018 The partnership has to have less than a hundred partners. 00:19:25.438 --> 00:19:28.018 And they have to all be eligible partners. 00:19:28.888 --> 00:19:31.738 An eligible partner includes an individual. 00:19:32.158 --> 00:19:35.698 A C Corp or a foreign entity that would be a C Corp. 00:19:35.728 --> 00:19:37.188 If it was domestic. 00:19:37.848 --> 00:19:39.228 An S corporation. 00:19:39.588 --> 00:19:42.498 Or the estates of deceased partners. 00:19:43.038 --> 00:19:46.218 If those are the only types of partners in the partnership 00:19:46.308 --> 00:19:47.628 and there's a hundred or less. 00:19:48.198 --> 00:19:51.348 You have the option to elect out of that whole treatment? 00:19:51.858 --> 00:19:55.038 And keep it so that you can still a men tax returns if you want. 00:19:55.638 --> 00:19:57.048 The partnership tax returns. 00:19:57.348 --> 00:20:01.608 And then if there's an issue or something found you would amend the partnership 00:20:01.608 --> 00:20:04.548 return and all the partners would amend their personal returns and pay 00:20:04.548 --> 00:20:07.248 their own difference in tax personally. 00:20:07.848 --> 00:20:09.948 At each person's separate tax rate. 00:20:10.448 --> 00:20:11.768 Ineligible partners. 00:20:12.158 --> 00:20:15.488 So if the partnership has any partners that are from 00:20:15.488 --> 00:20:17.978 this list, you can't opt out. 00:20:18.188 --> 00:20:21.578 You are subject to that centralized partnership audit regime. 00:20:22.118 --> 00:20:27.878 No matter what, if you have any of these type of partners, so ineligible partners. 00:20:28.538 --> 00:20:30.998 Are going to include other partnerships. 00:20:30.998 --> 00:20:32.278 He trusts. 00:20:32.788 --> 00:20:36.538 Foreign entities that would not be treated as a C Corp if they were domestic. 00:20:37.018 --> 00:20:41.998 Disregarded entities and states have individuals other than deceased. 00:20:42.688 --> 00:20:43.198 Partners. 00:20:43.318 --> 00:20:46.858 Oh, so why do I mention this as well? 00:20:46.908 --> 00:20:49.488 Because there are a lot of legal firms. 00:20:49.878 --> 00:20:54.048 That liked to set up elaborate partnership structures that include 00:20:54.048 --> 00:20:56.538 many of these ineligible partner types. 00:20:57.138 --> 00:21:00.048 So it is really common to have a partnership where one of the 00:21:00.048 --> 00:21:01.698 partners is another partnership. 00:21:01.728 --> 00:21:03.108 We have a tiered partnership. 00:21:03.618 --> 00:21:04.908 Or a disregarded entity. 00:21:04.908 --> 00:21:09.198 You have an LLC under a partnership or a trust under a partnership. 00:21:09.228 --> 00:21:10.458 This is very common. 00:21:10.848 --> 00:21:13.008 So I'm not saying it's right or wrong. 00:21:13.248 --> 00:21:18.498 I'm just saying if your attorney suggests that, or if this is part of your structure 00:21:18.498 --> 00:21:20.688 is a partnership with a partner that is. 00:21:21.078 --> 00:21:23.808 A partnership, a trust or a disregarded entity. 00:21:24.208 --> 00:21:28.438 Make sure you also understand the tax implications and the filing implications 00:21:28.498 --> 00:21:33.958 of not being able to elect out of that centralized partnership audit regime. 00:21:34.458 --> 00:21:40.878 So in conclusion, Accidental partnerships happen pretty often. 00:21:40.908 --> 00:21:42.228 They're pretty common. 00:21:42.498 --> 00:21:45.768 And there are several solutions for how you can fix them. 00:21:46.248 --> 00:21:47.868 And that might work for you. 00:21:48.228 --> 00:21:51.438 So to go through and recap these solutions real quick. 00:21:51.948 --> 00:21:53.448 The first option. 00:21:54.018 --> 00:21:56.778 Is that if any community property, state. 00:21:57.408 --> 00:22:02.418 And the only members of that multi-member LLC are the taxpayer and spouse. 00:22:03.048 --> 00:22:09.498 They have the option under rev proc 2002 69 to be treated as disregarded instead. 00:22:10.278 --> 00:22:16.518 The next solution is that if a partnership was created because two or more people 00:22:16.518 --> 00:22:21.378 are carrying on an active trader business together, your solutions here. 00:22:21.678 --> 00:22:25.968 R that if it was only to own a piece of property for rent, 00:22:26.478 --> 00:22:27.858 You do not have a partnership. 00:22:28.368 --> 00:22:32.598 Or if the only people operating that trader business are a taxpayer and 00:22:32.598 --> 00:22:38.088 spouse, then they have the option to instead file as a qualified joint venture. 00:22:38.448 --> 00:22:41.178 Where they each just report a business on the 10 40. 00:22:41.358 --> 00:22:43.218 They don't have to file a partnership return. 00:22:44.118 --> 00:22:46.908 Your last solutions are, if you do have to file. 00:22:47.268 --> 00:22:51.168 You do have a late 10 65, you found out about it after the fact. 00:22:51.588 --> 00:22:55.578 Look into rev proc 84 dash 35. 00:22:55.818 --> 00:23:01.278 To see if you qualify for late relief for submitting that 10 65 late. 00:23:01.848 --> 00:23:03.318 And kind of the bonus item. 00:23:04.098 --> 00:23:07.218 'cause you can't qualify for rev proc 84 35. 00:23:07.218 --> 00:23:07.878 If you can't. 00:23:08.328 --> 00:23:09.348 Elect out of this. 00:23:09.978 --> 00:23:14.118 Is take a look at that CPAR, that centralized partnership audit regime 00:23:14.538 --> 00:23:16.938 and see if you have elected out of it. 00:23:17.448 --> 00:23:21.078 Or not, or if you can, based on what type of partners do you have. 00:23:21.528 --> 00:23:24.678 So in short partnerships are in a bad thing. 00:23:24.798 --> 00:23:27.228 There's lots of reasons to intentionally create them. 00:23:27.468 --> 00:23:29.598 It just happens accidentally pretty often. 00:23:30.348 --> 00:23:34.818 If you have a partnership tax return, it is due by March 15th. 00:23:35.328 --> 00:23:37.818 And you can still file a six month extension. 00:23:38.328 --> 00:23:41.808 A partnership tax return does require quite a bit of more information. 00:23:41.808 --> 00:23:44.478 So you will probably need additional bookkeeping. 00:23:44.868 --> 00:23:47.778 And you're going to have to pay for a second tax return as well 00:23:47.778 --> 00:23:49.548 as separate 10 65 tax return. 00:23:49.908 --> 00:23:51.918 So think about this as well. 00:23:52.158 --> 00:23:56.928 When setting up your structure, or when talking to attorneys about your 00:23:56.958 --> 00:23:59.958 legal structure and how it's going to help you on the protection side. 00:24:00.678 --> 00:24:02.988 Because this can add up pretty quickly. 00:24:03.438 --> 00:24:04.488 Unintentionally. 00:24:04.938 --> 00:24:08.238 So I'll leave off today's episode with a quick story. 00:24:08.748 --> 00:24:11.418 Of something I saw this week on Facebook. 00:24:11.838 --> 00:24:15.648 So someone posted in a group, a real estate investor group, 00:24:15.648 --> 00:24:19.128 and they said, I just got the bill for having my taxes done. 00:24:19.128 --> 00:24:21.828 And it's going to be like $12,000. 00:24:21.828 --> 00:24:22.818 This is crazy. 00:24:22.818 --> 00:24:25.188 Like we have six rental properties. 00:24:25.188 --> 00:24:28.188 We have six LLC is like, this is madness. 00:24:28.188 --> 00:24:29.748 There's nothing too complicated about it. 00:24:30.078 --> 00:24:31.968 People are all over the place, right? 00:24:31.968 --> 00:24:33.108 Like that's ridiculous. 00:24:33.108 --> 00:24:34.038 You're getting ripped off. 00:24:34.338 --> 00:24:35.238 That's crazy. 00:24:35.298 --> 00:24:36.648 I can't believe that much. 00:24:37.248 --> 00:24:39.798 But we ask a few more questions. 00:24:40.368 --> 00:24:41.088 Guess what? 00:24:41.538 --> 00:24:46.878 They had set up every LLC in every single LLC held one rental. 00:24:47.508 --> 00:24:52.368 Every single LLC was an LLC owned by both the taxpayer and the spouse. 00:24:52.788 --> 00:24:56.988 So every single rental had its own partnership return. 00:24:57.798 --> 00:25:01.248 If you want to file your own partnership return on TurboTax. 00:25:01.308 --> 00:25:05.178 I think they charge like $1,200 for you to do it yourself. 00:25:05.718 --> 00:25:10.548 So if you're going to go to a tax firm with six partnerships, Paying 12 grand, 00:25:10.548 --> 00:25:15.078 which is, you know, two grand or return plus their personal, that's not out 00:25:15.078 --> 00:25:16.758 of the realm of a reasonable price. 00:25:17.268 --> 00:25:20.388 It's that these taxpayers didn't realize. 00:25:20.778 --> 00:25:24.468 They had accidentally created a half dozen partnerships. 00:25:24.968 --> 00:25:27.308 Additionally since they didn't know that's what happened. 00:25:28.088 --> 00:25:30.878 I'm guessing they also didn't have really good books and tracking 00:25:30.908 --> 00:25:32.228 to do a partnership either. 00:25:32.228 --> 00:25:36.548 So that tax firm probably had to put a fair amount of time into some bookkeeping 00:25:36.548 --> 00:25:38.528 to kind of pull together that information. 00:25:39.098 --> 00:25:42.668 So that's kind of, my morning story is accidental partnerships happen. 00:25:43.118 --> 00:25:44.378 Try to prevent it. 00:25:44.558 --> 00:25:49.088 If you have two or more people on an LLC, it is almost always 00:25:49.088 --> 00:25:50.498 going to create a partnership. 00:25:50.828 --> 00:25:54.368 Or if you are just operating an active business with another person. 00:25:54.818 --> 00:25:57.578 It is likely going to create a partnership. 00:25:58.088 --> 00:26:01.628 I hope some of these solutions are helpful for you. 00:26:02.108 --> 00:26:06.398 So as always, I am so thankful to you guys for listening. 00:26:06.848 --> 00:26:11.738 Please make sure if you found some value in this episode, or if you're sitting 00:26:11.738 --> 00:26:15.158 there and thinking of the person you accidentally created a partnership with, 00:26:15.428 --> 00:26:17.258 please share this episode with them. 00:26:17.678 --> 00:26:19.088 Share it like it. 00:26:19.178 --> 00:26:20.318 Give us a follow. 00:26:20.648 --> 00:26:25.568 And if you are a tax professional, please join us in the online Facebook group. 00:26:25.718 --> 00:26:29.498 If you're a real estate investor, I've got a separate group for real estate investors 00:26:29.828 --> 00:26:32.168 links to everything are in the show notes. 00:26:32.618 --> 00:26:36.518 Thanks so much for listening and I will talk to you guys next week.