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How is a Partner paid / taxed - real estate rentals?
My father owns several rental properties and eventually wants to add me as a partner. Currently he is not setup as anything special like an LLC, SCORP, etc. He simply pays personal taxes on his earnings each year.
What is the best way he can legally pay me on a percentage of earnings from the rentals? I would help invest my own money into repairs, further purchases, help with advertising, and maintaining full occupancy.
Do I go 1099, W2, or is there another option?
1 Answer
- Anonymous10 years agoFavorite Answer
I think you'd flunk an audit if dad put up the money and all you did was claim half the income on your tax return. The IRS is against people who try to transfer income to their children without actually transferring the source of that income.
To make you a partner, you would need to have basis in the property. To be a 50% owner, you need 50% of the basis. Let's say the property is currently worth $200K. Is dad planning to gift you 1/2 of the value of the rental property *and* file a gift tax form with the IRS? If yes, this is possible. If you go the partnership route, you'd need to hire someone to prepare the 1065 and k-1s showing the rental income, the rental expenses, etc. The K-1 would then transfer your 1/2 to your tax return. (Because of basis issues, you need a professional to keep track of this for you, so depreciation is correct and the gain when you sell is calculated correctly.)
There would be no 1099-Misc, nor a W-2.