If you’re involved in a real estate or investment venture with one or more other parties—perhaps co-owning property or collaborating on a business project–you may be at risk of being treated as a partnership by the IRS. Fortunately, in some cases, you can elect out of partnership status to avoid unwanted tax obligations.
You might think you’re simply sharing ownership, but the IRS may see it differently. Without proper precautions, your arrangement could be classified as a partnership for federal tax purposes, triggering filing requirements and potential penalties you weren’t expecting.
Why It Matters
Under IRS rules, many informal joint ventures—such as syndicates, pools, and unincorporated business arrangements—can be treated as partnerships, even without a legal partnership agreement.
This could mean:
- You would need to file Form 1065 annually.
- You would have to issue Schedule K-1s to all co-owners.
- You might lose eligibility for Section 1031 like-kind exchanges.
- You could incur potential IRS penalties of up to $255 a month per partner, limited to 12 months.
Fortunately, if your situation qualifies, you can elect out of partnership status and avoid these headaches.
How to Elect Out of Partnership Status
The IRS allows co-owners of certain investments—such as real estate or oil and gas ventures—to opt out by filing a “blank” Form 1065 with specific details and a formal election statement. This proactive step ensures each owner can independently report income and deductions on their return, often using Schedule E or Schedule F of Form 1040.
Take Action Now
Failing to file a partnership return when required can be costly. Speak with your tax advisor to determine if you qualify to elect out of partnership status and simplify your tax filing process.
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