Many couples form a married couple LLC to hold rental property and gain liability protection. After forming a married couple LLC, they often ask an important tax question: Does a married couple LLC require filing a partnership return?
Married Couple LLC: Do You Have to File a Partnership Return?
The answer depends largely on where they live and how they own the property.
Federal tax rules treat any unincorporated business with two owners as a partnership by default. When a husband and wife form a two-member LLC, the IRS normally requires a partnership return on Form 1065. Some exceptions exist, but most couples do not qualify for them.
Tax law allows “mere co-ownership” of real estate without creating a partnership. This rule applies only when individuals own property directly as tenants in common and simply maintain and rent it. Once spouses place the property inside a multi-member LLC, they move beyond co-ownership and create a separate tax entity. At that point, the partnership rules apply.
Qualified Joint Venture Election for Married Couples
Spouses sometimes ask about the qualified joint venture election. That option lets qualifying couples file a single Schedule E instead of a partnership return. Unfortunately, the election does not apply when spouses operate a rental through an LLC or any other state-law entity.
Married couples who live in community property states have more flexibility. In those nine states, married couples may treat an LLC-owned rental as a single disregarded entity and file one Schedule E. The other 41 states do not offer this option.
In those 41 states, the husband-and-wife LLC result stays clear: they must file a partnership return and issue Schedule K-1s.
Before forming an LLC, couples should weigh the liability protection against the added tax filing complexity. For more guidance on rental property tax strategies, see Why Serious Landlords Rely on the 1031 Exchange.
How We Can Help
Sterling Tax and Accounting is here to help your business with tax planning! Our comprehensive approach to tax planning helps reduce your overall tax liability and keep more money in your pocket. If all your accountant does is file your taxes, chances are they are making you pay more than your fair share of taxes.
Learn how to proactively save on taxes by scheduling a call with our tax planning specialists.
Our tax planning, accounting & business services help you stay on track. Sterling Tax & Accounting will work with you to optimize your business and minimize your taxes. We will work to provide you and your business with the tools and resources you need to build a solid tax and business foundation. We’re a trusted CPA Firm in Sarasota, Florida. We serve clients all over the US, and proactively work to minimize their taxes.
Welcome to the Sterling Standard of business! Want to learn more? Schedule a meeting with our tax planning team here.