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Formal general partnership Essentially, a formal general part-
nership is a tenancy in common that is required to file a partnership tax return (usually Form 1065), which is usually prepared by the partnership’s accoun- tant. Very often, establishing the part- nership also requires an attorney to pre- pare the partnership agreement. M & G’s accountant strongly urged them to have a formal partnership agreement if they chose to enter into any form of part- nership; in his experience, many prob- lems are avoided if they are anticipated, which is what the partnership agree- ment formalizes. The partnership is not required to pay
One of the most attractive attributes of commercial real estate is the ability to leverage (or encumber) the property.
income taxes, and each partner’s share of net rental income or loss on the property is taxed at ordinary income tax rates on his or her tax return. The general part- ners have unlimited liability for the part- nership’s acts, and they will often opt to insure against loss from those activities.
Formal limited partnership A formal limited partnership is another
type of tenancy in common required to Method
Limited Liability Company (LLC)
Sole Ownership/ Joint Ownership
Formal General Partnership
Formal Limited Partnership
Liability • Limited
• Unlimited but potentially mitigated by purchasing insurance
• Unlimited but potentially mitigated by purchasing insurance
• Limited partners’ liability is limited to initial equity capital
• General partners’ liability is unlimited but potentially mitigated by purchasing insurance
C-Corporation (regular corpora- tion) Ownership
• Limited
file a Form 1065 partnership tax return. However, while the limited partners’ lia- bility is generally restricted to the amount they contributed to the partnership, the general partners’ liability is unlimited. There must be at least one general part- ner, and, most often, it will be a corporate entity established for that sole purpose. If so, that corporate owner must file a Form 1120 tax return to report its share of the income from the property. Again, establishing the partnership
often requires the services of an attorney to prepare the partnership agreement. The partnership is not required to pay income taxes. Each partner’s share of net rental income or loss is taxed at ordinary income tax rates on his or her tax return.
C-Corporation (regular corporation) It is rare that a property is owned
by a corporation and leased out to oth- ers; doing so usually means losing tax advantages such as favorable capital gains treatment on the property at sale, the ability to deduct operating losses from the property and the ability to take tax-sheltered cash from the property. In
Costs/Taxation
• Legal fees for establishing LLC • Partnership tax returns if two or more owners
• Insurance policy (if purchased) • Taxed at the personal level
• Partnership fees • Insurance policy (if purchased) • Taxed at the personal level
• Partnership fees • Insurance policy to mitigate general partners’ liability (if purchased) • Taxed at the personal level
• Incorporation costs • Double-taxation at the corporate and personal levels
Trends magazine, November/December 2010
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