When purchasing and obtaining rental real estate with the purpose of operating as a rental with other people, the issue of forming a business entity or not should be considered.
While forming a partnership does have it’s benefits, it is not necessarily a requirement. Federal Reg Sec. 301.7701-1(a)(2) holds “mere co-ownership of property that is maintained, kept in repair, and rented or leased does not constitute a separate entity for federal tax purposes (attached).” The deed specifying that each party owns a specific part of the property creates a tenancy in common.
If the partners do not decide to form a partnership, each should claim and report on their individual tax filings on Schedule E the amount of income, and also allowable expense deductions, based on the percentage of ownership they each possess reflected on the property deed.
Though a partnership or LLC is not required, there are benefits to forming a partnership/LLC to manage the rental property. The structure of a partnership will specify the exact share of the income, losses, and expenses each partner can claim and streamline the process eliminating the need for manual calculations. Also, with a partnership/LLC there will be more structure and certainty in the amounts reported and liability can be limited to just the partnership/LLC itself and not the individual members.
A partnership filing will not be required, though one may be beneficial. A follow up detailed analysis of the benefits of forming a partnership or LLC to manage the rental property should be considered when getting into rental real estate ventures with other individuals.