Summary Of Rental Properties In Partnerships

By Jason Watson, CPA
Posted Sunday, May 25, 2025

Here is a summary of the upsides and downsides of a partnership entity owning rental properties for your memory jog-

• Partnerships allow for low audit rates and a mechanical demonstration of basis, and therefore the ability to deduct losses is presented with math.

• Partnerships report rental property activities on a K-1 which is then reported on each partner’s individual tax return. Each expense category such as management fees and repairs (the annoyingly visible ones) are kept far away from your individual tax return.

• Section 179 expensing is problematic since it is limited at the partnership level, and cannot create a loss and therefore offset W-2 income directly like reporting rental activity on your individual tax return might be able to do.

• Balance sheets in partnerships, or any other business entity which files a separate tax return, create havoc between recording assets correctly, tracking outside cash, and overall capital account reconciliations.

• Mixing various rental activities such as short-term, mid to long-term and vacation home properties will make tracking loss limitations and other calculations intensive.

• Material participation needs to be carefully tracked and partly planned.

Sidebar: You and your rental property co-owner can report a split of the rental property activities on each individual tax return. However, if you present like a business with continuous and regular involvement with a profit motive, the IRS could deem this a partnership arrangement and therefore require a partnership tax return (Form 1065) to be filed. Silly rabbit, can’t have it both ways.

Don’t forget to read our buying out your real estate partner section for some important considerations.