Do I Want My Rental to be a Qualified Joint Venture?

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essbeer
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Do I Want My Rental to be a Qualified Joint Venture?

Post by essbeer »

My wife and I are about to put our first rental on the market. I know we have the option to put the property into an LLC. Still debating whether we really need one, but it seems cheap and doesn't appear to add much complication. I notice that we apparently also have the option of treating the LLC as a Qualified Joint Venture since we are in a community property state (Texas.) It looks like we just each file a Schedule C to make the election. But I'm not sure what would go on the Schedule C as I think the rental income would still go on a Schedule E, right? Is there some benefit to having a QJV on a rental property? Thanks
skepticalobserver
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Re: Do I Want My Rental to be a Qualified Joint Venture?

Post by skepticalobserver »

I think what you’re looking for is to distinguish between characterizing a business enterprise as a security or a joint venture. Very broadly speaking a JV is a business enterprise wherein the parties have invested money, expect a profit and have co-equal say in the management of the enterprise. Again broadly speaking, a security is the investment in a business enterprise, there’s an expectation of profit, however management of the enterprise is not shared by the investors but rather management is centralized in one party—only one decider. The number of investors is not relevant as to whether or not you’ve got a security—only need two or more people.

With a security federal and state securities regulations must be followed. Often this can be a costly undertaking.

The dispositive case on the subject, SEC v. Howey, https://en.wikipedia.org/wiki/SEC_v._W._J._Howey_Co.
Last edited by skepticalobserver on Fri Aug 23, 2019 5:25 pm, edited 1 time in total.
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Blueskies123
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Re: Do I Want My Rental to be a Qualified Joint Venture?

Post by Blueskies123 »

essbeer wrote: Fri Aug 23, 2019 3:22 pm My wife and I are about to put our first rental on the market. I know we have the option to put the property into an LLC. Still debating whether we really need one, but it seems cheap and doesn't appear to add much complication. I notice that we apparently also have the option of treating the LLC as a Qualified Joint Venture since we are in a community property state (Texas.) It looks like we just each file a Schedule C to make the election. But I'm not sure what would go on the Schedule C as I think the rental income would still go on a Schedule E, right? Is there some benefit to having a QJV on a rental property? Thanks
Definitely put it in an LLC but why not each of you owns 50% of the stock. Either way you will have to personally guarantee any debt.
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essbeer
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Re: Do I Want My Rental to be a Qualified Joint Venture?

Post by essbeer »

skepticalobserver wrote: Fri Aug 23, 2019 5:21 pm I think what you’re looking for is to distinguish between characterizing a business enterprise as a security or a joint venture. Very broadly speaking a JV is a business enterprise wherein the parties have invested money, expect a profit and have co-equal say in the management of the enterprise. Again broadly speaking, a security is the investment in a business enterprise, there’s an expectation of profit, however management of the enterprise is not shared by the investors but rather management is centralized in one party—only one decider. The number of investors is not relevant as to whether or not you’ve got a security—only need two or more people.
I think I am possibly not understanding how to apply this information. In what I read, the QVJ was touted as a way of simplifying paperwork by allowing the LLC to avoid filing and dealing with K-1s. Since I have some experience with trusts I don't find the paperwork particularly onerous. Are you saying there is some sort of protective benefit to declining being treated as a partnership in our situation?
Blueskies123 wrote: Fri Aug 23, 2019 5:24 pm Definitely put it in an LLC but why not each of you owns 50% of the stock. Either way you will have to personally guarantee any debt.
We actually have no loans on the property. My only hesitation about the LLC is that is seems like my umbrella insurance will be less helpful in protecting our property if a lawsuit exceeds the limits of the rental dwelling policy. I can get $5M pretty cheap, though I know the insurance doesn't cover all possible scenarios we could run into.
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essbeer
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Re: Do I Want My Rental to be a Qualified Joint Venture?

Post by essbeer »

Edit: Never mind I've found contradictory information, so I'm not sure about that answer anymore.
Spirit Rider
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Re: Do I Want My Rental to be a Qualified Joint Venture?

Post by Spirit Rider »

essbeer wrote: Fri Aug 23, 2019 3:22 pm My wife and I are about to put our first rental on the market. I know we have the option to put the property into an LLC. Still debating whether we really need one, but it seems cheap and doesn't appear to add much complication. I notice that we apparently also have the option of treating the LLC as a Qualified Joint Venture since we are in a community property state (Texas.) It looks like we just each file a Schedule C to make the election. But I'm not sure what would go on the Schedule C as I think the rental income would still go on a Schedule E, right? Is there some benefit to having a QJV on a rental property?
A qualified joint venture (QJV) can either apply to rental income that files on two Schedule Es or a self-employed business that files on two Schedule Cs. The election of QJV status has nothing to do with the Schedule C/E status of the underlying rental income. In other words, electing QJV for rental income does NOT magically make it being engaged in a real estate business eligible/required to file on a Schedule C. The latter is an extremely difficult hurdle to meet for rental income.

QJV is simply a filing status election to make it far easier for a two spouse only tax filing of joint rental income or joint self-employment income instead of the much more complex partner ship rules and tax filing.
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essbeer
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Re: Do I Want My Rental to be a Qualified Joint Venture?

Post by essbeer »

Spirit Rider wrote: Fri Aug 23, 2019 11:59 pm QJV is simply a filing status election to make it far easier for a two spouse only tax filing of joint rental income or joint self-employment income instead of the much more complex partner ship rules and tax filing.
Thanks. So do we just file Schedule Cs with zeros in all the spaces? The rules seem to indicate we have to include a Schedule C. If there is really no consequence other than not having to do a 1065 and K-1 it would seem like this would be a very popular option, but I couldn't really find an examples of people claiming they'd done this with their rental properties, so I wasn't sure if there was some problem I wasn't aware of.
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Re: Do I Want My Rental to be a Qualified Joint Venture?

Post by Spirit Rider »

essbeer wrote: Sat Aug 24, 2019 1:29 am
Spirit Rider wrote: Fri Aug 23, 2019 11:59 pm QJV is simply a filing status election to make it far easier for a two spouse only tax filing of joint rental income or joint self-employment income instead of the much more complex partner ship rules and tax filing.
Thanks. So do we just file Schedule Cs with zeros in all the spaces? The rules seem to indicate we have to include a Schedule C. If there is really no consequence other than not having to do a 1065 and K-1 it would seem like this would be a very popular option, but I couldn't really find an examples of people claiming they'd done this with their rental properties, so I wasn't sure if there was some problem I wasn't aware of.
Did you not read the first paragraph of my previous post that you quoted the second paragraph of? In your circumstances, two Schedule Cs and SEs are not appropriate. You are almost certainly NOT engaged in a business of real estate. Nothing about QJV filing changes that. You will still simply have Schedule E rental income.

The only difference with electing to file as a QJV. Is that you will file two Schedule Es on a Form 1040 personal return.

Instead of filing a Schedule E and two Schedule K-1s on a Form 1065 partnership return and then reporting the appropriate information on your Form 1040 personal return.
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Re: Do I Want My Rental to be a Qualified Joint Venture?

Post by MarkNYC »

essbeer wrote: Sat Aug 24, 2019 1:29 am
Spirit Rider wrote: Fri Aug 23, 2019 11:59 pm QJV is simply a filing status election to make it far easier for a two spouse only tax filing of joint rental income or joint self-employment income instead of the much more complex partner ship rules and tax filing.
... If there is really no consequence other than not having to do a 1065 and K-1 it would seem like this would be a very popular option, but I couldn't really find an examples of people claiming they'd done this with their rental properties, so I wasn't sure if there was some problem I wasn't aware of.
Spirit Rider has explained it correctly. Most spouses who own a rental property jointly (and most return preparers) incorrectly report the rental income and expenses on a joint Schedule E rather than making the QJV election and splitting the income and expenses onto two separate E Schedules which entails additional time and effort. The IRS does not know if the property is owned by one spouse or both, and reporting on one E vs. two Es has no effect on total income tax, so this is a reporting procedure that the IRS has very little incentive to scrutinize or enforce.
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essbeer
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Re: Do I Want My Rental to be a Qualified Joint Venture?

Post by essbeer »

Spirit Rider wrote: Sat Aug 24, 2019 6:23 am Did you not read the first paragraph of my previous post that you quoted the second paragraph of? In your circumstances, two Schedule Cs and SEs are not appropriate. You are almost certainly NOT engaged in a business of real estate. Nothing about QJV filing changes that. You will still simply have Schedule E rental income.
I'm not trying to re-characterize the income. I understand that. I'm just trying to follow the IRS guidance which state that the election to be treated as a QJV requires filing a schedule C or F. I don't see anything about making the election with just a schedule E. This is what I'm reading from the IRS website:

How to Make the Election to be Treated as a Qualified Joint Venture
Spouses make the election on a jointly filed Form 1040 by dividing all items of income, gain, loss, deduction, and credit between them in accordance with each spouse’s respective interest in the joint venture, and each spouse filing with the Form 1040 a separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) or Schedule F (Form 1040), Profit of Loss From Farming and, if otherwise required, a separate Schedule SE (Form 1040), Self-Employment Tax. For example, to make the election for 2014, jointly file your 2014 Form 1040, with the required schedules (see below). The partnership terminates at the end of the taxable year immediately preceding the year the election takes effect. For information on how to report the business for the taxable year before the election is made, see Publication 541 on Partnerships and terminations.
Spirit Rider
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Re: Do I Want My Rental to be a Qualified Joint Venture?

Post by Spirit Rider »

The webpage you referenced is specifically for self-employed Qualified Joint Ventures. Qualified Joint Ventures do apply to Schedule E. See Schedule E Instructions, page E-2, Qualified Joint Venture.

I did make a small error and MarkNYC didn't catch it. Probably because we are far more used to seeing QJVs as applied to self-employment (Schedule C). I just noticed the following when reading the reference from above. Unlike with self-employed QJVs, rental income QJVs only file one Schedule E.

"Although you and your spouse will not each file your own Schedule E as part of the qualified joint venture, each of you must report your interest as separate properties on line 1 of Schedule E. On lines 3 through 22 for each separate property interest, you must enter your share of the applicable income, deduction, or loss."
MarkNYC
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Re: Do I Want My Rental to be a Qualified Joint Venture?

Post by MarkNYC »

Spirit Rider wrote: Sun Aug 25, 2019 11:08 am The webpage you referenced is specifically for self-employed Qualified Joint Ventures. Qualified Joint Ventures do apply to Schedule E. See Schedule E Instructions, page E-2, Qualified Joint Venture.

I did make a small error and MarkNYC didn't catch it. Probably because we are far more used to seeing QJVs as applied to self-employment (Schedule C). I just noticed the following when reading the reference from above. Unlike with self-employed QJVs, rental income QJVs only file one Schedule E.

"Although you and your spouse will not each file your own Schedule E as part of the qualified joint venture, each of you must report your interest as separate properties on line 1 of Schedule E. On lines 3 through 22 for each separate property interest, you must enter your share of the applicable income, deduction, or loss."
You're right, the reporting should be done as separate rental properties rather than separate Schedules E. And this proper tax reporting procedure for a joint rental property is rarely seen. For individual tax returns, there are some filing procedures that are ignored more often than followed, and this is one of them.
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