Limited Partnership: Real Estate, Forming, Advantages / Disadvantages & Taxes

Limited Partnership Real Estate – With a limited partnership in real estate you can avoid personal liability. With a general partner who will usually take up most of the responsibilites and investors only contributing their capital, this is a very favoured form of real estate investment company. What is a RELP? How are limited partnerships taxed? Find out below

Limited Partnership: Formation, Advantages and Disadvantages

A limited partnership is typically more expensive, and many investors contribute. These are generally less involved in day-to-day business, leaving this to the general partner who makes most decisions on behalf of investors.

Definition and Basics: Limited Partnerhip in Real Estate

In a limited partnership, many investors pool their capital. One, so-called general partner, has full liability, meaning that he is fully responsible for any losses, and other partners are merely liable up to the amount of capital which they have contributed.

  • Many investors pooling resources

What is a RELP?

A limited partnership specialized in real estate, and therefore operating real estate is often called a RELP. This is nothing more than a handy acronym of the words Real Estate Limited Partnership.

RELP = Real Estate Limited Partnership

What kind of Company is Ltd.? – Ltd. Company Meaning

Lmtd. indicates the type of company, namely a limited partnership. Therefore, a limited partnership is easily identified when a company ends with the word Ltd. This is just an abbreviation, and just indicates the limited partnership.

  • That the company is formed as a limited partnership

Forming a Limited Partnership: Easy Guide of Process, Individual Steps

Limited partnerships are one of the less complicated forms of limited partnerships. To begin, you must choose a location. This may seem like a strange question, but you can freely choose the state where you want to register. Delaware for example makes it much easier to form a business, and generally is more lenient and flexible. Next, you can search registries to find if the name you have chosen is already taken. After, you will form a partnership agreement, which should include a variety of legal points to give you safety in the case of the company not succeeding as wished. Lastly, you register!

Process summarized:

  1. Choose Location (state) to Register
  2. Find Name
  3. Form Partnership Agreement/Operating Agreement
  4. Register

Documents:

  • Operating Agreement

Advantages: Taxes and Attracting Capital

The possibly strongest point speaking for a limited partnership in real estate is that you are less liable. In case of legal proceedings it will be the company, not the individual being prosecuted. There may also be advantages in the form of planning and gift opportunities. As with an LLC, you are also able to prevent double taxation. Of course, another major point is that the general manager has more capital than he would usually, meaning that he has better opportunities. Meanwhile partners can make passive profit, with little risk, as the general partner carries liability.

  • Less Liability
  • Avoiding Double Taxation
  • More Opportunities

Disadvantages: Sharing Profits, Conflict

Any company includes multiple members, and will therefore by definition have interpersonal conflict. This is of course often a good thing, forcing members to think about their decisions more carefully, but it can also lead to breakdown and stagnation. Especially in the case of poorly written partnership agreements, relationships can break down. A second disadvantage is of course the need to share profits. This is because the work was also shared, but for the general partner, this can at times be frustrating.

  • Interpersonal Conflict
  • Bad Partnership Agreements
  • Sharing Profit

Real Estate Limited Partnership: Contributions, Conflict

A limited partnership for investing in real estate is a common method. There are a few issues to take into consideration though. Including everyday processes and the way the company functions.

Can a Limited Partner Contribute Property?

This is a common question. With multiple investors coming from real estate, it is not uncommon that a member would be willing to contribute a piece of real estate which they own. In legal code, a limited partner can contribute capital in the form of money or property.

  • Yes, limited partners can contribute Property

What do Limited Partners do?

In a sense, apart from contributions in the form of capital, limited partners have no role in the company. They own shares, and depending on the worth of the partnership, these can increase. Yet they have no tasks or contributions to make on the daily basis. Of course, they are part of some decisions, but these are often avoided, as these partners then also incur liability.

  • Contribute Capital

How do Limited Partnerships Work?

This video gives a hdny quick overview on how this type of company works, explaining top to bottom everything you need to know, when trying to get informed about limited partnerships.

Taxes: When to Pay, How to Save

Every year, at specific timepoints, all partners will receive a share of the profits of the limited partnership. These individuals are responsible themselves to report this income on their tax sheet when the time comes. The company will  offer all partners a K-1 which details their income from the partnership.

  1. Who Pays Taxes in a Limited Partnership
  2. Tax advantages of a Limited Partnership
  3. How to Pay Taxes in a Limited Partnership

Who Pays Taxes in a Limited Partnership?

Limited partnerships are not forced to pay invome tax, instead, the individuals pay the taxes on their share of the profit as income on their tax return.

  • Every partner according to their share

Tax Advantages of a Limited Partnership

As with an LLC, the taxation of a limited partnership means that individual partners will not suffer under double taxation. Partners will tax their income fully, but as opposed to other forms of companies, this incomee will only be taxed once, thanks to the pass-through.

  • Avoid Double Taxation

How to Pay Taxes in a Limited Partnership

A limited partnerships is filed jointly using the Form 1065 with the IRS. This should be filed with all other tax returns. Because members are paid at multiple points throughout the year, they will often use the K-1 to know what they have to pay.

  • Use 1065 Form

Limited Partnership Summary: Less Risk

A limited partnership will leave you with less risk than you would usually have to bring. That means that real estate investors that prefer a hands-off approach will often take this route to maintain a passive income. Real estate investing requires a lot of information and staying up to date, which is why investors like to delegate this work to a general partner who takes up more liability.