Self Rental, not all materially participate

Technical topics regarding tax preparation.
#1
FLCPA  
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I have a partnership client owned by 3 brothers, 2 of them work for the corporation that rents from the partnership.

According to 1.469-2, property rented to a corporation owned by the taxpayers in which taxpayer is a member, is subject to the self rental rules.

1. Would the 3rd brother not be considered under the self rental rules, making this income passive to him?

2. Also, the partnership rents approximately 85% of the building to this commonly owned corporation, would they call this all active income or do I need to do a percentage?

Thanks so much for any guidance!
 

#2
BTJig  
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So the partnership is the property company, and the corporate entity is the operating company.

Regs. Sec. 1.469-2T(f)(6) covers the treatment of self-rental transactions.

It provides that an amount of the taxpayer’s gross rental activity income for the tax year from an item of property equal to the net rental activity income for the year from that item of property is treated as not from a passive activity if:

(1) the property is rented for use in a trade or business (2) in which the taxpayer materially participates for the tax year.

You would have to look at the 3rd brother's level of participation in the operating company in order to determine if his distributive share of net rental income from the property company is subject to reclassification under the self-rental rules. If that 3rd brother does not materially participate in the operating company, his distributive share of the net rental income from the property company would be considered passive, and not subject to the self-rental rules.

And we know that if 100% of the property was rented to an unrelated corporate entity, all the rental income would be subject to the "standard" PAL rules, so I think it is safe to assume that the rental income related to the 85% of the building rent is subject to the self-rental rules (with the exception of the share going to Brother #3) with the remaining rental income related to the 15% of the building rental activity being subject to the "standard" PAL rules.
 

#3
FLCPA  
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Thanks so much BTJig!!
 

#4
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What are each owner's ownership percentage in each company?
Steve
 

#5
FLCPA  
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The partnership consists of 3 brothers each owning 1/3 of the partnership. They rent 85% of their building to a corporation owned by 2 of the partnership's brothers. These two brothers own 100% of the corporation.

For example, John, Ron and Don own ABC, LLC partnership. Each own a 1/3 interest in this partnership, which rents 85% of their building to XYZ Corp., owned 100% by Ron and Don.
 

#6
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Florida is the only state imposing a sales tax on commercial rent. This is a situation calling for the use of a term interest instead of a lease to avoid the sales tax.
Steve
 


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