Partnership rents to partnership

Recently, there was a discussion about a husband's Schedule C that paid rent for a building owned by the husband/wife partnership. The husband could only claim 50% of the rent as a deduction because Section 162(a)(3) states that a taxpayer can only deduct rent for property in which he has no equity.

https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=16818&p=148467&hilit=rent+disregarded#p148467

New client. In this case a husband/wife (50/50) partnership LLC business rents the building from a husband/wife partnership (50/50) LLC. The business partnership itself does not have a direct interest in the rental partnership. My reading is that the business H/W LLC does not have an interest in the rental H/W LLC and that rent can be deducted under Section 162(a)(3).

Does attribution taint this arrangement such that no rent is allowed as a deduction by the business partnership LLC and no rental income is reported by the partnership rental LLC?

I am by no means an expert on this area but was looking around and came upon this article.

http://digital.graphcompubs.com/publica ... leBrowser#{%22issue_id%22:62667,%22view%22:%22articleBrowser%22,%22publication_id%22:%221008%22,%22article_id%22:%22654844%22}

About halfway down this statement is made:

IRC Sec. 707(a)(1) stipulates: “If a partner engages in a transaction with a partnership other than in his capacity as a member of such partnership, the transaction shall ... be considered as occurring between the partnership and one who is not a partner.” Consequently, rental of personally-owned property to a partnershiptype entity appears to fall under this rule, although the presence of another entity (an LLC, for example) which owns the property might make the distinction clearer.

Think “arm’s-length transaction” and “economic substance doctrine” to help assess whether such a rental will pass audit review. However, this approach has not been adequately tested in the courts and some court decisions suggest that the controlled group rules intended for corporations might be applied here.

Is this along the lines of what you are asking?

What he’s saying is that you can’t rent property to yourself – even if one or both parties to the arrangement is a 1-member LLC owned by you.

So, we have a situation involving two separate H/W partnerships. One of those partnerships owns property and rents it to the other partnership. He’s wondering if we have some type of attribution here that would collapse this arrangement back down to the general principle of “you’re renting property to yourself.”

The answer is no. A partnership is a regarded entity.

You could even have a situation with the two parties being (1) an individual X and (2) a partnership owned 99.99% by X and 0.01% owned by someone else. You do run into an issue as to whether or not you have a valid partnership when somebody owns a miniscule share of it. But no one really knows what that threshold might be.

Ok, thank you. We knew from the previous thread that if a business owned solely by the husband were to rent space from a building owned by husband and wife, Section 162(a)(3) would only allow 1/2 the rent as a deduction for the husband's business.

Conceptually, two H/W partnerships offers an opportunity of, in essence, renting to yourself yet achieving a desired result that is not possible with one person.