Using partnerships to make real estate investments in the United States has become extremely popular among many Israelis. The use of partnerships has many advantages, but in order to use them in an optimal manner, close familiarity with the tax burden that applies to them is required, including the annual income tax report.
Understanding the reporting obligation, the relevant forms, and the dates of submission will ensure protection and increase the feasibility of the investment. What is partnership Form 1065 What is a partnership and what are the tax reporting burdens applicable to it? This, and more, is in the following article.
What is a partnership?
American law establishes various types of associations, commercial and other, some of which are similar to legal entities known to us here in Israel, and some unique to American law. The most common legal organization for making real estate investments in the United States is a partnership type organization.
When you talk about a partnership in this regard, we are referring both to a partnership and an L.L.C. In both cases, it is an association for trading purposes, which is a separate legal personality from its owners and therefore provides the partners with protection from legal liability. The difference between a partnership and an L.L.C is that for the first type one of the partners must be a general partner whose liability is not limited to his initial investment sum as the other partners.
The use of a partnership has become common since not only does it provide limited liability to partners (which is the case in many types of companies), but at the same time it is a transparent entity for tax purposes. This means that the partnership’s tax burden applies to each partner according to their share of the partnership, with the tax rates attributable to them as the tax rates that apply to individuals and not to companies.
What are the advantages of investing through a partnership?
As mentioned above, the main advantage of investing through a partnership is the combination of limiting the liability of the members and the tax transparency. These characteristics enable the members to enjoy the benefits of companies alongside the benefits of investing as individuals.
To these benefits we can add the following additional benefits:
- Taxation at tax rates that apply to individuals – not only do no corporate tax rates apply but there is no tax liability when distributing dividends.
- The partnership provides a flexible and inexpensive mechanism for operating real estate that can be changed at any time.
- There are sometimes preferable tax rates that apply to partnerships. For example, a tax benefit on business income, QBI.
Keep in mind that alongside the above advantages there are disadvantages to investing through a partnership, so we recommend professional tax advice which will assist you in careful and efficient planning of the investment.
Tax Reporting Obligation – Partnership Form 1065
As any person or company that generates income originating in the United States, partnerships engaged in trade, or any business activity must also report their income annually. The tax reporting of partnerships will be done through Form 1065 – U.S. Return of Partnership Income.
Since the partnership does not bear the tax liability itself but transfers the liability to the partners who hold it, in addition to the report submitted by the partnership, each of the partners will submit a separate personal income tax report (Form 1040 or alternatively 1040NR).
Form 1065 is a relatively short form, which includes in addition to general information about the partnership details regarding the partnership’s business activities. As part of the form, the partnership will report income, expenses, profits, losses, credits, and other activities of the partnership. These figures will be the basis for the distribution of the tax burden between the partners. Thus, as part of the form, the partnership will issue an appendix, Schedule – K, which will report each partner’s share of the profits, all in accordance with the set in the partnership agreement.
It should be noted that if one of the partners is a foreign entity, the partnership will originally deduct tax from its income and issue a form 8805. This form will be used by the partners in the personal income statements to receive a tax refund for withholding tax.
When should the form be submitted?
A partnership will report its revenue through Form 1065 by March 15 of the following year. As the partnership is managed outside the United States, an extension will be given on demand until June 15. In any case, an additional extension can be requested until September 15th.
Please note that delaying the deadline may result in heavy fines – about $200 for each partner per month.
Summary words
Investing through a partnership is a popular practice among Israeli investors, and for good reason. Investing in this manner includes many advantages, mainly limiting the partnership’s legal liability alongside transparency in terms of the tax aspects applicable to its activities.
However, keep in mind that the use of a partnership for investment requires careful planning, preferably by a professional. Moreover, although this is a transparent entity for tax purposes, there is still a tax burden that needs to be considered – especially when it comes to tax reporting liability.
The tax reporting of a partnership is done in a dedicated form for the partnership, and here too receiving professional aid when filling the form will ensure the protection of the viability of investment and enjoyment of tax benefits reserved for partnerships.
The Tax Advisors Team of MasAmerica has experience in the complex tax aspects of real estate investments in the United States and will be happy to be at your disposal for any matter.
