Do I Have to Pay Income Tax on Rent Paid to My Own Family Limited Partnership?

A very important part of estate planning, especially for high-income individuals and those with rental income, is setting up a family limited partnership.  Not only does setting up a family limited partnership can help shield your assets and income, but it also provides for various tax benefits including lowering or eliminating estate tax consequences for those estates that owe taxes and lowering income taxes for partners to the partnership.  Family limited partnerships are a complex tool in any estate plan and having one properly set up with the assistance of a New York estate attorney is the best way to make sure you have the asset and tax protections that it provides and don’t run into trouble with the IRS.

A family limited partnership is made up of general partners, those who make decisions on the partnership, and limited partners, those who cannot make decisions but still have a financial gain from the partnership.  The general partners to a partnership can have an ownership interest in as little as 1%, even if their share of what is going into the partnership is higher.  Through using this type of partnership, the general partner can create shelters for their assets from creditors while also lowering their income for tax purposes.

A family limited partnership is often used by high net worth individuals to pass along their assets to their heirs with as little of a tax consequence as possible.  Part of this tax savings is often found in the form of taxes on rental income.  While a family limited partnership would not totally eliminate income taxes coming from rental property, it can be valuable in lowering the tax rate on such income.  The reason for this is that the taxes on such rental property can be determined by the amount of shares owned in the family limited partnership.

An example of what this means is shown when a general partner with very high income holds a 1% share in the family limited partnership while a limited partner owns 35%. It would most likely be the case in such a situation that the general partner would be subject to the highest income tax bracket while the limited partner, which is commonly a child of the general partner, is subject to a much lower tax bracket because they are younger and don’t have as high an income.  Because of this, 35% of the income taxes owed for rental income would be subject to the lower tax bracket, creating a significant tax savings for all who own shares of the family limited partnership.

While family limited partnerships can create a huge tax savings for those with means, they are also closely looked at by the IRS when it comes to if they were properly formed and maintained.  The ultimate purpose for a family limited partnership is to pass along a family business across generations, meaning that there must be some business purpose, rather than just a way to shelter assets and income.  Hiring a New York estate attorney to assist you with your entire estate plan, including one or more family limited partnerships is the best way to make sure that this tool is used correctly along with the rest of your estate and retirement planning. Call the Law Offices of Albert Goodwin at (212) 233-1233.