[leglock]

We know that business income of a partnership is subject to self employment tax.

My question is if you are a partner in a general partnership, and the partnership’s purpose is real estate related, and the partnership buys a piece of land this year, and 13 months later sells that piece of land for a profit, would this income be subject to self employment tax?

also, what is the character/classification of the income?

[rupert]

Depends. What do you mean the partnership's purpose is real estate related? Buy and sell properties? Developers? Builders?

How about this particular piece of property? Was it held primarily for sale to customers in the ordinary course of the real estate business? Or was the property being held for investment (i.e. appreciation over time)? If the former, treatment would be similar to sale of inventory, which would be ordinary income subject to SE tax. If the latter, might qualify for capital gains treatment, which would not be subject to SE tax and would also be taxed at lower rate.

Depends on the relevant facts.

FAR 90 Oct. 6, 2012
AUD 96 Dec. 8, 2012
REG 93 May 30, 2013
BEC 84 Aug. 31, 2013

NIU CPA Review Correspondence and Wiley Test Bank

[leglock]

Thanks for your response. If the partnership was set up with its purpose of buying properties and developing them, but this particular piece was not developed so it was listed for sale after a year for the purpose of capitalizing on its increased value.

Also, would it be a section 1231 asset and not a capital asset?

[rupert]

Intent matters at both time of acquisition and time of sale. Many other factors should be considered.

Don't think this would be a 1231 asset from what you've described. 1231 property includes real property used in the trade or business and held for more than one year, but excludes property includible in inventory or held primarily for sale to customers.

Although I wouldn't rule out capital gains treatment without examining all of the facts, it does sound like an uphill battle based on the limited information provided.

I suggest you take look at this article by Dave Fogel: https://www.fogelcpa.com/Documents/DMF-CSEA-REdealer.pdf

FAR 90 Oct. 6, 2012
AUD 96 Dec. 8, 2012
REG 93 May 30, 2013
BEC 84 Aug. 31, 2013

NIU CPA Review Correspondence and Wiley Test Bank

[leglock]

Thank you for that info Rupert. Extremely helpful. I'm in a situation with an LLC taxed as a partnership, so aside from the income classification, I'm also concerned with the SE Tax implications.

My thinking is that a sub s would have been better than an llc, but it was not my decision.

[rupert]

Hard telling for sure. S Corp would've avoided the SE tax….at least to some extent. Members would still need to be paid reasonable compensation (subject to FICA).

Some clients aren't cut out for the corporate formalities. The S Corp is somewhat inflexible compared to an LLC taxed as partnership, so the SE tax isn't always the only consideration, although it can sometimes result in a significant tax savings.

FAR 90 Oct. 6, 2012
AUD 96 Dec. 8, 2012
REG 93 May 30, 2013
BEC 84 Aug. 31, 2013

NIU CPA Review Correspondence and Wiley Test Bank

[Author]

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