You and one or more other parties participate in an unincorporated joint venture or other co-ownership arrangement to conduct a business or investment activity.

You agree to split the income and expenses.

The general rule is that such an arrangement will be treated as a partnership for federal income tax purposes.

To be clear, you can be deemed to have a partnership for federal income tax purposes, with the related potentially complicated tax rules and tax filing obligations, even when there’s no partnership for state-law purposes. Yikes!

Here’s what you need to know, along with a way to hopefully avoid the issue.

Basic Considerations

Arrangements that can be deemed partnerships for federal income tax purposes include syndicates, groups, pools, joint ventures, and other unincorporated organizations through which any business, financial operation, or venture is carried on and which is not a corporation, trust, or estate.1

But mere co-ownership, rental, and maintenance of real property does not create a partnership for federal income tax purposes. Similarly, a mere agreement to share expenses does not create a partnership for federal income tax purposes.2

Finally, if your deal satisfies certain conditions, you can “elect out” of partnership tax status when partnership status would otherwise be deemed to exist. We cover the elect-out possibility later in this article.

But why should you care about all this? Please keep reading.

Advantages of Avoiding Partnership Status

Avoiding partnership tax status is often desirable for three important reasons.

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