Taxation of the Asset Management Limited Partnerships: Balancing Business and Personal Assets

In the intricate landscape of financial planning and asset management, the Asset Management Limited Partnership (AMLP) emerges as a versatile vehicle for handling a diverse range of assets. This includes both personal use real estate and investment real estate with rental income. Understanding how to report expenses associated with these assets on an FLP's IRS Form 1065 is crucial for compliance and maximizing tax benefits.

Holding Assets in an AMLP:

AMLPs can hold a variety of assets. For our discussion, we focus on two: personal use real estate (like a family second home) and investment real estate (properties generating rental income).

1. Personal Use Real Estate:

When an AMLP holds personal use real estate, it's important to understand that the related expenses are not generally deductible for tax purposes. Expenses like maintenance, property taxes, and mortgage interest for personal residences within an AMLP are considered personal expenses.

Reporting Personal Use Expenses:

• These expenses should be carefully tracked but are not deductible on the AMLP’s tax return.
• The personal use of property by a partner should be reported as a distribution to that partner.

2. Investment Real Estate:

Conversely, investment real estate in an AMLP is a different story. Rental income is considered business income, making related expenses potentially deductible.

Reporting Business Expenses:

• Common deductible expenses include property management fees, maintenance costs, property taxes, mortgage interest, and depreciation.
• These expenses are reported on Form 1065, impacting the partnership's taxable income.

Allocation of Expenses:

A critical aspect of FLP management is the allocation of expenses. Since the partnership holds both personal and business assets, it's essential to segregate expenses related to each.

• For Personal Use Property: Record-keeping should be good, ensuring personal expenses don’t get mistakenly reported on the AMLP’s tax return.
• For Investment Property: All business-related expenses should be documented and reported for tax deduction purposes.

Tax Implications and Reporting:

The AMLP must file IRS Form 1065 annually. This form reports the partnership’s income, deductions, gains, losses, etc.

• Schedule K-1: Each partner receives a Schedule K-1, detailing their share of the partnership’s income and losses.
• Personal vs Business Expenses: While business expenses related to the investment property reduce the partnership’s taxable income, personal expenses do not.

Conclusion:

Managing an Asset Management Limited Partnership holding both personal and business assets requires a keen understanding of tax laws and diligent record-keeping. The distinction between personal use and investment assets significantly impacts tax reporting and potential deductions. It's advisable for families engaged in such partnerships to seek guidance from tax professionals to ensure compliance and optimize their tax positions.