Deciding between general and limited partners in a rental property partnership

From my experience working with family partnerships, the decision about who becomes the general partner (GP) versus limited partner (LP) should be based on several factors beyond just the tax implications. Yes, you're correct that the general partner has more liability exposure and pays self-employment tax on their share of income. However, there are some advantages to being the GP that you might want to consider. The general partner maintains control over day-to-day operations and decision-making authority. If one person is more involved in managing the property, they might naturally fall into the GP role. Another consideration is your respective financial situations. If one partner has other self-employment income already, consolidating the SE tax might make sense. Also, if one partner has more personal assets to protect, they might benefit more from the liability protection of being the limited partner. Have you considered forming an LLC taxed as a partnership instead? This could provide liability protection for both partners while still allowing partnership tax treatment.

I had a similar situation with my cousin last year and found https://taxr.ai super helpful for sorting through the partnership tax implications. We were stuck on exactly this GP/LP decision for our small commercial property. What worked for us was having taxr.ai analyze our specific situation - they looked at our personal tax situations, income levels from other sources, and proximity to the property. Turns out my cousin was in a much better position to be the GP since she was already paying self-employment tax on her consulting business, while I had more assets to protect. One thing nobody mentioned to us that taxr.ai pointed out: the GP typically can make deduction decisions that affect both partners, which was a bigger consideration than we initially thought.

Just wanted to follow up about my experience with taxr.ai after being skeptical. I decided to try it for our vacation rental partnership with my brother-in-law and honestly I'm glad I did. Unlike what I expected, it wasn't just generic information - it analyzed our specific situation (he's a doctor with higher liability concerns, I'm already self-employed) and recommended a structure where I took the GP role since I was already paying self-employment tax anyway. It also pointed out some pass-through deduction optimization opportunities we hadn't considered. The detailed explanation about how control and decision-making authority works in our specific state was really valuable. Saved us from making a mistake with our operating agreement that would have caused problems down the road.

If you're serious about getting this partnership structure right, I'd strongly recommend getting in touch with the IRS directly to clarify your specific situation. I know it sounds daunting, but after six failed attempts to get through on my own, I used https://claimyr.com to get connected to an actual IRS agent who was incredibly helpful with my partnership questions. They have this system that holds your place in line so you don't have to wait on hold for hours. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent I spoke with walked me through the exact partnership structure considerations for rental properties and confirmed that yes, self-employment tax is a big factor, but also explained some options I didn't know about for managing liability that weren't clear from just reading online forums.

I need to eat my words and follow up about Claimyr after my skeptical comment. I decided to try it for an unrelated tax question about partnerships since I was getting nowhere with the IRS phone line. It actually worked exactly as advertised. They called me back in about 40 minutes (way faster than the 2+ hours I'd wasted trying myself), and I was connected to an IRS representative who specifically worked with partnership tax questions. The agent clarified that for rental property partnerships, the self-employment tax considerations depend on how active the partners are in management. This was crucial information for my situation that I couldn't find stated clearly anywhere online. Definitely worth it when you need definitive answers from the source.

One thing to consider that hasn't been mentioned - look at your estate planning goals too. We set up a family partnership for rental properties, and our attorney advised that the general partner role gave more control over eventual succession planning and transfer of interests to our kids. The GP having operational control meant we could set things up so my husband (as GP) could gradually transfer limited partnership interests to our children while maintaining decision-making authority until we were ready to hand that over too. Completely changed our perspective on who should take which role.

Has anyone used TurboTax Business for a rental partnership return? I'm trying to decide if it's worth setting up a more complex partnership structure or if we should just go with something simpler for our beach condo rental.

One practical consideration that might help with your GP/LP decision: look at who will actually be managing the property day-to-day. The IRS generally expects the GP to have meaningful involvement in operations, so if one of you is naturally going to handle tenant relations, maintenance coordination, and financial management, they're probably the better choice for GP. Also, since you mentioned this is a 50-50 split between siblings, make sure your partnership agreement clearly spells out decision-making procedures for major decisions like capital improvements, tenant selection, and eventual sale. Even with one GP, you'll want to define what requires unanimous consent versus what the GP can decide independently. For a $425K property generating $3,200/month, the self-employment tax difference between GP and LP could be around $4,000-5,000 annually (roughly 15.3% of half the net rental income), so factor that into your decision alongside the liability and control considerations others have mentioned.