An unincorporated business jointly owned by a married couple is generally classified as a partnership for federal tax purposes. However, in 2007, there was an addition to the Internal Revenue Code that excludes from partnership status a Qualified Joint Venture (“QJV”) conducted by a married couple who file a joint return. This was enacted by Congress to alleviate what was considered an unnecessary burden of filing partnership returns where the only members of a business joint venture are a husband and wife filing a joint income tax return.
Definition of a Qualified Joint Venture
QJV is defined as any joint venture involving the conduct of a trade or business if:
- the only members of the joint venture are married;
- both spouses materially participate;[1] and
- both spouses elect the application of QJV treatment.
A qualified joint venture, for purposes of the provision enacted in 2007, includes only businesses that are owned and operated by spouses as co-owners and not in the name of a state law entity (including a limited partnership or limited liability company). If the business is owned and operated by spouses as co-owners, it will not qualify for the election. There are special rules for married couple state law entities in community property states.[2]
Filing requirements for qualified joint ventures
As a result of utilizing the QJV election each spouse should file a separate Schedule C reporting his or her respective share of the items of the venture. There is no prescribed form for making the election. The election is deemed made on a jointly filed Form 1040 by dividing all items of income, gain, loss, deduction, and credit between each spouse in accordance with each spouse’s respective interest in the joint venture, and each spouse filing with the Form 1040 a separate Schedule C (Profit or Loss from Business).
QJV implications for real estate
Now that you have the basics of a QJV, you might be thinking, “isn’t this a real estate blog?”
You’re correct, this is a real estate blog.
If you and your spouse each materially participate as defined under the at-risk and passive activity limitations and you file a joint return for the tax year, you may elect to be taxed as a qualified joint venture instead of a partnership. By making the election, you will not be required to file Form 1065 Return of Partnership Income, for any year the election is in effect and will instead report the income and deduction directly on your joint return.
To make this election for a rental real estate business, check the “QJV” box on line 2 for each property that is part of the qualified joint venture.
The confusion surrounding a QJV typically arises in non-community property states, including New Jersey and New York, where spouses jointly own interests in an LLC. The LLC purchases a rental property, which now needs to be reported on a partnership return instead of Schedule E of the individuals’ 1040s. As noted above, the QJV will not apply to a venture that is in the name of a state law entity.
We’ve got your back
If you are considering not filing a partnership return because of the QJV election, you should contact your preparer to review the rules, especially related to rentals owned by LLCs where spouses are the only members.
With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and taxes. Contact him at sfilip@krscpas.com or 201.655.7411 today.
[1] IRC Section 469(h).
[2] Rev. Proc. 2002-69.
