Hey guys, posted a more exciting thread over in Tax Strategies, but hoping to get an answer to this as well. I’ll try to keep it brief.
Sole-Prop Rental: Cash flow with loss on Schedule E means you get to take a loss even though you made money. This is no problem because draws are not taxable and capital accounts are irrelevant to the IRS.
Partnerships: The same situation would be a problem here because draws debit the corresponding member’s capital account (my understanding), and those accounts going negative brings up at-risk limitations (or similar). Joint undertakings would solve this, but I imagine with an LLC and filing a f1065 you can through that idea out the window. How should a partnership handle this? Is there a special rule for capital accounts when the only business activity is rental real estate? If not, this seems to kill one of the best parts about rentals: tax free cash flow and simultaneous losses on Schedule E.
Thanks!