It’s no wonder there are so many people interested in investing in real estate, especially in Arizona, which consistently ranks as one of the top markets in the country. If you’re particularly brave—or rich—you can forge into the market alone. The benefit of solo ownership is that you reap all the rewards, but you also assume all the risk. For many others, a smarter and easier way is through a real estate partnership—two or more people pooling resources. According to the Internal Revenue Service, there were 1.1 million real estate partnerships in the United States in 2004, with more than $2.5 billion in assets. That number continues to grow.
Real estate can be owned by various types of organizations. However, holding real estate in a general or limited partnership, a limited liability partnership (LLP) or a limited liability company (LLC) may offer the most flexibility.
One of the advantages of a partnership is that you can spread the risk and increase your leverage. No single person has to have all the assets, knowledge or time. Rather, all partners can share the risks and rewards. If you’re the kind of person who has the stomach for the ups and downs of real estate investing, then a partnership could be for you.
Obviously, selecting your partner or partners is a crucial step. Choose partners with skills and/or resources that complement your own. And, beware of forming business relationships with family or close friends—it can mean losses far beyond monetary ones.
No matter who you choose as a partner, you must give significant thought to the partnership's foundation. There are three basic stages of a partnership and each requires careful consideration and meticulous, thorough written agreements:
Initial funding phase: In this planning phase, partners develop the partnership agreement (operating agreement for LLCs) which specifies where the funding will come from and how partners will work with one another. It can take up to 12 months to complete this phase.
Maturity or operational phase: Once the planning is complete, the partnership will acquire and/or develop real estate. Your operating or partnership agreement must specify how each partner will contribute in terms of time, money and talents and how each will benefit during this time. The time frame covered by this operational phase can last for months, years or decades, depending on whether the partners are holding the property or structure as an income producing vehicle, holding it for future sale or turning it around for a near-term sale.
Wind-down or liquidation phase: The final stage of a partnership is where partners are most likely to run into problems. To avoid such headaches, it is critical to spell out in the partnership or operating agreement exactly how the partnership will be dissolved. Of particular importance is addressing the potential for a partner who might want out prematurely. In the flush of new opportunity, it’s easy to say “we’ll deal with that later.” But, “later” is almost always too late if one of the partners needs or wants out.
To help you through each of these phases, it’s important to consult with trusted advisors. Generally, your advisors should include an accountant or tax specialist, legal counsel, and lenders or bankers. While a single accountant and an attorney may suffice, it is not unusual to need multiple sources for financing, since larger deals may necessitate tiered funding.
At each step along the way, involve your advisors. For those of us who provide professional services, it’s always disheartening to sit across the desk from a client and deliver bad news. What is worse, however, is to also tell a client that it could have been avoided if they had involved us earlier.
From a tax perspective, there is no cookie cutter approach for real estate deals. Different types of real estate partnerships are governed by different tax laws and regulations. These tax laws and regulations are constantly changing. To ensure that your decisions are made based upon the most up-to-date information, include your accountant or tax specialist early and often in your discussions.

Cati Piorkowski is a partner with Lohman Company, PLLC. She is responsible for managing the firm’s tax services, which focus on closely-held, owner-managed businesses and their owners.
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