We are investors in an apartment building. Can we have a MERP when we file a Schedule E and not a Schedule C or F? : FAQ/Blog/Solutions
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We are investors in an apartment building. Can we have a MERP when we file a Schedule E and not a Schedule C or F?

by Tom Luker on 05/01/15

In cases where the husband/wife are listed as joint owners, it's often thought that it's not advisable to hire the other person.

  • Similar to partners not hiring partners.
  • On one hand, spouses who jointly own farms can be hired by the business-owner because whose name is on the top of the Schedule F is the ER and the spouse is the EE. This has been allowed in thousands of cases.
  • However, both spouses might be listed as names on the Schedule E, then no.
  • But if the Schedule E’s business name is “XYZ Properties,” then it would seem that XYZ could legitimately hire a family member to do many tasks involved with running a real estate property.
  • Thus, a MERP can cover any EE of a property as long as Sec. 105 rules are followed.
  • There's nothing wrong with even hiring Joe Lunch-Bucket and providing benefits in lieu of W-2 wages in the form of a MERP.
  • Oftentimes, other services such as the cleaning or other maintenance issues, outsourced independent contractors can be utilized.
  • While on the subject of outsourcing, or using “independent contractors” rather than W-2 employees [to save payroll taxes] you should seek the advice of your tax professional as to the definitions of an “employee” before you get into trouble.

One example as to how we helped a farm family several years ago was a Heritage Farm over 150 years in the same family. When they told us they were an LLC, we asked, How many members?” When they said, 15,” we said Whoa, who are they? The LLC members were the parents and all of the children and grandchildren, done so to preserve the Heritage Farm in the family as a forever entity. Of course they couldn't set up a MERP unless the LLC was taxed as a corporation, which it wasn't just multiple partners. We then asked the father if he had any other business interests, which he did. They were a few apartment buildings and an office building. He said he had a non-related partner in those enterprises, and that his wife did the books for them. Easy family MERP there. When we asked if his real estate partner was married, he answered in the positive, but that his partner's wife was not involved such that she could be employed. We asked, Could she be trained to be useful?’” The answer was, “Yes.” So a 2-EE MERP was established. The other adult kids in the Heritage Farm was another project that we're working on.

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