Many Huntersville, NC entrepreneurs form informal joint ventures—especially in real estate and startups—without realizing the IRS may treat those arrangements as partnerships. By default, that triggers a requirement to file Form 1065, issue Schedule K-1s, and forfeit certain benefits like Section 1031 deferrals. In this post, we’ll explain who qualifies to elect out of partnership status under Treas. Reg. § 1.761-2, how to file the election, and why Huntersville investors and small‐biz owners should care.

What Constitutes a Partnership Under IRS Rules?

The IRS views a partnership as “any unincorporated organization carrying on a trade or business” if two or more persons share profits. This includes:

  • Real-Estate Co-Ownerships: Two or more individuals owning rental property together.

  • Joint Ventures: Developers pooling capital to flip a Huntersville residential subdivision.

  • Service Collaborations: Local consultants sharing fees on an ad hoc project.

External Link: Treas. Reg. § 1.761-2 (Election Out of Partnership Status)

Who Qualifies to Elect Out?

Under Treas. Reg. § 1.761-2, co-owners of real estate, oil and gas interests, or other joint investments can opt out if they meet all of these conditions:

  1. No Business Entity Formed: No separate legal entity (LLC, corporation) was created for the venture.

  2. Intention to Hold Property: Co-owners intend to hold the asset for investment or rental (not resale).

  3. No More Than Five Co-Owners: Smaller groups are eligible for election; larger groups must form a partnership.

  4. Timely Election Filed: Form 1065 “blank” with an attached election statement must be sent by the partnership return due date.

Benefits of Electing Out for Huntersville Co-Owners

  1. Preserve Section 1031 Like-Kind Exchange Eligibility

    • If you co-own a Huntersville rental property and exchange it, you can defer capital gains if you’re not “in a partnership” for tax purposes.

  2. Avoid Partnership Return Penalties

    • Filing a Form 1065 incorrectly or late can lead to penalties up to $255/month per partner (max 12 months). Electing out eliminates this filing requirement.

  3. Simplified Individual Reporting

    • Co-owners report rental income or losses on Schedule E (Form 1040) instead of issuing K-1s and filing a separate partnership return.

Step-by-Step: How to Elect Out in Huntersville, NC

  1. Draft a “Blank” Form 1065

    • Complete the partnership name, address, and Employer Identification Number (EIN), leaving all other fields blank.

  2. Attach a Formal Election Statement

    • Write:

      “Under Treas. Reg. § 1.761-2, we, the co-owners of [Property Address in Huntersville, NC], hereby elect not to be classified as a partnership for federal income tax purposes for the taxable year ending December 31, 2025. Each co-owner will report income, gains, losses, deductions, and credits on their individual returns.”

    • List each owner’s name, SSN or EIN, and percentage interest.

  3. Mail Before the Due Date

    • The due date is the 15th day of the third month following year-end (March 15 for calendar-year co-ownerships).

  4. Maintain Contemporaneous Records

    • Keep a shareholders’ agreement or joint-venture memorandum demonstrating intent to hold property as an investment.

Huntersville NC Example: “Lake Norman Condo Partnership”

Two Huntersville residents co-owned a three-unit condo near Lake Norman. Without an election, they faced a mandatory Form 1065 for 2024, plus potential penalties of $1,020 ($255 × 2 partners × 2 months). By filing a “blank” 1065 with an election statement in March 2025, they:

  • Avoided the 1065 requirement.

  • Each reported rental income or loss on Schedule E of their 2025 returns.

  • Preserved eligibility for a Section 1031 exchange when they sold and reinvested in new Huntersville rentals.

Internal & External Resources

Electing out of partnership status under Treas. Reg. § 1.761-2 can save Huntersville NC co-owners thousands in filing fees, penalties, and lost Section 1031 opportunities. If you’re co-owning property or a venture, our Huntersville proactive tax strategies team can walk you through eligibility and the election process. For a broader suite of tax planning, run your info through our Tax Strategy Finder.