How to Dissolve a Partnership of a Real Estate Business

Legal partnerships can be formed unintentionally.

Anytime two or more parties (individuals, limited liability companies, limited partnerships or corporations) agree to do business together and share profits and losses, a legal partnership is formed. Dissolving a partnership is not as simple as agreeing to disband -- the partnership must be wound up in an orderly fashion. Since real estate partnerships typically own high-value property, you must take particular care to properly dispose of partnership assets.

Instructions

1. File the partnership's final tax returns with federal and state authorities. Some states, such as Pennsylvania, require you to obtain a tax clearance certificate before you may dissolve the partnership.

2. Attempt to collect partnership debts.

3. Notify interested parties in writing that the partnership is dissolving. Interested parties include creditors, debtors, suppliers, tax authorities and major clients.

4. Cancel the partnership's Employer Identification Number with the IRS by mailing a request to cancel to "Internal Revenue Service, Cincinnati, Ohio 45999." Cancel any business licenses or permits held by the partnership.

5. Pay all external partnership creditors in full, even if the partnership must liquidate its real estate holdings to accomplish this.

6. Repay any partners who have loaned money to the partnership.

7. Pay each partner his capital entitlement in accordance with the terms of the partnership agreement.

8. Distribute any remaining partnership assets among the partners in accordance with the terms of the partnership agreement. If the partnership agreement is silent on this issue, distribute these assets in accordance with state default rules -- normally, in proportion to each partner's capital contributions to the partnership.

9. Change the title to any real estate that was distributed to individual partners as part of their capital entitlement or partnership distribution to the name of the property's new owner.

10. Close the partnership bank account.

11. File a certificate of cancellation or its equivalent in your state, if your partnership is a limited partnership or limited liability partnership. Most states require the partnership to file this document with the state Secretary of State.

Tips & Warnings

• If the partnership must liquidate real estate holdings to satisfy its obligations, it will realize a capital gain if the real estate is sold at a profit. This capital gain will be imputed to individual partners in proportion to their right to share in partnership profits, and the resulting tax will be assessed against partners in the same proportion. If the real estate is sold at a loss, however, partners will realize a capital loss, which can be deducted from taxable income on each partner's individual income tax return.

• The partnership must distribute its property in the right order -- external creditors first, then partners who are partnership creditors, then capital entitlements and finally, distribution of any remaining assets to each partner in proportion to his respective interest in the partnership.

References

• Desktop Lawyer: Dissolving a Partnership
• Pennsylvania Department of Revenue: How is a Partnership Dissolved?; August 2008
• FindLaw: Partnership Rules and FAQs
• Realty Times: Is a Real Estate Partnership a Good Way to Invest?; Clifford A. Hockley; July 2004
• Internal Revenue Service: Closing a Business Checklist; August 2011