Forming an LLC with your spouse to hold rental property can feel like a smart, protective move—and legally, it often is. But when tax season arrives, many couples are surprised to discover that this structure can trigger extra filings, professional fees, and administrative work.

So what’s the real rule?

Does a husband-and-wife LLC have to file a partnership tax return?

In most cases, yes but where you live and how the property is owned can change everything.

Let’s unpack what every married real estate investor should know.

The Default IRS Position: Two Owners Mean Partnership Taxation

An LLC with two members is generally taxed as a partnership unless the owners elect corporate treatment.

For married couples, that usually means:

• Filing Form 1065 each year

• Issuing Schedule K-1s to both spouses

• Reporting rental income on Schedule E, Page 2

While this isn’t necessarily wrong or harmful, it does add complexity—and cost—compared with reporting rental income directly on a joint return.

Does Simply Owning Property Together Create a Partnership?

Not always. When two individuals hold rental real estate personally as tenants in common and simply rent and maintain it, the IRS may consider that co-ownership, not a business partnership.

But once that same property is placed into a multi-member LLC, the situation changes.

• An LLC creates a separate legal entity, so the “mere co-ownership” rule usually no longer applies.
  That’s why most husband-and-wife LLCs outside special jurisdictions must file partnership returns.

Can Married Couples Use the Qualified Joint Venture Election?

Some spouses who jointly operate a business can elect Qualified Joint Venture (QJV) status and avoid partnership filing.

To qualify, both spouses must:

• Be the only owners

• File a joint return

• Both materially participate

• Elect not to be treated as a partnership

However, there’s a major limitation:

• QJV status does not apply to rental properties held inside LLCs or other state-law entities.

For most LLC-owning couples, this option is unavailable

Community Property States Get Special Treatment

Geography matters more than most investors realize.

Spouses living in certain community property states can choose to treat their LLC-owned rental activity as either:

• A single “disregarded” entity (one Schedule E), or

• A partnership

This special flexibility exists only in:

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

If you live in one of these states, your tax filing options may be far simpler than those of couples elsewhere.

Why Most Couples Still End Up Filing Partnership Returns

For married investors in non-community-property states:

• The property is owned through an LLC

• QJV status isn’t allowed

• Co-ownership exceptions don’t apply

This means Form 1065 is required every year.

This is the compliance “cost” of the liability shield the LLC provides.

The Big Trade-Off: Protection vs. Paperwork

LLCs are powerful tools for risk management—but they aren’t tax-neutral when multiple owners are involved.

Before forming or restructuring a husband-and-wife LLC, investors should:

• Compare LLC protection with high-limit insurance

• Review their state’s property laws

• Estimate annual tax-preparation fees

• Consult a CPA or tax attorney

Strategic planning up front can save thousands—and eliminate frustrating surprises later.

Final Thoughts

A husband-and-wife LLC isn’t automatically wrong—but it does come with filing obligations that many couples don’t expect.

Understanding whether you fall into a special wexception—or must comply with partnership rules—can make the difference between smooth tax seasons and expensive compliance headaches.

Planning before you file is always cheaper than fixing things later.