How is each type of corporate vehicle used to invest in real estate taxed?
For US federal income tax purposes, a limited partnership is a pass-through entity. Thus, the limited partnership itself does not pay any US federal income tax. Instead, the income and loss of the limited partnership is passed to the partners who each report their share of income and loss on their tax returns. The taxable income passed to the partners retains its character; thus, if the partnership sells an appreciated capital asset that it has held for 12 months, each partner will be allocated capital gain (currently taxed in the US at more advantageous capital gains rates) from that sale. If the partnership has rental income, each partner will be allocated ordinary income. Note that some states charge a separate flat tax on limited partnerships owning real estate in their state.
For US federal income tax purposes, an LLC is a pass-through entity. Thus, the LLC itself does not pay any US federal income tax. Instead, the income and loss of the LLC is passed to the members who each report their share of income and loss on their tax returns. The taxable income passed to the members retains its character; thus, if the LLC sells an appreciated capital asset that it has held for 12 months, each member will be allocated capital gain (currently taxed in the US at more advantageous capital gains rates) from that sale. If the LLC has rental income, each member will be allocated ordinary income. Some states (such as California) impose an entity-level tax on LLCs.
For US federal income tax purposes, a general partnership is a pass-through entity. Thus, the general partnership itself does not pay any US federal income tax. Instead, the income and loss of the general partnership is passed to the partners who each report their share of income and loss on their tax returns. The taxable income passed to the partners retains its character; thus, if the partnership sells an appreciated capital asset that it has held for 12 months, each partner will be allocated capital gain (currently taxed in the US at more advantageous capital gains rates) from that sale. If the partnership has rental income, each partner will be allocated ordinary income.