Many married couples form an LLC to own rental property to obtain liability protection. After they create the LLC, they often ask an important tax question: Does the LLC force them to file a partnership return?

The answer depends largely on where they live and how they own the property.

Federal tax rules treat any unincorporated business with two owners as a partnership by default. When a husband and wife form a two-member LLC, the IRS normally requires a partnership return on Form 1065. Some exceptions exist, but most couples do not qualify for them.

Tax law allows “mere co-ownership” of real estate without creating a partnership. This rule applies only when individuals own property directly as tenants in common and simply maintain and rent it. Once spouses place the property inside a multi-member LLC, they move beyond co-ownership and create a separate tax entity. At that point, the partnership…