What is a family limited partnership?
A family limited partnership is a state-law limited partnership whose partners all belong to one family. The general partner, often the parents or an entity they control, makes the decisions. The limited partners share in the income and value but have no say in running the business.
Families use FLPs and family LLCs to keep a rental building under one set of managers while ownership gradually passes to the next generation. Liability protection, one set of books and transfer restrictions that keep units in the family are part of the appeal, along with the gift and estate tax angle.
How an FLP or family LLC holds a rental building
The usual pattern is for parents to deed the building to a new partnership in exchange for all of its interests, then give limited interests to the children over time. An attorney drafts the deed, and if the building has a loan, the lender’s consent may be needed.
- Form the entity under state law and sign a partnership or operating agreement.
- Deed the building to the entity and update insurance, leases and the rent account.
- Parents keep the general partner or manager role, and some or all of the economic units at first.
- Get a qualified appraisal of the building and of the interests being transferred.
- Gift limited interests by written assignment and report them on Form 709.
- Run the entity like a business: its own bank account, books, K-1s and pro rata distributions.
FLP vs family LLC
Both are taxed as partnerships by default and both can own a rental building, so the choice mostly comes down to state law and who manages. Many families now use an LLC, which our LLC for rental property guide covers in more detail.
| Family limited partnership | Family LLC | |
|---|---|---|
| Who manages | General partner | Manager or managing member |
| Liability of manager | General partner can be liable unless it’s an entity | Members generally shielded |
| Non-managing owners | Limited partners | Non-managing members |
| Federal tax default | Partnership, Form 1065 and K-1s | Partnership if two or more members |
| Transfer limits | Set in the partnership agreement | Set in the operating agreement |
Why gifted FLP interests can be valued at a discount
A limited interest in a family partnership is usually worth less than its share of the building, because someone who bought that interest couldn’t control the property or easily resell the interest. Appraisers usually express this as a discount for lack of control and a discount for lack of marketability.
The IRS treats this as a valuation question, not an automatic benefit. Form 709 asks directly whether any reported gift includes a discount for lack of marketability, a minority interest or a fractional interest in real estate, and it requires an attached explanation of the basis and amount of the discount. The size of a discount comes from the appraiser’s analysis of the specific agreement and building, and it’s the number the IRS examines most closely.
Gift tax 2026 and estate tax 2026: the figures
For 2026, the gift tax annual exclusion is $19,000 per recipient, and the basic exclusion amount for gift and estate tax is $15,000,000 per person. Both figures come from IRS Rev. Proc. 2025-32, which says the 2025 tax law raised the basic exclusion to $15,000,000 for 2026 and that it will be adjusted for inflation for 2027 and later years.
Gifts above the annual exclusion don’t usually mean tax is due. They reduce the basic exclusion you have left for later gifts and for your estate, and tax is owed only once cumulative taxable gifts and the estate pass that amount.
| Item | 2026 figure |
|---|---|
| Gift tax annual exclusion, per recipient | $19,000 |
| Basic exclusion amount, per person | $15,000,000 |
| Generation-skipping transfer exemption | $15,000,000 |
| Gift tax return | Form 709, due April 15 of the following year |
Filing Form 709 for an FLP gift
Any gift of a partnership interest above $19,000 to one person in a year generally requires Form 709, and a married couple who wants to split gifts must each file. The return is due by April 15 of the year after the gift.
Adequate disclosure matters more than usual with FLP gifts. Under the Form 709 instructions, the statute of limitations on a gift starts only if the gift is adequately disclosed, which includes either a qualified appraisal or a detailed description of how fair market value was determined. The instructions also flag penalties if the reported value is 65% or less of the actual value, and larger ones at 40% or less.
Worked example: gifting LP interests in a 16-unit building
Let’s say a married couple owns a 16-unit building worth $3,000,000, free and clear, with an adjusted basis of $900,000. They put it into an FLP, keep the general partner role, and give a 10% limited interest to each of their two children.
Each 10% interest is a pro rata $300,000 of building value. Their appraiser concludes a 15% lack-of-control discount and then a 20% lack-of-marketability discount, so each gift is valued at $300,000 × 0.85 × 0.80 = $204,000, a combined 32% below the pro rata value.
If the couple splits gifts, each spouse is treated as giving $102,000 to each child. After the $19,000 annual exclusion, that’s $83,000 of taxable gifts per child, or $166,000 per spouse, which uses part of each spouse’s $15,000,000 basic exclusion and leaves no tax due. Both spouses file Form 709.
| Step | Per child |
|---|---|
| Pro rata value of 10% interest | $300,000 |
| After 15% lack-of-control discount | $255,000 |
| After 20% lack-of-marketability discount | $204,000 |
| Each spouse’s half (gift splitting) | $102,000 |
| Less annual exclusion per spouse | $19,000 |
| Taxable gift per spouse | $83,000 |
| Carryover basis in the gifted interest | $90,000 |
How the IRS challenges FLPs under Section 2036
The IRS’s main weapon against FLPs is Internal Revenue Code Section 2036. It pulls property back into the estate at full value if the decedent transferred it but kept the right to its income or enjoyment, or the right, alone or with others, to decide who enjoys it. When Section 2036 applies, the discount on the partnership interests can effectively disappear.
In Strangi v. Commissioner, 417 F.3d 468 (5th Cir. 2005), the court held the FLP assets includible under Section 2036(a)(1) because the decedent kept the use of them through an implied agreement. In Estate of Powell, 148 T.C. 392 (2017), the decedent’s son, acting under a power of attorney, formed the partnership shortly before her death, and the Tax Court held that her ability, together with the other partners, to dissolve the partnership was a retained right under Section 2036(a)(2).
Section 2036 has an exception for a bona fide sale for adequate and full consideration. Courts look at whether the entity had a real non-tax purpose and was run that way: separate accounts, no personal use of partnership property, distributions in proportion to ownership, and the transferor keeping enough assets outside the partnership to live on.
Basis: gifted interests vs interests held at death
A gifted FLP interest takes the donor’s basis under Section 1015, so the children in the example each start with $90,000 of basis, not $204,000. If the partnership later sells the building for $3,000,000, each child’s share of gain is about $210,000 before any depreciation taken after the gift, and part of that may be depreciation recapture.
An interest still owned at death generally gets a basis equal to its estate tax value under Section 1014, and that value reflects any discount. The partnership’s own basis in the building doesn’t change automatically: under Section 743(b), it adjusts for the heir only if a Section 754 election is in effect. Our step-up in basis guide covers the inheritance side in more depth.
Selling a building that an FLP owns
When an FLP sells its building, the partnership is the seller, and the general partner signs under the authority in the partnership agreement. The gain is reported on the partnership return and passed through to each partner on a K-1 by ownership share, using each partner’s own basis history.
A 1031 exchange has to happen at the partnership level if the entity sells, because the same taxpayer that sells must buy the replacement property. Partners who want different outcomes, some cashing out and some exchanging, need planning well before the purchase contract, and an installment sale through seller financing can spread the gain for everyone.
How this works for a 5+ unit apartment building
A 5+ unit building suits an FLP because it already runs like a business, with rents, payroll, a management company and a separate bank account. That same structure can help the entity look like a real operating partnership rather than a wrapper around a family asset.
The weak points are usually the loan and the paperwork. Commercial lenders may need to approve the transfer to the partnership, and each gift should be backed by a current appraisal of both the building and the interest. Have your CPA run the gift, basis and sale numbers together, because the right answer for estate tax may be the wrong one for capital gains.
Selling an FLP-owned apartment building to Skyline
Skyline Capital Investments buys 5+ unit apartment buildings nationwide, including buildings held by family partnerships, LLCs and trusts. We work with the general partner or manager who has signing authority, can offer seller financing terms for families who prefer spreading the gain, and can work with a 1031 exchange timeline.
Send the address and unit count through the form on this page or call (469) 660-2977. We typically respond within 48 hours.
