Changed rental property from sole proprietorship to husband-wife partnership on Jan 1, 2022. Manually filled out 1065 and K-1's. Where do I enter the K-1 lossses?

[Carl]

I haven't refreshed myself by reading through this thread. But I am assuming you are dissolving the partnership on Dec 31 2022 and will wait until next year when you do your 2023 tax return to enter the property on your 2023 1040.

When I send that again, I can either tick the "Final return" box or leave it unchecked.

You'd check that box.

Then what? I was going to change our partnership to a sole proprietorship so that we could just do all our taxes on TT Home & Business, Schedule E.

You sure are hung up on that "sole priorietorship" terminology. 🙂

But you've convinced me that if change the partnership to a single owner, my wife, it doesn't make it a sole-proprietorship.

It's simply a passive activity.

Once I write up a contract where I give my 50% share in the partnership to my wife, can we still have bank accounts and get 1099-NEC's from our management company (that collects the rents) all in the name of our LLC using the LLC EIN, but then just enter it in Part I, as if we were just individuals making rental income?

Change things with the management company where they provide a 1099-MISC (not 1099-NEC) with all income paid for "any reason" concerning the rental, in box 2 of the 1099-MISC. No other box should have any income paid to you reported in it. Since you're filing a final K-1, the partnership is closed and the EIN for that partnership is no longer active. So they will issue the 1099-MISC to any one of the owners using the SSN (not an EIN) of that owner.  I really doesn't matter whose SSN they use, so long as it's one of the tax filers that owns the property, and is one of the tax filers on the joint return.

When you enter the property on SCH C in TurboTax 2023 next year, several things to note:

 - On a joint return, you will have options to select the owner/income recipients.

     a) tax filer #1

     b) tax filer #2

     c) Both of us

Simply select the "Both of us" option and press on.

 - When entering the property assets, all information (with 2 exceptions) will be identical to what was on the 1065. I'm not sure, but I do believe the 1065 will produce two "unofficial" form 4562's that print in landscape format. One is titled "Depreciation and Amortization Report" and the other is "Alternative Minimum Tax Report". You will need those two printouts to enter everything on your 2023 return so it matches exactly. The only two columns that will not match (because you don't actually enter them) is the "prior year's deprec" column and possibly the "current year deprec" column.

I'm not 100% certain the 1065 will have the 4562's I mentioned above. So for the final printout of the 1065, select the option to save absolutely everything in PDF format. That's the only way to ensure you save all the forms and calculation worksheets. Then search that PDF for the two 4562's I mentioned above.  I've attached below a screen shot of one of the 4562's I'm referring to. Just click it to open and view it.

[korz]

@Carl  Thanks!

So there's no way to have this run via an LLC unless it's a partnership?

I've already sent in the 1065 with the "Final return" box checked.  I was going to send an amended return because of a typo in the 1065, but if they've already closed the partnership and nixed the EIN, we may not be able to un-do that.  So it would seem that the partnership has been dissolved in the eyes of the IRS.

Thanks again.

[MarilynG1]

Yes, an LLC must be either a Partnership or a Corporation.

A single-member LLC will file a Schedule C.  A married couple can choose 'disregarded entity' as an SMLLC and file with two Schedule C's.

Here's more info on LLC Taxes and Husband/Wife LLCs. 

@korz 

[Carl]

A single-member LLC will file a Schedule C.  A married couple can choose 'disregarded entity' as an SMLLC and file with two Schedule C's.

This thread pertains to long term residential rental real estate, which is not reported on SCH C.

[Anonymous_]

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@Carl wrote:

A single-member LLC will file a Schedule C.  A married couple can choose 'disregarded entity' as an SMLLC and file with two Schedule C's.

This thread pertains to long term residential rental real estate, which is not reported on SCH C.

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It would not be applicable in any event since the spouses do not hold their interests in the LLC as community property in a community property state.

[Carl]

So there's no way to have this run via an LLC unless it's a partnership?

Stop over thinking things and creating complexity where it doesn't exist. You can call it anything you want. It still gets reported on SCH E.

I was going to send an amended return because of a typo in the 1065, but if they've already closed the partnership and nixed the EIN, we may not be able to un-do that.

If the 1065 you submitted was accepted by the IRS, and the "final" box was checked, you're done. The only way to "undo" it, is to file an amended return to un-check it. But if the only thing you're doing is unchecking the "final" box with an amended return, don't bother. The only time the IRS requires an amended return, is if/when amending changes your tax liability.  If you were to submit another 1065 with the same EIN next year, that would do it. But why bother? There is absolutely nowhere what-so-ever on the SCH E where you will enter an EIN.

[korz]

Actually, our questions all are about short-term rental real estate (vacation condo), but from what I gather, that doesn't matter.

[korz]

We neither live (Illinois), nor is the vacation rental condo (Florida), in a community property state.

[Anonymous_]

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@korz wrote:

We neither live (Illinois), nor is the vacation rental condo (Florida), in a community property state.

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Exactly, so you and your spouse would have to file a 1065 if you were both members of an LLC that held title to, and rented, the condo in Florida.

[korz]

Indeed.  I looked at the Sched E Part I asks only for a SSN.

Part II asks for an EIN, but that's presuming we stay a partnership and I don't want the extra paperwork and cost of that.  What I liked about the partnership was that the bank account was in the name of the LLC rather than our names and the management company only knows our EIN and not our SSN.  Now we'll have to open a bank account in one of our names if we want to keep the money separate and also we'll have to share one of our SSN's with the management company.  On the plus side, we don't have to keep filing Annual Reports, which cost money, and we can use TT Home and Business for all our taxes... we don't have to buy TT Business for the 1065/8825/K-1's and the related 4562.

[korz]

Yes, that's what we did for 2022, but because I'm cheap, I did the 1065 and the 8825 and the 4562 and the two K-1's manually... typing into a pdf, printing, signing, and sending in an envelope.  I'm trying to avoid that next year and so we're dissolving the partnership, but I'm used to a sole proprietorship and was trying to shoehorn our short-term real estate rental endeavor into a sole proprietorship.  @Carl has kindly shown a lot of patience while explaining to me how a sole proprietorship cannot do a real estate rental because it's passive income.

[Anonymous_]

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@korz wrote:

I'm trying to avoid that next year and so we're dissolving the partnership....

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To be blunt, your problem is not the partnership, it is the LLC. An LLC is considered a state law entity by the IRS which does not qualify for qualified joint venture (QJV) treatment (your interests in the rental are not held as community property in a community property state).

See https://www.irs.gov/businesses/small-businesses-self-employed/election-for-married-couples-unincorpo...

If you had a partnership with your spouse (not an LLC, which defaults to a partnership when it has more than one member), then you could file a Schedule E for the rental and you could still get an EIN from the IRS (and use that instead of your SSN for your personal security). 

[korz]

The reason I MUST send an amended return is because I accidentally omitted a minus sign (or parentheses) on each of the K-1's.  I correctly showed a $15,176 loss as -15,176 on line 2 of schedule K of the 1065, but I accidentally showed each of the K-1's as just 7,588.  In the amended return, I have each as (7,588), i.e. a loss.  Or is it better to type -7,588?

[korz]

Interesting.  Thanks!  I wonder if I can dissolve the LLC partnership and create a new partnership that is not an LLC?  I got bad advice online (that never happens!) that an LLC protects you from liability when you rent property.  But since we didn't have the LLC until the beginning of 2022 and mingled funds in 2021 between the real estate endeavor and our personal accounts, even a law student could go for our personal assets in a lawsuit.  We tried to have the deed in the name of an LLC, but the bank would not let us change in the middle of underwriting.  We have liability insurance and there's nothing particularly dangerous for tenants to use like bikes or a pool or a free use of the condo howitzer.

[korz]

I don't think that we can be a QJV... because by definition, real estate rental is passive income and we'd have to give massages to tenants or walk their pets or do their dishes to materially participate.  But I think that if we were a partnership, I'm still stuck doing the 1065 and 8825 and K-1's and B-1 and B-2 and the associated 4562, which I don't want to do.