Form 1065 - Commercial Rental

[nstillwell]

I (husband & wife) have an LLC which owns a commercial building.  The building is rented out all year long.  1/3 of the building is rented by a individual person.  2/3 is rented by my sons' LLC (automotive business) or which my husband and I are 20% owners.   The son's LLC pays rent to use the building, but has been known to skip a month when funds are low.  Question:  Does son's LLC count as personal usage since we own 20% of his busines?  If so, how do I allocate expenses across the rented vs personal usage?  Would items like depreciation only be deducted on a percentage base, i.e. 1/3 of the yearly depreciation?

[ThomasM125]

Your ownership interest would not constitute personal use since the business entity is paying you rent. Even if you ran your own business in the building it would be considered rental property of the LLC that owns it as long as rent was being paid to it.

[Rick19744]

I am going to disagree or want to clarify  @ThomasM125 on one part, however, I don't believe it changes the direct result of your specific question.

• Where I disagree or want clarification, is if you ran a separate business in the building, and materially participated in that business, then the rent would be considered self-charged rental.  This would complicate the nature of the rental activity.
  • This is due to the fact that rental is by default considered a passive activity.
  • Self-rental changes that characterization to nonpassive.
• Based on your facts, while you do own a business within the rental building (your 20% ownership), it doesn't appear based on the limited facts that you or your husband's involvement within your son's business rises to the material participation level.  While there is attribution between spouses, I don't see any attribution between parents and children in my quick read of the various regulations.
• If you would be considered material participants in your son's LLC, then 2/3 of the rent of the commercial building would be considered self-rental.  If that would be the case, I would recommend meeting with a tax professional to work through the issues and accurate tax filings.
• Ultimately, I agree based on the limited facts, there is no personal usage.

[AmeliesUncle]

---

@nstillwell wrote:

The son's LLC pays rent to use the building, but has been known to skip a month when funds are low. 

---

Are you not holding them responsible for the 'missed' payments?

If not, that seems like it could potentially fall into the not-for-profit rental situation (not renting at Fair Rental Value).

In my opinion, this is really something that you should NOT be doing yourself; you should be going to a good tax professional.