One question I do have is, does your rental income qualify as a "trade or business"? Most likely it does not. Especially since you were paying another entity to manage the property for you. But it "could" if it meets the IRS requirements to qualify as a trade or business. Typically, for someone who owns less than 3 rental properties it's not common. That doesn't mean it's not possible.
Can we use/file a 1040 Schedule C for the home based business related income and expenses?
No, for several reasons based on the assumption it does not qualify as a trade or business for all of 2020.
- Unless your residential rental real estate qualifies as a "trade or business" under the IRS guidelines, residential rental real estate is passive income that gets reported on SCH E as a part of your personal 1040 tax return.
- "WE" can't own a SCH C business. A business reported on SCH C can only have one owner, even if filing a joint return. (In community property states the tax filers that own a multi-member LLC can each report their 50% share on SCH C if they are married to each other and file a joint return.)
- Most likely, the data from the K-1 issued by your multi-member LLC for the rental property ended up on page 2 of the SCH E on your personal 1040 tax returns in the past, thus showing a history of passive income, as opposed to non-passive income that would be subject to normal taxes as well as the additional 15.3% self-employment tax.
When a rental activity does qualify as a trade or business for SCH C filing when previously filed on SCH E, the transfer of assets can be tricky since rental property is depreciated over 27.5 years, while business property is depreciated over 39 years.
