LLC owns a house but neither of us take the income

[WillSun]

So, my brother and I were given our mothers house after she passed away, neither of us are in a position to move into the house so we have short term renters in the house.  We made an LLC for the house, we do not take any of the income made from the renting of the house, it just goes into an account. How do we do our taxes this year and not get hosed from the income. 

[Opus 17]

You pay the tax on any net profit, even if you didn't withdraw it from the LLC's account. It's still your profit from the rental arrangement.

You may be able to file a Schedule E for the rental, I'm not clear on this.  Most partnerships (which includes multi-member LLCs) file a form 1065 partnership return, but there may be an exception for residential rental LLCs.  Another expert will have to confirm that.  But either way, any profit is taxable to the owners even if you don't withdraw it. 

[Vanessa A]

An LLC is a flow through entity.  This means the income flows through the LLC and is taxed at the individual level.  If you split it up 50/50, then you each claim 50% of the income and expenses on your return.  The LLC does not get taxed, but it does need to file an information return, form 1065, which is a partnership return.  This will generate a K-1 for each of you with your share of income and expenses.  You will then both enter the K-1 on your return which will flow to Schedule E.  You will be taxed on the profit from the LLC. 

You will need to use TurboTax Business (not home and business) to file the 1065.  

When filing your individual taxes you will need to use TurboTax Premier to report the income from the K-1.

If you elected to be treated as an S-Corp, you will still need to use TurboTax Business, but instead of a 1065, you will file an 1120S.  This will still generate a K-1 for both of you to enter on your own returns and you will still be taxed at your personal rate. 

The way you will decrease your tax liability will be to take all the deductions you are allowed to take.  This would be things such as repairs, renting expenses,  utilities you pay for the tenants, etc.  Also, be sure to take depreciation, as when you sell the house (if you do) you will be required to recapture the depreciation whether or not you take it. 

[Anonymous_]

@WillSun 

You do not have to file a partnership return (Form 1065) if you do not want to go that route. Per Section 301.7701-1(a)(2), mere co-ownership of property, even if rented, does not create a separate entity.

As a result, you can each report your share of the income and expenses on your own individual income tax returns.

See also Rev. Proc. 2002-22:  https://www.irs.gov/pub/irs-drop/rp-02-22.pdf

Similarly, mere co-ownership of property that is maintained, kept in repair, and rented or leased does not constitute a separate entity for federal tax purposes.

[WillSun]

Thank you for the quick response.  Neither of us take any income from the property, it is put into an account for the house for repairs, taxes and such.  Would we both have to show it on our taxes as income, or should I do it as a business and do a k1 to each of us?

[Anonymous_]

You could each file your own return (1040) with a Schedule E or file a 1065 and issue a K-1 to each of you.

[Opus 17]

@Anonymous_ 

They did form an LLC.  Does that change your interpretation of the quoted section?

[Opus 17]

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@WillSun wrote:

Thank you for the quick response.  Neither of us take any income from the property, it is put into an account for the house for repairs, taxes and such.  Would we both have to show it on our taxes as income, or should I do it as a business and do a k1 to each of us?

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If you have a profit from renting the property, you pay taxes on that profit, even if you left the money in a separate bank account for future maintenance etc.  

[AmeliesUncle]

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@Anonymous_ wrote:

mere co-ownership of property, even if rented, does not create a separate entity.

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But in this case, they created a separate entity (they formed an LLC).  Wouldn't that require a 1065?

[Anonymous_]

OK, YES, if, in fact, the brothers formed an LLC in which they were both members, then a 1065 would absolutely be required in that event. 

@WillSun