How to handle rental income for LLC where property is only in the name of one partner but income is 50/50

[ostergaardam]

My brother and I partnered on the purchase of a short term rental property last year (2021). We were equal investors in the purchase by capital % (50/50), but the property was only put in my brother's name. We also formed an LLC to manage the business expenses and income from the property. 

In order to account for my income as a partner in the LLC, I began filling out form 1065 but found myself questioning how to properly define the business income as the LLC is not the owner of the property seeing as it is in my brother's name. Do I still fill out form 8825 to demonstrate the real estate income of the property that informs Schedule K (form 1065)? The only income generated by the LLC is generated by rental income from the STR property in my brother's name.

Your thoughts are much appreciated.

Thank you.

[ostergaardam]

I should also mention that we treat have treated the mortgage, PMI, taxes and insurance payments on the property as a business expense.

[ThomasM125]

It doesn't matter whose name the property is in, the LLC is set up to manage the property, so the two of you can be partners in that. You do need to prepare the partnership return 1065 along with the rental schedule 8825, reporting all the income and expenses of the partnership. When you are done, you will generate a schedule K-1 for each of you, which will report your share of the partnership net income or loss, that you will then use to enter that amount on your personal tax return.  

[Rick19744]

Not sure I understand the vision or goal here, but your brother owns the property individually since it is in his name.  Your facts make note that "my brother and I partnered on the purchase of a short term rental property...." doesn't jive with the property being owned 100% by your brother.

As noted by @ThomasM125 , any rental income or expense related to this property is not reported on the form 1065 or form 8825 based on your current facts.

Based on your facts, the LLC manages the property.  As such, what gets reported on the LLC tax return is the income the LLC receives to manage the property and any related expenses.

You may need to meet with a professional who can help you sort out the vision and goal and help you get to that goal using the correct entity structure(s).

[ostergaardam]

All income from the property is deposited directly into a business bank account in the name of the LLC. Expenses for the business are payed from that account and profits from the rental income are shared 50/50 by myself and my brother. Why wouldn't that qualify as being reported on the 1065 and 8825 form? If it isn't reported in that manner, how would I (and my brother) account for the income from the property in our personal taxes?

[DianeW777]

It does qualify for partnership treatment, however you indicated that you are deducting the mortgage, PMI, taxes and insurance which would not be allowed because this property is not in the name of or held liable by the partnership. 

Since the property is in the name of your brother, then you should seek legal council to add both names to the property.  Only the legal entity that is liable for the debt can deduct the expenses for the purchase of the property for business use. Also, the partnership agreement should be reviewed to be sure it is sufficient for your needs.

Secondly, mortgage payments are not deductible.  The cost of the property, including purchase expense and/or capital improvements is a depreciable asset, meaning you deduct a portion of this cost each year.  This is only allowed by the person or company that owns the property, has title or deed and is liable for the debt.

You can report the income and general expenses such as advertising, or contract labor for maintenance (not including any capital improvement cost to the building itself). 

Please update for further clarification.

[Rick19744]

You have a serious issue here and you need to get some professional advice and separate the business (LLC) income and loss, from the rental income and expenses.

You are mixing business and personal income and expenses.

The LLC does not own the property!!!

If you don't get this corrected quickly, you will have a significant tax problem.