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Investors & landlords
You're just playing with folks in this forum for fun aren't you? 🙂
@ene777ene was not aware you had that much in rentals, and you specifically stated the rentals are "in my name" which anyone reading that would assume that, and nothing more. Definitely wasn't aware of the "with a partner" stuff. That has the potential to change everything. Because they are in your name, based on what I read in your initial post starting this thread, you've been doing correctly by reporting them on SCH E as a part of your personal tax return.
First, if the rentals are in your name, to correctly put them in the partnership they would have to be in the name of the partnership. Otherwise, a tenant's lawyer suing you can quite plainly see that "detour" around the partnership/LLC veil of protection you may think you have, yet doesn't exist at all.
If you can put the deeds in the name of the partnership (if the mortgage holders will allow it) It's perfectly possible that you "may" qualify to set this up as you want. One way to make this switch on the deed that the mortgage holders "might" go for, is if you personally "sell" it to the partnership. That would mean the partnership would apply for a new mortgage, and lenders love selling new mortgages.
Assuming you can, and in fact "do" do that, then make sure your tenants make their rental checks payable to the partnership - not to you or the other partner individually. Otherwise, it leaves a potential "hole" in the already thin veil of protection offered by an LLC.
In fact, what I would do in your situation with that many rentals and a partner, is I would form an S-Corp with the partner once I had confirmation my mortgage holders would allow my S-Corp to own or "buy" rental property.
Now for the tax stuff, as far as getting it treated as business income as on a SCH C, depending on your state (read those last four words again, *they are important!) you may be able to do that ***IF*** three basic IRS requirements are met and you can prove it if audited.
- You are a real estate professional by the IRS standards.
- Rental (passive) income provides a substantial portion (meaning more than half) of your taxable income.
- Rental real estate is your primary means of producing income and you spend more than 750 hours (not sure on the hours) per year dealing directly with real estate.(Note the IRS pub does not state "dealing with rentals". It states "dealing in real estate". This is stated somewhere in IRS Pub 925 (I think) at <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p925.pdf">https://www.irs.gov/pub/irs-pdf/p925.pdf</a>.
In some states (again, read those first three words again, as they are important!) the above three basic rules have to be true for all partners of the partnership or controlling members of the S-Corp, in order to treat it as active business income. If its not true for any one partner, then none of the partners can treat it as active business income. Again, this is state law specific.
For your K-1 question, a single member LLC doesn't issue any tax documents what-so-ever to the owner, since it's reported on SCH C as a part of that owner's personal tax return.
But you specifically stated "partnership". For tax purposes at the federal level, the only difference between a multi-member LLC and a partnership, is the spelling. Regardless of what you call it (multi-member LLC or Partnership) the "business" files it's own completely separate IRS Form 1065 Partnership return. You are correct in this case that the multi-member LLC/Partnership will issue each owner a K-1. But here's where it gets tricky.
If you'll take a look at the sample 1065 K-1 at <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/f1065sk1.pdf">https://www.irs.gov/pub/irs-pdf/f1065sk1.pdf</a> you'll see in part III where box one is for "ordinary" business income which is subject to the additional SE tax which "I think" is paid by the partnership in the name of each owner so their social security and Medicare accounts are property credited.
Box 2 is for that passive rental income, which will not be subject to the SE tax. Where you rental income ends up on the K-1, depends on how you answer the questions in the TurboTax Business program when filing that initial 1065 return. For the most part, you can fully expect all rental income to end up in box 2.
My head hurts. I could keep typing, but I'll give you a chance. I'm actually enjoying this discussion now.
@ene777ene was not aware you had that much in rentals, and you specifically stated the rentals are "in my name" which anyone reading that would assume that, and nothing more. Definitely wasn't aware of the "with a partner" stuff. That has the potential to change everything. Because they are in your name, based on what I read in your initial post starting this thread, you've been doing correctly by reporting them on SCH E as a part of your personal tax return.
First, if the rentals are in your name, to correctly put them in the partnership they would have to be in the name of the partnership. Otherwise, a tenant's lawyer suing you can quite plainly see that "detour" around the partnership/LLC veil of protection you may think you have, yet doesn't exist at all.
If you can put the deeds in the name of the partnership (if the mortgage holders will allow it) It's perfectly possible that you "may" qualify to set this up as you want. One way to make this switch on the deed that the mortgage holders "might" go for, is if you personally "sell" it to the partnership. That would mean the partnership would apply for a new mortgage, and lenders love selling new mortgages.
Assuming you can, and in fact "do" do that, then make sure your tenants make their rental checks payable to the partnership - not to you or the other partner individually. Otherwise, it leaves a potential "hole" in the already thin veil of protection offered by an LLC.
In fact, what I would do in your situation with that many rentals and a partner, is I would form an S-Corp with the partner once I had confirmation my mortgage holders would allow my S-Corp to own or "buy" rental property.
Now for the tax stuff, as far as getting it treated as business income as on a SCH C, depending on your state (read those last four words again, *they are important!) you may be able to do that ***IF*** three basic IRS requirements are met and you can prove it if audited.
- You are a real estate professional by the IRS standards.
- Rental (passive) income provides a substantial portion (meaning more than half) of your taxable income.
- Rental real estate is your primary means of producing income and you spend more than 750 hours (not sure on the hours) per year dealing directly with real estate.(Note the IRS pub does not state "dealing with rentals". It states "dealing in real estate". This is stated somewhere in IRS Pub 925 (I think) at <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p925.pdf">https://www.irs.gov/pub/irs-pdf/p925.pdf</a>.
In some states (again, read those first three words again, as they are important!) the above three basic rules have to be true for all partners of the partnership or controlling members of the S-Corp, in order to treat it as active business income. If its not true for any one partner, then none of the partners can treat it as active business income. Again, this is state law specific.
For your K-1 question, a single member LLC doesn't issue any tax documents what-so-ever to the owner, since it's reported on SCH C as a part of that owner's personal tax return.
But you specifically stated "partnership". For tax purposes at the federal level, the only difference between a multi-member LLC and a partnership, is the spelling. Regardless of what you call it (multi-member LLC or Partnership) the "business" files it's own completely separate IRS Form 1065 Partnership return. You are correct in this case that the multi-member LLC/Partnership will issue each owner a K-1. But here's where it gets tricky.
If you'll take a look at the sample 1065 K-1 at <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/f1065sk1.pdf">https://www.irs.gov/pub/irs-pdf/f1065sk1.pdf</a> you'll see in part III where box one is for "ordinary" business income which is subject to the additional SE tax which "I think" is paid by the partnership in the name of each owner so their social security and Medicare accounts are property credited.
Box 2 is for that passive rental income, which will not be subject to the SE tax. Where you rental income ends up on the K-1, depends on how you answer the questions in the TurboTax Business program when filing that initial 1065 return. For the most part, you can fully expect all rental income to end up in box 2.
My head hurts. I could keep typing, but I'll give you a chance. I'm actually enjoying this discussion now.
‎June 6, 2019
1:35 AM
20,407 Views
