Investors & landlords

I did form and LLC (end of 2018) to buy, own and rent my rental property,

So if you did "IN FACT" form a "single" member LLC, then you, and you alone are the one and only owner of that LLC as far as your state *and* the IRS is concerned. Under no circumstances can there be more than one owner of a single member LLC. There are absolutely positively no exceptions.

The fact that you file a joint tax return with your spouse will not change the fact that you and you alone are the one and sole owner of the LLC.  (or your spouse if they are the sole registered owner of the LLC.) Otherwise:

If when you registered the LLC with your state you listed more than one owner, then it is not a single member LLC regardless of what you, I or anyone else may say. It is a multi-member LLC. Period. A multi-member LLC does not file a SCH C unless specific and explicit criteria are met. If that criteria is met, then  two SCH C's are filed with the joint tax return. One for each partner. That criteria is:

- The two owners of the multi-member LLC must live in a community property state.

- The two owners of the mulit-member LLC must be married to each other as of Dec 31 of the tax year.

- The two owners of the multi-member LLC must file a joint tax return.

- The two owners of the multi-member LLC must split *EVERYTHING* 50/50.

If all four criteria above are met, then your jointly filed 1040 return will include two physically separate SCH C's. One for each tax filer.

But the above does not change the fact that it is a multi-member LLC.

If both of you do not live in a community property state, then the multi-member LLC files it's own physically separate 1065 Partnership Return. The partnership then issues each partner their own personal K-1, which each partner will require in order to complete the personal 1040 tax return. It does not matter if the partners are married to each other and file a joint 1040 tax return.

We can discuss this point all day long and it will not change the way your state or the IRS sees this LLC.  So, is this a single member LLC or a multi-member LLC?

and my wife and I file jointly,

How you file (your filing status) just flat out does not matter when it comes to the LLC.

so the IRS consider it a sole proprietorship.

As of yet, I don't know that for an absolute fact based on the information about the law I have provided you above. But I will assume that you and you alone are the one and only owner of the LLC.

I will file my (the LLC) rental income, expenses (a lot), and depreciation on schedule E,

That is correct. Under no circumstances and with absolutely no exceptions, is long term residential rental real estate reported on SCH C.

but do I also file a schedule C for that LLC business because it owns the property?

If rental property is the only thing the LLC owns, then you will not file a SCH C at all. There is no need to.

BTW, I have another sole proprietor business that although retired and it's more on a hobby level now, I still file a schedule C for.

Again, under no circumstances and with no exceptions will you report one single penny of rental income, rental expense, or anything else concerning your long term residential rental property on SCH C.

The below is provided just to explain why do do not report long term residential rental real estate on SCH C, along with why it's a general waste of time to put rental property into an LLC.

Additional Information For Rental Property Owners

Occasionally a rental property owner will be “convinced” they need to put their rental property into an LLC (be it single owner or multi-owner LLC) as a means of protecting themselves and their personal assets from legal litigation should they ever be sued by a tenant. The property owner is told the LLC gives them and their personal assets a “veil of protection” from any legal litigation that may arise as the result of legal actions perpetrated by a rental tenant. Nothing could be farther from the truth.  If you check court records (even in your local area) you’ll probably find numerous cases where a tenant sued their landlord and the LLC provided practically no protection of the property owner’s assets. That “veil of protection” supposedly offered by an LLC is so thin, even a new first time lawyer has no problem piercing that veil and attacking the personal assets of the property owner on behalf of the tenant. In fact, many legal firms will give such cases to their “new hires” right out of law school because it’s a great confidence builder for them since it’s practically a guaranteed win for the tenant. There are other problems and issues with this too.

In order to legally transfer ownership of rental property to an LLC, the owner must have the permission of the mortgage holder. No lender in their right mind will give this permission either. Even if you think you can refinance the property or “sell” it to your LLC, unless your LLC has the cash on hand to pay for it in full, your LLC will never qualify for the mortgage loan. The lender doesn’t want to risk your LLC going under (by filing bankruptcy for example), and they lose money because of it. So I’m confident in telling you, that’s not going to happen.

When you create an LLC for your rental property, it’s generally understood that business income gets reported on SCH C as a part of your personal tax return. However, a SCH C business produces “earned” income, and a rental property produces “passive” income. What’s the difference?

Earned income is income which you have to go out and “do something” in order to earn it. This income is subject to regular income tax, and also an additional 15.3% self-employment tax. The SE tax is basically the employer side of your social security and Medicare. But rental income is not “earned” income, and therefore is not reported on SCH C. So if you create an LLC for your rental property, then absolutely nothing concerning that rental property will be reported on SCH C. Not one penny of rental income and not one penny of rental expenses.

Rental income is “passive”. That’s because all you do with rental property on a recurring basis is just “sit there” and collect the rent every month. You are not “doing anything” to “earn” it on a recurring basis. That’s why rental income is reported on SCH E. Rental income is subject to regular tax, but is NOT subject to the additional self-employment tax. This means that rental income DOES NOT COUNT for your social security account or Medicare contributions.

SO if you create an LLC for your rental property, there are two things that will NOT happen.
 - You will not be able to “legally” transfer ownership of the property from you, to the LLC unless you have a really dumb lender.
 - You will not report one penny of rental income or one penny of rental expense on SCH C.

So in the end, you will be filing a zero income/expense SCH C with your personal tax return.

Now let’s say you decide to file the 8832 to treat your LLC like an S-Corp, and then you transfer ownership of the property to your LLC. You can and will report your rental income on IRS Form 8825 as a part of the 1120-S Corporate Return. The corporation will issue each owner a K-1 with the rental stuff reported in box 2, and/or3, and/or 6 of that K-1. When you enter the K-1 into your personal 1040 tax return, the amounts in the aforementioned boxes end up on page 2 of the SCH E as a part of your personal tax return. Therefore, rental income/expenses is reported on SCH E no matter what.

But keep in mind that the S-Corp election is for ***TAX PURPOSES ONLY!!!****. So if a tenant sues you, I seriously doubt the courts will recognize your S-Corp, and I seriously doubt the court will recognize the S-Corp as a physically separate owner of the property. Remember, that 8832 Entity Classification Election is for “TAX PURPOSES ONY”. It has no weight at all for any and all other legal purposes – such as you being sued by a tenant.

SO if you want to do this (and it still makes no financial sense) then form an actual S-Corp and transfer ownership of the property to the S-Corp. More than likely the lender won’t allow the transfer. But you can sell the property to the S-Corp if the S-Corp can qualify for a mortgage loan.  Overall though, it’s still financially dumb to do this. Here’s why I say that.

When you move out of your primary residence and convert it to residential rental real estate, you have to convert your homeowner’s insurance policy to a rental dwelling policy. Or if you buy the real estate as rental property outright, then you have to obtain a rental dwelling policy at that time.  A rental dwelling policy will, at a minimum, include $300,000 of liability coverage. For most that will suffice. But if the property is in certain areas of the country you may want more liability coverage. I have three rentals myself and have a total of $1,000,000 of liability on each. It cost me less than an additional $100 a year on the insurance for each property. So for me, it’s worth it. It’s also significantly cheaper not only in money, but in time spent dealing with corporate taxes and all that other additional paperwork crap.

One mistake I see quite often is that when an owner converts their primary residence or 2^nd home to rental property, and they fail to update their insurance policy. This can bite when you have a claim. If the property is insured as your primary residence, but you are using it as rental property (which is other than it’s insured use) don’t be surprised when the insurance company denies your claim, and you can’t find any lawyers that will take your case.  If it’s a case of you being sued by a tenant, then to be honest and put it bluntly, you’re screwed.