I own some rental properties in my personal name, which I actively participate in the management of, but I am not a real estate professional. Every year I fill out a 1040 and Schedule E. I just got an EIN for banking purposes. Will the EIN not go anywher

[Carl]

Nope, the EIN doesn't go anywhere. Let me save you some time too.

Do not waste your time or money putting your rentals in an LLC. The IRS considers a single member LLC to be a disregarded entity. Therefore, you do not and can not report your rental income and expenses on SCH C. You *HAVE* to report them on SCH E. So if you create an LLC and put your rentals into that LLC, you will still report all rental income and expenses on SCH E. You will report absolutely nothing concerning your rentals on SCH C. Nothing what-so-ever.

Here's some of the Q&A's I see on this most often.

Q: Can I put my rentals into an LLC?

A: Of course you can. Buy why? It changes nothing what-so-ever for how you report your rental income and expenses on your tax return.

Q: Won't putting my rentals into an LLC provide me a "veil of protection" should I ever be sued by a tenant for liability"

A: Not really. The "veil" provided by an LLC is so thin that it's practically worthless. It's extremely easy for a lawyer representing the plaintiff in a suit, to "go around" your so-called veil of protection offered by an LLC, and take you for everything you own.

Q: Are there any other drawbacks to putting my rentals in an LLC?

A: Yes, and they are many. But the major one is if you have a mortgage on the property. You can't just go willy-nilly and change the name on the deed from your name to the LLC's name. You need the mortgage holder's permission to do that. No mortgage holder in their right mind is going to grant you that permission either. If you default on the loan, they don't want to risk not being able to go after your other assets, however minimal that risk may be. The lender just isn't going to allow it.

Q: Why can't I report my rental income and expenses on SHC C as any other business does?

A: While it's true that renting out property is a business, it's not like other more common businesses. For example, if you work from home selling stuff on e-bay, the income you earn by doing that is "active" income; meaning that you actually have to "do something" on a recurring basis to earn that money. That business income is reported on SCH C and is subject to the additional 15.3% self-employment tax which goes towards your Medicare and future social security benefits.

But rental income is "passive" income. All you do is "sit there" and collect the rent each month. You don't "do" anything on a recurring basis to earn it. Therefore, passive rental income (unlike active business income) is not subject to the additional 15.3% self-employment tax, since you don't "do" anything to earn it. Rental income also does not count when figuring your tax deductible or tax deferred retirement plan contributions either. (both traditional and ROTH). It also doesn't count for social security.

Q: What if I put my rentals into an S-Corp?

A: All that does is require the S-Corp to file it's own physically separate 1120-S tax return. The rental income to the S-Corp is still passive income, and it's still reported on SCH E by the S-Corp. So tax-wise there's absolutely no benefit.

Q: How about if I file the 8832 requesting the IRS treat my LLC "like and S-Corp"?

A: Of course you can do that. It still changes nothing on the tax front. The S-Corp will still report all rental income and expenses on SCH E. As for that better "veil of protection" an S-Corp offers, you won't get it. Just because the IRS and your states Division of Corporations agrees to treat your LLC like an S-Corp for tax purposes, does not in any way obligate the courts to treat your LLC like an S-Corp, in the event your are sued by a tenant for liability.

Q: So what can I do to protect myself and my assets if I am ever sued by a tenant?

A: Check your insurance policy on the property. Traditionally, all rental dwelling insurance policies will include at a minimum, $300K of liability protection. You can raise that amount if you so desire. Where I see the biggest blunders on this, is when a property owner moves out and converts their primary residence to a rental, yet fail to update their insurance policy.

While living in the house as their primary residence, they carry a "homeowner's policy" on the property. Such a policy covers absolutely nothing if the house is used for anything other than your primary residence.  Upon vacating the property and converting it to a rental, it's imperative the property owner contact their insurance agent to convert the homeowner's policy to a rental dwelling policy. If that's not done and a claim is file "for any reason", then chances are high the insurance company can (and will) deny the claim and have every right to do so since the property was not being used for the purpose it was insured for under the homeowner's policy. If the losses are high, the mortgage holder is not going to be happy and that will create more legal problems for you.

[suzyquzy]

Can you provide the cite for this information? People should know whose opinion they are getting.

[ene777ene]

Reading your comment does give me relief Carl, but SuzyQuzy is right, I would feel better with a citation for where it came from?

Thank you for the information on LLCs, I was not planning on getting an LLC 🙂 I see the waste that they are.

[Carl]

LLC's aren't a waste at all. It's just that establishing an LLC solely for rental property is. If you're going to do that with rental property, then you're better off creating an S-Corp for that. An S-Corp offers a significantly better veil of protection than does an LLC by far. The rental income is still passive.... but it's passive to the C-Corp and that passivity is passed to the owner in the way of distributions on the K-1 issued to the owner by the S-Corp.
You have to do other things too like ensuring that rent payments are made to the S-Corp, and not the owner.
I myself have three rentals, all in excellent shape and I'm extremely picky on selecting my tenants. None of them are in an S-Corp or LLC, as with $300K of liability coverage in my rental dwelling policies, I'm fine.
As for a citation, I've been a landlord for 25 years and when it comes to this stuff, I've been there, done that, got the T-shirt. I'm not willing to spend the inordinate amount of time necessary to "prove" myself. If my 25 years of experience isn't good enough for you, then I understand. You can always talk to a lawyer that specializes in tenant/landlord issues. A CPA or tax attorney would be knowledgable on the tax stuff, sure. But I wouldn't expect them to know sqat about anything beyond that when it comes to landlord/tenant issues. One thing I will point out though, is that since LLC's are a state thing, not all states treat LLC's the same when it comes to the legal protection. For my state of FL and a number of others, it's an absolute waste to use an LLC for rental property.
I've heard that KY treats LLC's for tax purposes at the state level, the same way the IRS treats an S-Corp at the federal level. But that's for taxes. Don't know if the "veil of protection" is any better though.
 When it comes to the veil of protection, that's a state thing. I know in a number of states it's rather easy for a halfway decent lawyer to find ways to circumvent that veil and go after the property owner's personal assets. I've read cases online about this occurring in FL all the time, mostly in the Miami/Dade County area.

[ene777ene]

I understand you not wanting to waste your time digging through pubs, and appreciate you sharing your experience.

I have 5 rental properties in my name, 300k coverage and a 1 million umbrella, those are all in my name.
I also have an LLC (Really a partnership) with a partner, which has more rentals. We formed the LCC for that because it gave us a lawyer familiar with partnership paperwork. Also because we have no intention of piercing that LLC's veil. All work is done by professionals, management is performed by others, books are kept completely separate from personal finances, etc. In my state (NY) you can of course sue and win for anything, but this just adds a level of difficulty at getting to my personal assets, or rather my personal insurance protection.

I do see the importance of an LLC at time, but for the rental properties in my name, I would pierce that veil daily making it not just a disregarded entity by the IRS but also by the courts 😉

As a side question to your last comment, this is my first year with the partnership and the LLC. I think we will have to still do K-1s for the LLC?

[SweetieJean]

<a rel="nofollow" target="_blank" href="https://www.landlordology.com/landlord-rental-llc-limited-liability-company/">https://www.landlordol...>

[Carl]

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]

Yes I am sneaky.  I find it better to have people think I am a total newbie when asking questions.  Otherwise they may assume I know something that I might infact not know .
Thank you Carl that is very informative and very helpful. I plan on keeping the five properties I currently have in my personal name.
They have no relationship to the partnership and never will. The property the partnership has, and the properties it is going to buy, have seperate accounts. The mortgages are in the name of the LLC but are personally guaranteed by my partner and using our socials.

The partnership was started 2 months ago we have one property and are acquiring a second right now (offer accepted).  We plan to acquire 6 to 8 more within the next 10 months.
We probably won't take any distributions the first couple of years as all monies will be reinvested.

I am assuming that the EIN which I filed for is completely unrelated to the partnership, but that might be a bad assumption? I filed for it specifically for the properties I own in my own name. My thought is that I won't need to use the EIN on any of my taxes anywhere and my social security number will be used everywhere?
But like I said I haven't filed taxes with the partnership before so I don't know if maybe some tax forms for the partnership will require my EIN. I would imagine if I use my social security number everywhere in the partnership and don't use my EIN then i wont use the EIN on my taxes.
When I acquired my EIN I checked for banking purposes only on the SS-4 form.  

I am usually excited to file taxes it is quite enjoyable to see the ins and outs of the IRS tax code. I get the feeling taxes for this year are going to be quite overwhelming, having a partnership and an EIN, however I still prefer to file myself.  (Well turbo tax is a huge help).

I am glad I got your interest with this conversation because I could always use some good learning :-).

I don't meet the real estate professional status yet, I am a software engineer full time. Still I can take up to 25k from real estate losses against my normal income which is all I need so far:) (of course this is if income is under 100k then it phases out up to 150k). In a couple of years i will becomes a real estate professional though.

[ene777ene]

I guess I should make it clear that for my personal properties I do not want to use a Schedule C I want to continue to use the schedule E.
From the sounds of it I can do that.

My other question is I do babiy sit and I do have to fill out a schedule C for, it is for mentally disabled individuals and New York state pays me. Would my Ein have to go on the schedule C which I fill out for that? I know your experience is in rental so you might not know the answer for that question.

[Carl]

I've got my own business too, having been self-employed as a computer consultant for 12 plus years now. So in addition to a SCH E for my three rental properties, I also file SCH C for my self employment. I've "dabbled" in babysitting back when my own daughter was in high school and babysat for the neighbors. I do recall quite a bit from helping her with her tax returns. I may not recall all the details. But I do know what matters.
 - Was the babysitting done in your home? Or the home of the person you provided the daycare for? That matters on the SCH C. If you did the caregiving in your home, then if certain other criteria are met, you may (or may not) be able to claim expenses related to that. (The program will know, based on your input and will ask the appropriate questions.)
For the babysitting income, I'm sure you're aware of the below. But I'm stating it anyway so it's "in writing". Besides, others reading this thread may find the information useful. For starters, I assume the EIN you obtained was *NOT* for the partnership, or any other business use beyond babysitting, or for your personal use. If so, then I highly suggest you use the EIN instead of your SSN on the SCH C. There's a reason for this.
 - The IRS issued you that EIN, and when you applied for it you had to "tie it" to a social security number which I assume is your social security number. So when you use the EIN the IRS "knows" what social security account to tie the self-employment taxes to. For others reading this, the 15.3% self employment tax is in addition to the regular tax, and is basically the employer side of your social security and Medicare payments. These payments are credited directly to the social security account associated with the EIN.
 - You are required by law to provide those who pay you for your babysitting services, the amount they paid you for the tax year, along with your SSN or EIN so they can claim the child care credit on their federal tax return if they qualify. Now I don't know about you, but there's no way on this green earth that I will 'EVER" under any circumstances provide my SSN to a client. Just not gonna happen. But I will provide them with my EIN. This is because if my SSN is ever compromised, it can totally ruin my life. However, if my EIN is compromised, the unscrupulous person using it illegally can only impact my business. So you should treat your EIN the same as you treat your SSN, and only provide it to those who have a demonstrated "valid" and "legal" need for it.

For your babysitting, you fulfill your legal requirement for this by providing all those who pay you a W-10 before Jan 31 each tax year. Get the form at <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/fw10.pdf">https://www.irs.gov/pub/irs-pdf/fw10.pdf</a>  To make things simpler for the issuer of the W-10 you can (and should) include the amount paid during the year on the back of the form. This form is not sent to the IRS or any other taxing authority. Its for the care provider's clients only. So in addition to the required information on the form, you can include any additional information as desired, that will make things easier and simpler for both provider and client. It would also be a good idea to keep copies of the W-10 in your own records, along with a signed acknowledgment of receipt by each of your clients, should they ever try to accuse you of not providing the information. (The penalties can be high, and if accused, the burden of proof is on *you*.)
Finally, on the babysitting/SCH C stuff, if your SCH C business earns less than $400 for the tax year, you'll still file SCH C and pay regular tax on the income. But if it's less than $400 for the tax year no self employment tax will be assessed or paid.

Give me a minute while I go do some digging for partnership information. I have some really good stuff that I'm sure you'll appreciate.

[SweetieJean]

@ene777ene  You are getting a lot of good info here for free.

[ene777ene]

I have to say we both have some tax obsessment  issues if we are doing this on the 4th of July.  🙂 wow, what are the chances you also have knowledge in the area of babysitting. It is only New York state that I babysit for. I get a 1099 miscellaneous from the New York State Office of the Comptroller every year,  have done it for a few years and they always use my social.  I'm of course fine with giving them my social. Should I be giving them my EIN number this year instead, or just leave it as is? The schedule C does have a spot for the social security number and a spot for EIN... so I guess even if no income goes to the EIN it would not hurt to put it there.

Here's another good question... probably a simple one for you but, when I 1099 contractors for working on my personal rental properties,  I will want to put my Ein on that form not my social. If I only fill out a schedule e how will the government link that 1099 to being from me? Thinking about it they  probably wouldn't really care I guess, and it is linked to my social anyways.  It just feels weird if I didn't have to do the schedule C for babysitting the Ein would not be on my taxes anywhere.
I look forward to the link you are going to post.

[ene777ene]

@SweetieJean you are correct and I am super grateful! Thank you @Carl for sharing all this knowledge. 🙂 hopefully others will learn some things as well!

[Carl]

For the state, you can provide your "personal" EIN if you like. But I'd feel fine giving them my  SSN since the state already has it in numerous databases already. But for an individual I was babysitting for, I would only give them my EIN. Of course, the EIN would need to be registered either in your name or you babysitting business name.
For the rentals, you'd need a separate EIN for that, because that is a separate "business" that has no relationship what-so-ever to the babysitting business. That EIN should be registered with the IRS in your legal name, since SCH E rentals don't have a "business name" per-se, and are not tax the same as your babysitting business is. Then for 1099's you issue to contractors for providing a product or service to your rental business, you use that separate EIN on their 1099-MISC's you issue them.
As I stated earlier, I flat out refuse to provide my SSN to anyone unless they can demonstrate and valid and legal need for my SSN, instead of my EIN. I myself have two EIN's. One is for my SCH C business, and the other is just in case I need to issue a 1099-MISC for anything related to my rentals. so far, I've never had to issue anything for the rental properties. But I'm sure my luck will run out at some time on that.