I transferred my personal real estate to LLC in middle of year and how should I report on schedule E? Do I just report everything on one property?

[DianeW777]

It depends.  If you are a single member limited liability company (SMLLC) you would continue to file a Schedule E. SMLLCs are considered disregarded entities separate from their owners.  This is because the IRS expects the taxpayer to carry the income onto his or her personal tax return using the Schedule E for rental real estate.  

If you have more than one rental property, you can choose to treat them as one property, although the choice is yours if you have a good method to remove one if one is sold. This will not be an issue if you enter each asset separately.  This way when one rental is sold, it could be easier to sell in the tax return without a lot of manual entry intervention.

There could be passive activity losses (PALs) to consider as well. These would be netted on Form 8582 and the carryover, if any, should be the same whether you combine them on one Schedule E/rental or separate them.

Please update or clarify if you converted your LLC to a partnership or an S-Corporation.

[elkiandart · Accepted solution]

Thank you DianeW777.  

I transferred my rental property in July 2023.  Do I report the whole year’s rental income and expenses on one property address on schedule E?  Or do I need to split into two properties with same address? Like first property address is from January to June and click dispose because I transferred personal property to SMLLC.  Then create another property with same address from July to December and click acquire this year.  Thank you for any help in advance.

[DianeW777 · Accepted solution]

No, you should leave it in tact as it is.  The reason is that the rental has 'relationship rules' attached which simply means that you had control before, you have control now and the property does not change it's position (cost, depreciation, date placed in service, etc). The depreciation does not change regardless of how you put it in.

• Related Persons in Tax Law (IRS Publication 925, page 22)

The date acquired does not change and the date placed in service does not change.  You can rename the property and keep the date of change in your tax return notes.

@elkiandart 

[elkiandart]

Thank you DianeW777.

You are very helpful and your answer makes sense.   I just want to clarify that I can just report everything on Schedule E like before, and nothing will be changed.  Also I live in California and I need to file CA Form 568 (Limited Liability Company Return of Income) for the year of 2023.  I need to report the rental income on this form and do I divide the total year income into half since I transferred my rental property to LLC in July?  
Thank you very much!

[DianeW777 · Accepted solution]

Yes, that is correct.  Report everything on Schedule E as if the SMLLC had not occurred.

And yes, you should file the CA Form 568 and you can divide the total year in half for that return since the LLC was not formed until July.

• Review the procedures in CA Form 568 Instructions (specifically SMLLC references)
• Form 568 must be filed by every LLC that is not taxable as a corporation if any of the following apply: The LLC is doing business in California. The LLC is organized in California. The LLC is organized in another state or foreign country, but registered with the California SOS.

@elkiandart 

[elkiandart]

Thank you very much.  

On CA Form 568, I have three questions:

1)  Item G: total assets at end of year: What should I enter in this box?  Will that be the value of the rental property minus depreciation and plus improvement cost? Or should I enter "0" in this box?

2)  Item Q: members in this LLC also LLCs or partnership?  I have two LLCs and each holds one rental property.  Will my answer to this question be "YES"?

3)  Item U (1): is the LLC a business entity disregarded for tax purposes?  And my answer to this question will be "YES".  Then Item U (2): if "Yes," see instructions and complete Side 1, Side 2, Side 3, Schedule B, Side 5 and Side 7, if applicable.  I read the instruction for CA Form 568 and it tells me SMLLC only needs to fill in Side 1, Side 2, Side 3, and side 7 (Schedule IW), but not Schedule B and Side 5.  Am I right?

Thank you.

[PatriciaV · Accepted solution]

1) Per the instructions for California Form 568, SMLLC's are not required to complete Schedule L. If this applies to you, leave the box blank. If you see a forms error, enter zero.

2) The question for Line Q refers to the owners of the LLC. For a Single-member LLC, this answer should be No.

3) An SMLLC is disregarded for federal tax purposes. so your answer would be Yes. 

U(2) If you have credits or credit carryovers for the SMLLC, you would need to complete the other sides/schedules for Form 568. In most cases, you would not, and your answer is No.

U(3) If your answer to U(1) was Yes, and if you have income that was not sourced in California, so that your total income is more than your California income, your answer would be Yes.

@elkiandart 

[elkiandart]

Thank you very much PatriciaV.

[elkiandart]

The activity for my LLC is residential rental only.  Which one should I choose for Question JJ on Form 568 Side 3:  

(1) Aggregated activities for IRC Section 465 at-risj purposes

(2) Grouped activities for IRC Section 469 passive activity purposes

Thank you.

[PatriciaV · Accepted solution]

If you have only one rental property, leave both boxes blank for question JJ.

If you have more than one rental property, see the instructions for federal Form 1065, under At-Risk Limitations and Grouping Activities, for help answering this question.

[elkiandart]

Thank you very much for your help.