Let's say your LLC is renting an entire building for $20000. The LLC subleases 1/3 of it to random tenants that are not a part of the LLC's business. It receives $4000 in rent from those tenants. I assume this rent has to be on a schedule E in order to avoid self-employment income (since this is passive income anyway). Now, is the LLC still allowed to deduct the full $20000 rent expense on schedule C? Or does it need to split it into thirds, and deduct only 2/3 on schedule C and 1/3 on schedule E as an "expense"?
What about other expenses that are related to the whole building? Let's say your LLC has to pay the water/sewer for the whole building as well. How does this expense get deducted? Split between 2/3 and 1/3 or just deducted on schedule C?
If the primary function of the LLC is *not* renting out property, then the sub-lease is included on the SCH C. For example, if you own a bait & tackle business that sells product and services, that is of course reported on SCH C. If your business pays rent for it's operating location, that is a SCH C business expense. If your business sub-lets a part of the building it pays rent for, then that rental income is reported on SCH C. Nothing needs to be reported on SCH E.
If the business owns the building, then you already claim the mortgage interest on SCH C and you already depreciate the building over 39 years. Nothing needs to change on that front. The rental income is basically included as "a part of" your regular business income.
The business will continue to deduct other business expenses such as utilities as normal, since most likely there is no separate metering between the building you rent or own, and the section of that building you sub-let out. There's also no change in how you report/claim property taxes or insurance.
I am assuming you are a single member LLC since you are filing using Schedule C. If this is the case, then yes, you would report the rental income on Schedule E. You would also prorate the rent expense between Schedule E and Schedule C as you have stated, 1/3 to Schedule E and 2/3's to Schedule C.
The other expenses you pay will be allocated the same way.
At the end of that thread, they said they ran into a situation when IRS required to amend the report to have it on schedule E.
@streampaw wrote:
At the end of that thread, they said they ran into a situation when IRS required to amend the report to have it on schedule E.
I read the post to which you are referring and, apparently, the business received a 1099-MISC with the amount paid by the sublessee presumably entered in Box 1 (Rent). Therefore, the IRS was most likely looking for that figure on Schedule E.
I am not certain why the same thing could not happen in this case which would be eliminated by reporting the payment by the sublessee as rent on Schedule E.
In a nutshell, this is more complicated than any of us may be considering.
The one issue I see with this, is that portion of the rented commercial property would be depreciated over 27.5 years. Yet, the entire property already has depreciation figured on 39 years on SCH C.
Now I've looked and can't find what I'm looking for. But years ago I saw an IRS pub somewhere that would most likely apply to this situation. That pub stated something along the lines of, even though it's reported on SCH E, depreciation would still be 39 years since it's commercial property that is already being depreciated over 39 years on SCH C.
So to "set this up" on SCH E, one would have to account for depreciation already taken on that property portion, on the SCH C. Additionally, the SCH C would have to be adjusted too. Overall, I see this as beyond the capability of the TurboTax program to handle correctly without an over ride, which would invalidate the 100% Accuracy Guarantee and require the return to be mailed instead of e-filed.
I've paid for the turbo tax self employed program. Would this property even be on schedule C at all? I assumed all of it would be on Schedule E now. I found some info that says if it's mostly commercial, it would still be depreciated over 39 years. Can we still do that on schedule E?
Do you own this building? In your original post you merely indicated the LLC (I presume single-member since you mentioned Schedule C) was "renting an entire building".
Technically, yes. One of my LLCs owns it and rents all of it out to my other LLC. Then that other LLC subleases some of it to outside tenants.
@Carl wrote:The one issue I see with this, is that portion of the rented commercial property would be depreciated over 27.5 years.
Why? The building should retain its character as nonresidential if sublet.
On the SCH E, if you identify that portion of the property as commercial rental real estate it will depreciate it over 39 years. But the problem with that, is that portion is already included in the cost basis on the SCH C. So you'll be double-dipping on the depreciation, which is not correct.If you change the cost basis on the SCH C by the amount you assign to the portion of property on SCH E, that will screw up the depreciation on SCH C for the current year and all future years. The change of cost basis on the SCH C will be treated "as if" that was the original cost basis when placed in service. The program will "see" that you took to much depreciation on that changed cost basis in past years, and will incorrectly adjust the depreciation for the current and all future years.
That's a problem that I don't see any way to overcome using TurboTax.
I don't have it listed on schedule C as of now. 2022 was when I got the building, both LLCs are me as a single member. Wouldn't I just list it on sch E and not on C? The LLC that owns the building only has the rental income, no other income. Plus it pays the mortgage.
I am not at all certain why, in this scenario, depreciation and expenses cannot be reported on Schedule C (as would be the case if there were no other tenants) while the rental income from any tenants renting a portion of the property cannot be reported on Schedule E (depreciation and other expenses have already been reported on Schedule C).
@streampaw wrote:
The LLC that owns the building only has the rental income, no other income. Plus it pays the mortgage.
I, for one, was under the impression that you were using the building for business purposes (for yourself as a single-member LLC) and then subletting a part of the building to another tenant or tenants.
I just assumed I don't even need to file a schedule C for the LLC that owns the property, since its only income is passive. Can commercial property only be depreciated on schedule C?
I have one LLC under which I conduct business. Llc owner rents it to LLC business, then the llc business subleases some of it to outside tenants that don't have anything to do with the business. Llc owner has an sba loan on the property and they had me set it up this way.
@streampaw wrote:
I just assumed I don't even need to file a schedule C for the LLC that owns the property, since its only income is passive. Can commercial property only be depreciated on schedule C?
No, but your original post (and a couple of subsequent posts) did not have sufficient information and/or contained some ambiguities.
If you are simply renting commercial property you own (via your single-member LLC), then the rental income and expenses (including depreciation) are reported on Schedule E.
I see. Yeah, I usually try to post my question in a simple way so that it's better understood. I find that when I post about my whole specific situation, it usually doesn't get answered very well.
In this case, would I split the expenses between the passive rental income portion and the active business portion? So 1/3 would go to schedule E as a rental expense and 2/3 to sch C as a business expense?
I'm still confused on how to report the expenses for the subleased part vs the part used for my business.
So, all in all:
Holding Company LLC owns the building.
Business LLC leases the whole building from Holding company LLC.
Business LLC sublets 1/3 of it (the residential apartment portion) to some random tenant.
I have two "properties" listed as "rentals", one is that my Holding Company LLC receives rent from my Business LLC. Business LLC is responsible for all utilities and repairs.
The other "rental" property listed in turbo tax is that my Business LLC receives rent from outside tenants for that apartment and pays some expenses for it.
How do we separate taxes for example? Taxes are assigned to the whole property. Do we just allot 1/3 of the taxes to schedule E? And the other 2/3 to schedule C as a business expense?
I assume depreciation will just be deducted in the first "property" I entered (where Holding Company LLC receives rent from Business LLC).
Your situation may not be as complicated as it seems. It looks like you have Holding Company LLC that owns a building with the intent to rent it (all of it) and you have Business LLC that does something else entirely. In my experience, Business LLC should not be subletting the building, but Holding Company LLC should be leasing to 2 tenants (Business LLC and Random). Since both Holding Company LLC and Business LLC are both single-member LLCs, all three of you (you, HC LLC, and B LLC) are considered one and the same so as long as you report all of your income, you can report it with the structure that makes the most sense.
So, a single-member LLC, that owns property for rent (or lease), reports on Schedule E and a single-member LLC, that operates a business, reports on Schedule C. Holding Company LLC should report the ownership of the building (including depreciation), all rent or lease income, and all applicable expenses for owning/operating the rental property on Schedule E. Business LLC should report all income from its business sources and all expenses from its business (rent should be prorated square footage actually attributable to the business usage) operations on Schedule C.
I would then recommend amending the lease to Random to a full lease (instead of sublet) from Holding Comapny LLC and the lease to Business LLC to reflect the correct square footage and lease amount.
I am required by the bank to lease the entire building via a triple net lease to Business LLC. Then, Business LLC is responsible for paying all the expenses associated with the building including taxes.
The complexities of this are brain bending, considering you're trying to deal with this in a text based communications medium of this public forum. I would highly suggest you seek professional help. One of those complexities deals with depreciation. For example, 100% of the property owned by the holding company is depreciated in it's entirety is depreciated over 39 years, assuming it's rented as commercial real estate. The property sub-leased out by the other company isn't depreciated at all, because the other company doesn't own it. A person or entity can not depreciate that which they do not own.
Yes, I understand that. I entered it into turbo tax where just Holding Company LLC is depreciating the commercial property, and Business LLC will not enter any depreciation. But I'm also asking about how to split the expenses, such as taxes and utilities, that are fully paid by Business LLC (because of the triple net lease).
But I'm also asking about how to split the expenses, such as taxes and utilities, that are fully paid by Business LLC (because of the triple net lease).
There's nothing to split that I can see. If Business LLC pays those expenses in full, then Business LLC claims those expenses in full.