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Anonymous
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LLC Owned Rental Property - Vacant First Year

An LLC is created, purchases a property mid-tax year, makes it available for rent (posts online), but does not get any tenants in the first few weeks.  The LLC realizes the property needs a renovation to be competitive and starts that process, making the property temporarily idle (out of service for repairs and improvements), completing the renovation in the following tax year.  

For that first tax year, the LLC will show no income (no tenants), but a number of deductible expenses (utilities, mortgage interest) and depreciation.  

 

1) Despite not having income in the first tax year, can the LLC take the deductions, as the property was made available for rent?

2A) In that multi (2)-member LLC, will form 8825 be used (not schedule e), ultimately showing a "net rental real estate loss" on the 1065 partnership return?  K-1s are given to the members.

2B) Can that loss be carried forward in the following tax year to offset subsequent rental income despite the LLC members being high-earners (triggering passive activities phaseout rule)?

 

Thanks!

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3 Replies
M-MTax
Level 10

LLC Owned Rental Property - Vacant First Year

1) The LLC can take rental expenses as deductions starting when the property is available for rent.

2A) Your LLC will use form 8825. The net rental loss will be carried through to members on their K-1s.

2B) Members can carry the losses on their K-1s forward until they can be used.

LLC Owned Rental Property - Vacant First Year

the multimember LLC files form 1065 using form 8825 to report the rental activity. the profit or loss goes on k-1's so the members can report on their personal return.

high-income taxpayers (AGI over $150k) will get no benefit from the losses generated until they dispose of the property in a taxable sale. thus the provisions on section 1031 can not be used. 

 

M-MTax
Level 10

LLC Owned Rental Property - Vacant First Year

high-income taxpayers (AGI over $150k) will get no benefit from the losses generated

High income taxpayers can still use the passive losses generated to offset any passive income they might have.

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