LLC Owned Vacation Condo Managed by Rental Management Company

[pokytrokyt]

We set up an LLC In DC with 2 partners (self and spouse) in 2021, each owning 50%.

The LLC purchased a vacation condo in SC in 2022.

The condo is managed by a rental management company.  They set rental rates, collect all rents and send the LLC a monthly payment for earned revenue, after deducting their management fees.

At the end of the year, they sent a 1099-MISC to the LLC.

I was planning for the LLC to pay Federal taxes on that income as a partnership, and sending K-1's to the LLC partners for our Federal tax return.

Does the LLC need to file a state tax return in SC? In DC?

Do I need to file a personal tax return for that income in SC? In DC?

I understand we could treat the LLC as a sole proprietor partnership, since the partners are a married couple, but we'd like the flexibility to sell part or all of our share to other family members in the future.

[AliciaP1]

Since you are running your business as an LLC you do not qualify to file as a Qualified Joint Venture (Schedule C on a joint return) unless you lived in a community property state.  Therefore you will need to report 2022 income on a partnership tax return (Form 1065) with Schedule K-1s going to each of you.

The partnership return will need to file in SC but only needs to file in DC if there is additional income to report from DC sources. Additionally, there are nonresident partner withholding taxes and entity-level potential tax liabilities that may need to be paid throughout the year. See SC Partnership for more details.

Personally, you will need to only file a state tax return for your personal state of residency.

[pokytrokyt]

The conversation did not answer all my questions.

Correct me if I'm wrong:

The LLC prepares a Federal 1065 return and does not pay Federal taxes itself, but instead sends Schedule K-1's showing the LLC's profit/loss to the partners for inclusion in preparing their personal 1040 Federal tax return.  

My remaining confusion concerns the state taxes for the LLC.  

Turbotax Business generates a companion state 1065 when the Federal form 1065 is created.  Even though my LLC is registered in DC, based on prior advice - the income I earn on real estate owned in SC is taxable in SC, not DC.  I THINK I will need to prepare and submit an SC1065, not a DC1065.  The profit for the LLC will be reported as the sole income on a composite SC1040.  If there is a loss, no SC1040 needs to be completed unless estimated taxes were prepaid.

Is this correct?

[DaveF1006]

Yes, this is true. If the rental property is located in South Carolina you will report the income from that piece of real estate in a SC 1065 return. Keep in mind though that the income may populate into your DC 1065 from the federal return also and you may need to exclude this from DC income so you won't get taxed in both states.

If there is a income loss from that piece of real estate, you have an option whether to file it or not, unless there are estimated taxes as you mention. This is a consideration since there is no other SC income to report on the state return.

Not knowing SC laws, it may be wise to file just to escape scrutiny from the SC Dept of Revenue, even though it is an income loss. Some jurisdictions are stranger than others.