Can I use the purchase of a rental property through my business as an asset to lower the taxable income of the business?

[Carl]

It may not be that simple.

What kind of business? sole proprietorship? single member LLC? multi-member LLC? S-Corp? C-Corp? Partnership?

Who is the listed owner on the deed? You? Some other business entity of some type? Who is liable for the mortgage? You? Some business entity of some type?

Generally, the business has to be the legal owner of the asset in order to claim/depreciate it. That's because an entity (be it a person or "other") typically can not depreciate that which the entity does not own.

[austinstilley]

The property was bought through my business (which is an LLC). I am the sole owner of the business. The land and rental is in my business name.

[Critter-3]

If this is an unincorporated single member LLC that ONLY has a rental in it that is NOT run as a B&B or MOTEL  then you report the rental on a Sch E and not a Sch C.  

[Carl]

business (which is an LLC). I am the sole owner of the business. The land and rental is in my business name.

The IRS considers your single member LLC to be a disregarded entity. So if this is a long term rental, and not something like a B&B where you provided services that are directly benificial to the tenant on a recurring basis, then all rental income/expenses are reported on SCH E as a part of your personal 1040 tax return. Absolutely nothing what-so-ever concerning this property gets reported on SCH C.

So if rental property is the only thing owned by the LLC, you have absolutely no need to file a SCH C at all.

[Kerensa]

I have the same question. We're expanding our manufacturing business by putting the profits into a property. We bought a property to rent out furnished, short term, in the name of our LLC business. Where do I put the costs related to the purchase of the property?

[Carl]

the name of our LLC business.

Your reference to *OUR* LLC indicates this is a multi-member LLC and you probably report business income/expenses on IRS Form 1065. If so, then all rental income/expenses is reported on the form 8825. The K-1 issued to each owner will end up on page 2 of the SCH E of the 1040 tax return.

[Kerensa]

Thank you Carl for all that concise information. I should have clarified that "our" is my husband and myself, so we count as one. We bought the property with cash, so there is no mortgage. Does that change anything?

[Critter-3]

Nope ...just less expense to enter.  Remember to enter the property as an asset & depreciate the structure.  

[Carl]

I should have clarified that "our" is my husband and myself, so we count as one.

Not per the IRS. "Our" is completely different from "me' or "I".  If you do not live in a community property state, and both of you own a multi-member LLC, then you have no choice but to complete and file a 1065-Multi-member LLC/Partnership return.

If you do live in a community property state, then you can file the 1065, issue the K-1's and the related rental data will still end up on page 2 of the SCH E that is a part of your joint 1040 personal tax return. Or you can just report the income on SCH E from the get go, and there is no need to enter separate entries for each of you if you are married and filing a joint return. The SCH E section provides the option to identify that owner as either one of you, or both of you together.

there is no mortgage. Does that change anything?

Other than the fact you will enter either nothing or zeros for mortgage interest, it changes nothing. Either way you go, the end result still gets reported on SCH E as a part of your personal joint 1040 tax return.

Also be aware that it is most common for rental property to operate and every increasing losses each and every year, and those losses just get carried forward. In a case where you don't have a mortgage and thus no mortgage interest deduction to claim, it's perfectly possible to actually show a taxable profit. The major factor on weather it operates at a loss or gain would be dependent on the amount of depreciation you're required to take.

[Kerensa]

Where do I enter it as an asset, in order to depreciate?

We purchased it on Dec 30 of last year, and it will take about another year to complete the rehab before it’s ready to rent. Do we have to wait until it is available to rent before we can depreciate it?

[Carl]

Nothing gets depreciated until the property is rented, or available for rent.

Absolutely nothing concerning the rental property will be entered on SCH E of your 2021 tax return, since the property was not rented, or available to rent. The only thing you can claim on your 2021 tax return is property taxes you actually paid in 2020, and any mortgage interest to you paid in 2021. Both are a SCH A itemized deduction. That's it.

Make sure to keep all your paperwork from the closing, as you will need it for your 2022 return you'll complete next year, assuming the property is place in service as a rental in 2022.