If your LLC sublets a property, do you deduct the rent expense on Schedule E or on Schedule C?

[streampaw]

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? 

[streampaw]

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. 

[Anonymous_]

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@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? 

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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. 

[streampaw]

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? 

[streampaw]

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). 

[AliciaP1]

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.

@streampaw 

[streampaw]

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. 

[Carl]

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.

[streampaw]

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). 

[Carl]

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.

[streampaw]

Yes, but with turbo tax I'm entering income and expenses in two different places. One for schedule E, for the subleased rental apartment, and one for Schedule C, which are actual business expenses. 

[Anonymous_]

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@streampaw wrote:

I am required by the bank to lease the entire building via a triple net lease to Business LLC. 

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Does the bank understand that the LLCs are separate entities for state law purposes, but not for the purposes of federal income taxation? In fact, they are all one in the same for purposes of the latter since they are single-member LLCs and you are the sole member of each.

Note Section 162(a)(3) in terms of deducting rental payments for property in which you hold title or in which you have an equity interest. 

See https://www.law.cornell.edu/uscode/text/26/162

[you can also read through an old Tax Court case if you want: https://www.bradfordtaxinstitute.com/Endnotes/TC_Memo_1993-326.pdf]

Frankly, you need to consult with a local tax professional and, possibly, legal counsel in order to structure your holdings properly for federal income tax purposes.

[streampaw]

Yes, and the whole point was to be able to deduct the mortgage payments as rent in order to reduce se tax for Business LLC. So here I'm trying to figure out whether I need to split my building expenses between the apartment rented (reported on sch e as the sublease) and the business expenses (schedule c, which reduces se tax). 

[Anonymous_]

I am not sure why you could not simply enter the real estate as a business asset (nonresidential/commercial and depreciate it over 39 years) on your Schedule C and deduct all ordinary and necessary expenses related thereto. 

If you then rented some portion, you could simply enter the rental income as such on Schedule E and allocate the expenses (in accordance with the lease (sublease) agreement).

Personally, and do not take this as anything other than my opinion, I would have set up the business as an S corporation and held title to the real estate in my own name or in the name of an LLC. This scenario gives you a couple of ways to reduce certain tax attributes: (a) pay yourself a salary and take a share of the net income as ordinary income (no FICA or SE tax) and (b) reduce the net income (and salary requirement) by taking a healthy rent deduction - [use your imagination here]