Schedule E landlord with business use of raw land

[knightscove]

All of our properties are reported via Sched E with no Sched C

We have purchased raw land we hope to develop. In the meantime we use the land to store materials, dirt, tree trimming, store equipment trailers and work vehicles.

We have installed fencing, cut the grass, installed security cameras and have a separate tax bill, thus expenses.

Last year I reported the expenses on a Sched E but since its not rented to a third party I'm thinking that's not correct.

Thoughts?

Thanks

Tom

[Anonymous]

if the storage activites and items stored are for your rental properties I would take the total costs and divide by the number of properties the items pertain to.  then report the prorated expenses on each schedule E. or use some other method to prorate them that can be justified should the IRS inquire. 

[Critter-3]

"we use the land to store materials, dirt, tree trimming, store equipment trailers and work vehicles."

What are these things used for ?   Do you have another business ?   Or is this for the rentals only ? 

[knightscove]

Only business we have is rentals and yes its all used for the rentals.

[knightscove]

Good idea, maybe spread them as "Other Expense" with comment "Storage" to the other properties. 

Last year I filed with the storage area as its own Sched E. Think I should just delete it this year or do I need to follow some other procedure to handle?

Thanks

[Carl]

Last year I filed with the storage area as its own Sched E.

So what I'm imagining you did was to give that property an "in service" date as a rental, when it was never "available for rent" to anyone.

I would suggest you amend 2018 to remove that property from the SCH E, and prorate any expenses incurred for that property at a storage area, across any other rentals you have. You go 3 or more years reporting it on SCH E without that property generating it's own rental income, and there's a high probability that will raise eyebrows with the IRS, as well as with your state if your state taxes personal income.

meanwhile, can you give me some more details please? I'm wondering why, if you need equipment for rental property and stuff, just "exactly" what it is you do? Do you have only a few rental properties? Maybe you have tens of rental properties? Are they all residential properties? Business properties? Mix of both? What "do" you do?

I ask because I'm wondering if what you have would not be a SCH C business - which would be more beneficial in some aspects, and not so in other aspects.

[knightscove]

We have 91 doors, SFH, Apartment buildings, mobile home park, and mixed use.

We have a work van, pickup truck, john deer tractor and other tractors. Equipment trailer and trailers to haul junk or supplies. We have a steady crew of 3-4, we do all our own lawn care, painting, cleaning, repairs, roofing, flooring etc etc.

All this cannot live at my house as I don't even have parking for my own car 😉

I do share costs across the Sched E's like suggested. Why it didn't dawn on me for this I don't know. Maybe since its real estate and I just went ahead and created a Sched E for it. I was going to rent some of it out for camping but never did much with it. 

Its all in a single member LLC. We've grown it over the years and starting a Sched C didn't seem to have many obvious benefits. Maybe its time to learn more?

[Critter-3]

IMO this is not a rental ... it is simply investment income until you do something else with it past using it as storage.   The only real expense you could have possibly  taken on a Sch E that I can think of is the RE taxes and those should have been reported on the Sch A if you itemized deductions.  

[Carl]

@Critter-3 

IMO this is not a rental ... it is simply investment income until you do something else with it past using it as storage.

Good point, and I wholeheartedly agree. However:

The only real expense you could have possibly taken on a Sch E that I can think of is the RE taxes and those should have been reported on the Sch A if you itemized deductions.

But, wouldn't that depend on the actual owner of the property? I ask, because I don't know if the RE taxes (and possibly mortgage interest) could be claimed on the SCH A, if the LLC is the named owner of the property. If passive income is the only thing tthe single member LLC deals with, then claiming it as an investment expense (or whatever) on SCH C wouldn't really help much.

@knightscove 

We have 91 doors, SFH, Apartment buildings, mobile home park, and mixed use.

Since the TurboTax program can only handle of maximum of 15 SCH E forms, thats a maximum of 45 properties. So now I have the strong belief that you are aggregating at least half of your properties so you can use TurboTax. Is this so?

We have a steady crew of 3-4, we do all our own lawn care, painting, cleaning, repairs, roofing, flooring etc etc.

So do you pay your folks as W-2 employees? Statutory Employees? Or as 1099-MISC contractors?

I'm trying to learn and understand your setup here. I myself have been a landlord for around 30 years now. But I've only got (and ever had) three residential rental properties.

My lack of clarity arises because I'm wondering how you deal with payroll expenses if your crews are W-2 employees. I also wonder if your employees fall under the IRS criteria to be W-2 employees thus giving you no other choice or say in the matter.

I would think that if the LLC did not own the rentals, then the LLC would be a completely separate business reported on SCH C. The SCH C business derives it's income from the rentals which pays the SCH C business for it's services. Then in turn, the LLC pays it's employees from that rental income paid to it by the rental business(s).

From what I gather (and I'm not knowledgeable enough to understand "all" of the intricacies of this) what the rental business(s) pay the SCH C are deductible rental expenses on SCH E. Then the profits of the SCH C business which is determined after payroll and other expenses, is "earned" income. While that earned income will be subject to the additional 15.3% self employment tax, that income is also included when dealing with things like social security as well as the amount you can contribute to a qualified tax deferred retirement plan. (Such as a solo 401K maybe?)

Again, I don't understand all the intricacies of this, but I do know there are special tax considerations when one business you own, pays for the services of another business also owned by you.

Maybe its time to learn more?

I totally agree. Were I in your shoes today, I'd be seeking advice from a few estate planners, tax professionals, and legal professionals well versed and experienced in the corporate business world. I would want advice and information from multiple sources - not just one. It would cost money for that of course. But with what you've amassed at this point, I feel confident that it will be well worth every penny in the end.