turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
Announcements
Close icon
Do you have a TurboTax Online account?

We'll help you get started or pick up where you left off.

Erik32
Returning Member

Tax Filing for a rental property that was not placed into service in 2019

A rental property was purchased in 2019 through an LLC owned by me and my spouse. Improvements were not completed in 2019, and the property was not placed into service during that year.  If I understand correctly, we can't file a Schedule E this year due to this. How would we file to claim the mortgage interest, property taxes, etc. this year. We are in a community property state, and will file as a QJV.

 

I have read that these items should be claimed on a Schedule A. However, I am not 100% sure if that is the correct way if the property is owned by an LLC, even if it is disregarded.

Connect with an expert
x
Do you have an Intuit account?

Do you have an Intuit account?

You'll need to sign in or create an account to connect with an expert.

10 Replies

Tax Filing for a rental property that was not placed into service in 2019

that's the correct way for now........next year if you want to file for the LLC as disregarded under the IRS rev proc because it's owned by a married couple as community property you can each file a SCH E

Anonymous
Not applicable

Tax Filing for a rental property that was not placed into service in 2019

for 2019 and future years you must file partnership return.  the IRS says that a LLC can not file as a qualified joint venture 

 

https://www.irs.gov/businesses/small-businesses-self-employed/election-for-married-couples-unincorpo...

from the IRS article

How to Make the Election to be Treated as a Qualified Joint Venture

and

A Business Owned and Operated by the Spouses through a Limited Liability Company Does Not Qualify for the Election

 

 

Erik32
Returning Member

Tax Filing for a rental property that was not placed into service in 2019

We are in a community property state, so the exception to that applies to us.

Carl
Level 15

Tax Filing for a rental property that was not placed into service in 2019

A rental property was purchased in 2019 through an LLC

The below information does not all apply to taxes. But it "DOES" matter on the legal front. Just understand that rental property income/expenses is reported on SCH E *NO* *MATTER* *WHAT* kind of tax return you file. Be it a 1040 personal return or a 1065 partnership return.

Additional Information For Rental Property Owners

Occasionally a rental property owner will be “convinced” they need to put their rental property into an LLC (be it single owner or multi-owner LLC) as a means of protecting themselves and their personal assets from legal litigation should they ever be sued by a tenant. The property owner is told the LLC gives them and their personal assets a “veil of protection” from any legal litigation that may arise as the result of legal actions perpetrated by a rental tenant. Nothing could be farther from the truth.  If you check court records (even in your local area) you’ll probably find numerous cases where a tenant sued their landlord and the LLC provided absolutely no protection of the property owner’s assets. That “veil of protection” supposedly offered by an LLC is so thin, even a new first time lawyer has no problem piercing that veil and attacking the personal assets of the property owner on behalf of the tenant. Most legal firms will actually assign such a case to a newly hired lawyer as their first case as a confidence builder, because they are so easy to win. There are other problems and issues with this too.

In order to legally transfer ownership of rental property to an LLC, the owner must have the permission of the mortgage holder. No lender in their right mind will give this permission either. Even if you think you can refinance the property or “sell” it to your LLC, unless your LLC has the cash on hand to pay for it in full, your LLC will never qualify for the mortgage loan. The lender doesn’t want to risk your LLC going under (by filing bankruptcy for example), and they lose money because of it. So I’m confident in telling you, that’s not going to happen.

When you create an LLC for your rental property, it’s generally understood that business income gets reported on SCH C as a part of your personal tax return. However, a SCH C business produces “earned” income, and a rental property produces “passive” income. What’s the difference?

Earned income is income which you have to do out and “do something” in order to earn it. This income is subject to regular income tax, and also an additional 15.3% self-employment tax. The SE tax is basically the employer side of your social security and Medicare. But rental income is not “earned” income, and therefore is not reported on SCH C. So if you create an LLC for your rental property, then absolutely nothing concerning that rental property will be reported on SCH C. Not one penny of rental income and not one penny of rental expenses.

Rental income is “passive”. That’s because all you do with rental property on a recurring basis is just “sit there” and collect the rent every month. You are not “doing anything” to “earn” it on a recurring basis. That’s why rental income is reported on SCH E. Rental income is subject to regular tax, but is NOT subject to the additional self-employment tax. This means that rental income DOES NOT COUNT for your social security account or Medicare contributions.

SO if you create an LLC for your rental property, there are two things that will NOT happen.
 - You will not be able to “legally” transfer ownership of the property from you, to the LLC unless you have a really dumb lender.
 - You will not report one penny of rental income or one penny of rental expense on SCH C.

So in the end, you will be filing a zero income/expense SCH C with your personal tax return.

Now let’s say you decide to file the 8832 to treat your LLC like an S-Corp, and then you transfer ownership of the property to your LLC. You can and will report your rental income on SCH E as a part of the 1120-S Corporate Return, and you will also report the K-1 on SCH E as a part of your personal tax return. But keep in mind that this is for ***TAX PURPOSES ONLY!!!****. So if a tenant sues you, I seriously doubt the courts will recognize your S-Corp, and I seriously doubt the court will recognize the S-Corp as a physically separate owner of the property. Remember, that 8832 Entity Classification Election is for “TAX PURPOSES ONY”. It has no weight at all for any and all other legal purposes – such as you being sued by a tenant.

SO if you want to do this (and it still makes no financial sense) then form an actual S-Corp and transfer ownership of the property to the S-Corp. More than likely the lender won’t allow the transfer. But you can sell the property to the S-Corp if the S-Corp can qualify for a mortgage loan.  Overall though, it’s still financially dumb to do this. Here’s why I say that.

When you move out of your primary residence and convert it to residential rental real estate, you have to convert your homeowner’s insurance policy to a rental dwelling policy. Or if you buy the real estate as rental property outright, then you have to obtain a rental dwelling policy at that time.  A rental dwelling policy will, at a minimum, include $300,000 of liability coverage. For most that will suffice. But if the property is in certain areas of the country you may want more liability coverage. I have three rentals myself and have a total of $1,000,000 of liability on each. It cost me less than an additional $100 a year on the insurance for each property. So for me, it’s worth it. It’s also significantly cheaper not only in money, but in time spent dealing with corporate taxes and all that other additional paperwork crap.

One mistake I see quite often is that when an owner converts their primary residence or 2nd home to rental property, and they fail to update their insurance policy. This can bite when you have a claim. If the property is insured as your primary residence, but you are using it as rental property (which is other than it’s insured use) don’t be surprised when the insurance company denies your claim, and you can’t find any lawyers that will take your case.  If it’s a case of you being sued by a tenant, then to be honest and put it bluntly, you’re screwed.

 

Erik32
Returning Member

Tax Filing for a rental property that was not placed into service in 2019

Thanks for the reply. I understand that next year the rental property is filed on a Schedule E, with my and my spouse reporting our interests as separate properties on a single Schedule E. It was purchased in the name of the LLC from the beginning. However, improvements were not done by the end of 2019, so the property was not available the whole year. Because of this my understanding is I cannot file a Schedule E for the property this year. I am unsure how to file to claim the mortgage interest and property tax for the property this year since it is owned by the LLC, and we would normally file as a QJV.

Carl
Level 15

Tax Filing for a rental property that was not placed into service in 2019

It was purchased in the name of the LLC from the beginning.

So you're saying that the name of a living, breathing person is "NOT" listed on the ownership deed for the property. If so, you will not report anything what-so-ever on page 1 of the SCH E on your personal tax return. Absolutely nothing. You can't report/claim on  your personal return, that which "YOU" do not own in your own name. The LLC owns the property - not you personally.

Now if you registered the MMLLC as an "active" business in 2019, then you need to file a partnership return. The SCH E will be a part of that 1065 partnership return showing zero income and that the property "was" available for rent on or before Dec 31 of the tax year.

Property improvements are entered in the Assets/Depreciation section and depreciation starts on the "in service" date, which is the earliest date a renter "could" have moved in.

If the property was "NOT" in service on or before Dec 31, 2019 then  you will file a zero income 1065 return with "NO" SCH E included. It'll just be a very basic return showing zero income for the business, and that's all.

Do note however, that regardless of how you file this, not one penny of your expenses will be "allowed", even though you still claim them. You can only deduct passive rental expenses from the passive rental income. That can't occur until the tax year the property is actually "in service" and available for rent. For property improvements, it doesn't matter when or in what tax year those improvements were done either.  If you have no rental income to deduct them from, then they are just carried forward to the next year. But if you don't "claim" those expenses in the tax year they were actually incurred, then you can not carry them forward to the next tax year.

Now if your MMLLC was not registered with your state in an "active" status in 2019, then you don't need to report anything concerning the LLC or the rental on any tax return. You'll deal with it on the 2020 1065 return next year. Even though the property improvements were done in 2019, that doesn't matter since you can't start depreciating them until the property is "in service" in 2020. So you "lose" nothing there.

 

Tax Filing for a rental property that was not placed into service in 2019

It;s not a qjv.....look up rev pro 2002-69 and you'll see you have what the irs calls a "qualified entity"....as such you can treat the llc as disregarded and do not need to file a 1065....and llcs that have to file a 1065 do not file SCH E because all rental inc/exp is filed on form 8825.

Tax Filing for a rental property that was not placed into service in 2019

Liked your post.  Very informative. 

I inherited my father's mountain cabin 7 years ago and it's been in repairs ever since,  never been placed in service. 

I kept it in his trust until recently and want to transfer the capital expense losses to my tax return.

Do I just continue to keep financial records until the day that I place it into service and then I can add it to my return and begin depreciating those capital expense renovation costs over 15 years?

Tax Filing for a rental property that was not placed into service in 2019

TurboTax won't even allow a real estate asset to be listed on my return to create a schedule E, unless it's producing income. 

RobertB4444
Expert Alumni

Tax Filing for a rental property that was not placed into service in 2019

If your rental real estate has never been placed into service then it is not yet rental real estate.  So there would be no need for a schedule E.  You have no qualifying expenses until it is places into service.

 

While you are renovating keep track of all of your expenses and add them together.  You'll add them to the basis of the cabin once you start renting it and depreciate it all over 27 and a half years.  As soon as the cabin is available for rent - whether it is rented or not, or making money or not - then TurboTax will generate a schedule E for it.

 

@oggiejax 

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
message box icon

Get more help

Ask questions and learn more about your taxes and finances.

Post your Question
Manage cookies