Tax implications for collecting rent on behalf of another

[mroberts2]

Hello, 

I own 2 condos in the name of an LLC, and rent them out.  My neighbors also own a condo in the same complex, and we collect rents for them and pay some expenses on their behalf.  We do not charge them for this.  All of the profit after expenses is given straight to them.  Here are my beginner questions:

1) Should we give them a 1099?

2) Should the rent that we collect on their behalf be included in our "Gross Sales"?

3) Likewise, should the expenses that we pay on their behalf be included on our 1065?

4) If rent and expenses are included on our 1065, how do we deduct the profit that goes to them?  It is not really an "expense"...

It seems like as all of this is a wash for us, then we could just ignore it for tax purposes, and only include items on the 1065 that belong to us.  Is that wishful thinking?  Does my favor to them in helping to manage their property then obligate me to do the additional accounting?

Thanks for your help!

[Critter-3]

No good deed goes unpunished ... if you are running all the income and expenses thru your LLC then you are obligated to give them a 1099 to get the profit off your return legally especially if you are ever audited.  And you really should charge them something for your efforts. 

[mroberts2]

Thanks, that's the answer to #1, but what about the rest?  Once I give them the 1099 for the "net" rent, does that then mean that I should include their gross rent as part of my sales, and their expenses as part of my deductions in order to offset?  And when I give them the profit (as indicated on the 1099) then what category of deduction is that?  In the end, it all needs to net zero.

[Critter-3]

Yes you report all income & expenses the send the Net rent...box 3 form 1099-misc. 

If you were in the business of managing rental properties then you should have a separate trust bank account for this client where all the income and expenses would go and you would give the owner a listing of all the income and expenses paid from that trust account to be put on their schedule e on their tax return. Part of the expenses paid from this trust account would be a fee to you for your management income which would go on your llc's tax return. But if you have not set up a separate bank account for the client AKA a trust account then you'll have to put all the income and expenses on your return and send them a net check and a 1099 reporting that net.

[mroberts2]

Thanks again, and now I am pushing my luck, but this brings me to my last question:  on what line of the 1065 should that 1099 amount be deducted?

None of the categories seem to fit "money I have collected for someone else".    If I had to choose one, "Rent" seems to be closest, but this is obviously not rent that I have paid...  Maybe "Salaries and Wages"?  Other deductions?

This is what caused me to ask the question in the first place.  When I saw that there is no clear place to deduct "money I collected for someone else" it made me wonder if I should have any of this stuff on my own 1065 at all.

[Critter-3]

As with all business forms if one of the preset categories doesn’t fit make your own at the end of the expenses section. 

[TomD8]

Is your neighbor (the actual property owner) declaring the rental income, depreciation, and expenses on his tax return?

Just curious.

[mroberts2]

Yes, that would be the idea.  So, we collected the rent and paid the trash collector, cleaners, etc and then gave him the excess, along with a 1099.  Then, he put the 1099 amount on his taxes, along with the expenses that we did not pay (mortgage, appreciation, repairs, etc).  In the end, it is all a wash for me, and ends up the same for him as well.  The bottom line will be the same in either case.  I am just not sure of the "correct" way to do it.  I have different rental property that is managed by a property manager.  He collects my rent and pays for incidental repairs for me and about 500 other property owners.  Does he really put all of that on his own taxes?  It just doesn't seem practical.  This is the same thing, except I am not charging anything.  If I were, the PM fee would be added to my gross sales, I'm sure, but would ALL of the rent he collects go there as well?  The rent that he collects is not "gross sales" for the PM business, it is just money that is handled on behalf of the client...  I have received different answers on different forums, and my own tax guy seems a bit ambivalent as well.

[Critter-3]

If you were in the business of managing rental properties then you should have a separate trust bank account for this client where all the income and expenses would go and you would give the owner a listing of all the income and expenses paid from that trust account to be put on their schedule e on their tax return. Part of the expenses paid from this trust account would be a fee to you for your management income which would go on your LLC's tax return. But if you have not set up a separate bank account for the client AKA a trust account then you'll have to put all the income and expenses on your return and send them a net check and a 1099 reporting that net.

[tagteam]

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@Critter-3 wrote:

If you were in the business of managing rental properties then you should have a separate trust bank account........

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Absolutely, and that is required in many states (many also require property managers who are compensated be licensed).

[mroberts2]

Yes, that makes sense now, and I see the difference.  I really do appreciate the input.  Thanks!