Transitioning multiple properties on same land into one for taxes

[pyropinup]

Hello. I'm working on my 2022 taxes. I have a (maybe?) complicated situation and I'm looking for some help. For the past few years (say 5), I've owned a property which has House A and Apartment B on the property. I've been renting out Apartment B as 100% rental property and tracking expenses to that throughout, prorating expenses that would be shared between A and B accordingly. I've been reporting Apartment B as a line item on TT; it has its own depreciation schedule, etc.

House A has been my primary residence throughout that time until very recently, when I moved. Before I moved, I was 1. renting out part of my house when I was also living there and 2. sometimes renting out the whole house when I was working elsewhere. I've calculated the personal vs business percentages accordingly to allocate to my expenses for House A. It also is a separate line item on TT with its own depreciation schedule.

My intent now is to rent out both House A and Apartment B 100% of the time, and they are both now within an LLC. I did not form the LLC until recently (late 2022). I know the LLC is a passthrough, and I am struggling to merge the 2 separate line items for rental property for A and B into one to reflect it as one item in TT. 

Question is: Do I need to merge A and B into one line item in TT since they are both under the same LLC? Pros/cons? What should I be looking for to do that successfully?

Thank you very much!

[KrisD15]

To clarify, are you reporting the income on Schedule E or Schedule C? 

(Is it passive rental income or a business?) 

[pyropinup]

Well, until 2021 was reporting on Schedule E. Now, i'm not sure if I should stay on Schedule E or switch to C, and if I should, how to do that... My plan in 2023 is to operate both A and B under one LLC, again allocating expenses accordingly when needed.

[pyropinup]

For most of 2022 (Jan-October), and for both of A and B, I've been actively managing them, even when being out of the area. When I moved (October), which is also right at the time of the formation of the LLC, I handed things over to a property manager and pay them to manage both.

[pyropinup]

Also since the formation of the LLC and when I moved (October), I've been tracking expenses for both A and B as together, since they are now managed together more or less as one entity. Trying to figure out how to report those expenses and income, if not broken out as A and B as separate line items.

[PatriciaV]

Your best option is to continue to handle these as two separate rental properties. This is consistent with the historical treatment and has benefits that outweigh the additional accounting work.

The business use of one property has changed over the years. Even though you have calculated the effective percentage and may have calculated the total depreciation claimed for the rental use, you'll be in a better position to determine the adjusted basis for the property when you sell it. The same is true for Property B, even though it has been primarily a rental unit since first placed into service. Again, calculating adjusted basis separately for this property will be much easier if it's not combined with the other property.

Other considerations include passive losses that may not be the same for both properties and depreciation recapture (if any) when sold. It's possible you may sell one unit and not the other. These are all good reasons to continue reporting the rental activity as you have been.

Also, income is likely different for each property and certain expenses may apply to one property and not the other. The management company is probably tracking these as separate rental units for the same reasons.

Finally, if you're not in the business of renting properties or buying & selling rentals, you should continue to report this activity on Schedule E. TurboTax asks some questions at the beginning of the Rental Activity section to help you determine if you are a "real estate" professional for tax purposes. Your answers may make the situation clearer for you.

[pyropinup]

Thank you very much, PatriciaV! That really helps me keep things as simple as possible. You bring up some great points about keeping them separate, including the point about paperwork!! Should I list them together as one Enterprise in TT? That is what I was attempting to do in TT, and not sure how that linkage impacts my ability to successfully do what you recommended. 

Thank you.

[PatriciaV]

If you want to claim the QBI safe harbor election as a business, then reporting the two properties as an enterprise is better. But you can treat each property as a business for QBI if it qualifies. See this link for more information: IRS Facts About the Qualified Business Income Deduction.

[pyropinup]

Ok that makes sense. I have a lot of loss carryover from previous years; does TurboTax automatically calculate the right amount to take each year or do I have to manually enter that, and where? Thanks

[pyropinup]

Also, does TT keep expenses entered for each property as entered, or does it combine them behind the scenes and enter the sum total since it's in one Enterprise? Like, does it take Advertising costs for A and Advertising costs for B (entered separately by property) and sum total them in the software? I'm reviewing my numbers and they don't add up to what I had before, I think.

[pyropinup]

And, should I have 1 Enterprise that includes both of these units (that are under 1 LLC) as well as another I have 100% of in another state (that is its own separate LLC), or keep them separate? 

[DianeW777]

You need to know your carryover passive activity losses (PALs) which are reported on Form 8582.  Confirm each year the losses are carried over for you and enter if necessary.  

• The amount of any carryover of passive losses from your prior year tax return will be found on Form 8582, page 2, part VIII in the "Unallowed Losses' column(b).
• The question is in the rental activity section when you scroll to the 'Less Common Situations' (see the image below)
• Expenses should be correct under each property unless you have combined them into one rental activity/enterprise.
• It's easier on sale if you keep them separate, it's your decision.

[pyropinup]

Thank you. That's helpful. It looks like they didn't carry over onto the worksheet each year. Can I add all of them now into 2022? They do look like they are reported correctly on Form 8995. 

Also, how do I decide how much to take in any given year of prior year carryover?

[PatriciaV]

Yes, you should confirm the amount of carryovers on your return each year to be certain the information transferred properly from your prior year return.

TurboTax will match your passive loss carryovers with your passive income each year until all carryovers are used up.

Read more about this here: IRS Tax Topic 425 - Passive Activities - Losses and Credits