Rental Property Loss claim on Schedule-E or C for LLC?

[Tedesco1967]

Last year we formed a real estate LLC and purchased a condo, which we've been renting out. For 2019, we had a net loss after factoring in all expenses, including depreciation of the property. 

Should I report this loss on Schedule-E or Schedule-C?

If I report on Schedule-E, I can't claim any of the loss, since my total income is greater than $150K. If I enter the income/expenses under Business Income (Schedule C), TT isn't given me the option to enter the property depreciation amount as an expense.

I understand the limits around passive income and the carry-forward loss when reporting under Schedule E, but am wondering if operating this rental as a LLC changes the scenario and allows me to report this loss under Schedule C.

Thanks!

[AmeliesUncle]

Unless you provide "services" to the tenants (such as maid service or meals), it needs to be on Schedule E.

[Critter]

" we formed a real estate LLC"   

IS THE "WE" A SPOUSAL SITUATION ?   If so you will report the rental on a Sch E  unless you run it as a bed and breakfast or motel.  

[Carl]

Last year we formed a real estate LLC

Exactly who is "we"? It matters. If "we" is you and your spouse and you are filing a joint return, then residential rental real estate is reported on SCH E as a part of your personal 1040 joint return *no* *matter* *what*. Not one single penny of rental income or rental expenses is reported on the SCH C.

If "we" really formed a multi-member LLC, registered it as such with the state, and the LLC is the named owner of the property on the deed, then that multi-member LLC files it's own psychically separate IRS Form 1065 Partnership return. Rental income/expenses gets reported on IRS Form 8825 as a part of the 1065 Partnership return. Then the partnership will issue each individual owner/partner their own 1065 K-1 which each partner will need for their personal tax return. Information entered from the K-1 pertaining to the rental property will then end up on page 2 of the personal 1040 SCH E.

Under no circumstances and with no exceptions is long term residential rental real estate reported on SCH C.

Now you will hear people talk about it qualifying as a SCH C business if your provide your tenants recurring services on a steady basis. I seriously doubt you do that. If you claim to, then you can expect in time the IRS will ask you to prove it, with only one rental unit.  Those recurring services must be "directly beneficial to the tenant". (keep the yard kept up is not directly beneficial to the tenant. You're gonna cut the grass weather there's a tenant in it or not.)

Recurring services that are directly beneficial to the tenant means things like daily or weekly housekeeping services that you provide or pay a third party to provide "on a recurring basis" and that cost is included in the rent you charge, as well as specified in the rental contract or lease agreement.

[Carl]

Additional Information:

When it comes to long term residential rental real estate, it will practically always operate at a loss "on paper" at tax time every year. This is expecially true if there is a mortgage on the property. When you add up your deductible expenses of mortgage interest, property insurance, property taxes, and add to that the depreciation you are required to take on the property every year, those items alone are generally enough to exceed the total rental income received for the year. So add to that the other rental expenses you're allowed to deduct and you're practically guaranteed to operate at a loss "on paper" at tax filing time.

Now your passive rental losses can only be deducted from the passive rental income. Once those losses get that taxable rental income to zero, that's it. You can't deduct anymore. So the "left over" loss gets carried forward to the next year.

So as the years pass you will find that carry over losses will increase with each passing year. You don't get to realize those losses until the year you sell the property. But for the most part you can expect that the taxability your rental income each year will be "zero'd out" by all the rental deductions, expenses and depreciation you are required to take. Thats just how it works.

You find with each passing year

[Anonymous]

whose we?  

a 1065 partnership return may be required

Who Must File
Domestic Partnerships
Except as provided below, every domestic partnership must file Form 1065, unless it neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes. Entities formed as LLCs that are classified as partnerships for federal income tax purposes have the same filing requirements as domestic partnerships.

Partnership
A partnership is the relationship between two or more persons who join to carry on a trade or business, with each person contributing money, property, labor, or skill and each expecting to share in the profits and losses of the business whether or not a formal partnership agreement is made. The term “partnership” includes a multi-member LLC through or by which any business, financial operation, or venture is carried on, that isn't, a corporation, trust, estate, or sole proprietorship.  A joint undertaking merely to share expenses isn't a partnership. Mere co-ownership of property that is maintained and leased or rented isn't a partnership. (see below  - Reg 1.761-2). However, if the co-owners provide services to the tenants, a partnership exists. 
Business owned and operated by spouses. Generally, if you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership and you must file Form 1065. 
Exception—Qualified joint venture. An LLC doesn't meet this exception.

so the question becomes as an LLC should a partnership return have been filed even if the ownership is husband and wife.  

reg 1.761-2

(2) Investing partnership. Where the participants in the joint purchase, retention, sale, or exchange of investment property:

(i) Own the property as coowners,

(ii) Reserve the right separately to take or dispose of their shares of any property acquired or retained, and

(iii) Do not actively conduct business or irrevocably authorize some person or persons acting in a representative capacity to purchase, sell, or exchange such investment property, although each separate participant may delegate authority to purchase, sell, or exchange his share of any such investment property for the time being for his account, but not for a period of more than a year, then

such group may be excluded from the application of the provisions of subchapter K under the rules set forth in paragraph (b) of this section.

(b) Complete exclusion from subchapter K -

(1) Time for making election for exclusion. Any unincorporated organization described in subparagraph (1) and either (2) or (3) of paragraph (a) of this section which wishes to be excluded from all of subchapter K must make the election provided in section 761(a) not later than the time prescribed by paragraph (e) of § 1.6031-1 (including extensions thereof) for filing the partnership return for the first taxable year for which exclusion from subchapter K is desired. Notwithstanding the prior sentence such organization may be deemed to have made the election in the manner prescribed in subparagraph (2)(ii) of this paragraph

(ii) If an unincorporated organization described in subparagraphs (1) and either (2) or (3) of paragraph (a) of this section does not make the election provided in section 761(a) in the manner prescribed by subdivision (i) of this subparagraph, it shall nevertheless be deemed to have made the election if it can be shown from all the surrounding facts and circumstances that it was the intention of the members of such organization at the time of its formation to secure exclusion from all of subchapter K beginning with the first taxable year of the organization. Although the following facts are not exclusive, either one of such facts may indicate the requisite intent:

(a) At the time of the formation of the organization there is an agreement among the members that the organization be excluded from subchapter K beginning with the first taxable year of the organization, or

(b) The members of the organization owning substantially all of the capital interests report their respective shares of the items of income, deductions, and credits of the organization on their respective returns (making such elections as to individual items as may be appropriate) in a manner consistent with the exclusion of the organization from subchapter K beginning with the first taxable year of the organization.

so if no services are performed, and the parties intended that no partnership return be filed but the merely operate as co-owners then no 1065 need be file.  Do realize that the IRS based on the facts in your situation could arrive at a different conclusion.  if it did penalties would be substantial. 

so if you are not going to file a partnership return (it would be late and penalties for late filing would already accrue), if it's husband and wife and there's an intent to split income and expenses then schedule E would be complete as if there were two properties.  income and expense would be split based on the intent of the parties 

[CP-1]

So, to follow up on this answer... I did form and LLC  (end of 2018) to buy, own and rent my rental property, and my wife and I file jointly, so the IRS consider it a sole proprietorship. I will file my (the LLC) rental income, expenses (a lot), and depreciation on schedule E, but do I also file a schedule C for that LLC business because it owns the property? BTW, I have another sole proprietor business that although retired and it's more on a hobby level now, I still file a schedule C for.

[Carl]

I did form and LLC (end of 2018) to buy, own and rent my rental property,

So if you did "IN FACT" form a "single" member LLC, then you, and you alone are the one and only owner of that LLC as far as your state *and* the IRS is concerned. Under no circumstances can there be more than one owner of a single member LLC. There are absolutely positively no exceptions.

The fact that you file a joint tax return with your spouse will not change the fact that you and you alone are the one and sole owner of the LLC.  (or your spouse if they are the sole registered owner of the LLC.) Otherwise:

If when you registered the LLC with your state you listed more than one owner, then it is not a single member LLC regardless of what you, I or anyone else may say. It is a multi-member LLC. Period. A multi-member LLC does not file a SCH C unless specific and explicit criteria are met. If that criteria is met, then  two SCH C's are filed with the joint tax return. One for each partner. That criteria is:

- The two owners of the multi-member LLC must live in a community property state.

- The two owners of the mulit-member LLC must be married to each other as of Dec 31 of the tax year.

- The two owners of the multi-member LLC must file a joint tax return.

- The two owners of the multi-member LLC must split *EVERYTHING* 50/50.

If all four criteria above are met, then your jointly filed 1040 return will include two physically separate SCH C's. One for each tax filer.

But the above does not change the fact that it is a multi-member LLC.

If both of you do not live in a community property state, then the multi-member LLC files it's own physically separate 1065 Partnership Return. The partnership then issues each partner their own personal K-1, which each partner will require in order to complete the personal 1040 tax return. It does not matter if the partners are married to each other and file a joint 1040 tax return.

We can discuss this point all day long and it will not change the way your state or the IRS sees this LLC.  So, is this a single member LLC or a multi-member LLC?

and my wife and I file jointly,

How you file (your filing status) just flat out does not matter when it comes to the LLC.

so the IRS consider it a sole proprietorship.

As of yet, I don't know that for an absolute fact based on the information about the law I have provided you above. But I will assume that you and you alone are the one and only owner of the LLC.

I will file my (the LLC) rental income, expenses (a lot), and depreciation on schedule E,

That is correct. Under no circumstances and with absolutely no exceptions, is long term residential rental real estate reported on SCH C.

but do I also file a schedule C for that LLC business because it owns the property?

If rental property is the only thing the LLC owns, then you will not file a SCH C at all. There is no need to.

BTW, I have another sole proprietor business that although retired and it's more on a hobby level now, I still file a schedule C for.

Again, under no circumstances and with no exceptions will you report one single penny of rental income, rental expense, or anything else concerning your long term residential rental property on SCH C.

The below is provided just to explain why do do not report long term residential rental real estate on SCH C, along with why it's a general waste of time to put rental property into an LLC.

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 practically 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. In fact, many legal firms will give such cases to their “new hires” right out of law school because it’s a great confidence builder for them since it’s practically a guaranteed win for the tenant. 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 go 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 IRS Form 8825 as a part of the 1120-S Corporate Return. The corporation will issue each owner a K-1 with the rental stuff reported in box 2, and/or3, and/or 6 of that K-1. When you enter the K-1 into your personal 1040 tax return, the amounts in the aforementioned boxes end up on page 2 of the SCH E as a part of your personal tax return. Therefore, rental income/expenses is reported on SCH E no matter what.

But keep in mind that the S-Corp election 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 2^nd 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.

[jujohn316]

That is not what i need. 

please chat with a live person about fixing my LLC status?

[jmzollin]

Thank you for the breakdown on the taxes, real estate, and LLCs.  I found it very helpful as I had filed an extension earlier but would have mistakenly used a Schedule C.

However, I do have one situation that you have discounted.  I have a single member LLC that i was told would help with protections (I understand the veil thing better now but that\s besides the fact).  When I refinanced the Flip into a rental, I used a commercial lender to finance and not a mortgage.  The LLC was then required to be the owner of the property as it was a commercial loan (thankfully I had one set up. I had to go commercial because I didn't qualify for a mortgage due to DTI at the time).  Once you exceed 10 mortgages, most investors move to commercial loans to hold property, which do require LLCs to be the owner.  So you are correct that you cannot qualify a mortgage as a business, but you can use commercial lending to do the same thing (30 year amortized loan).   

Would that still be a rental on schedule E?  Would I need a 0 income/ expense schedule C or just the schedule E?

Thank you

[Mike9241]

I don't see the original thread buthere's my 2 cents.

a single-member LLC is a disregarded entity unless it has elected Corporation status in which case the activity gets reported on the Corporate return  otherwise 

real estate rental activities regardless of where the financing comes from are reported on Schedule E unless significant services are provided to the tenants such as with an AIRB&B then the reporting for that property goes on Schedule C.  so it is possible where multiple properties are involved some where significant services are provided other where they're not you would have reporting on both schedules C and E (very unusual)

now if the LLC is not a single-member and not a corporation you have a partnership

in a community property state, a husband/wife only LLC/partnership can report directly on their 1040 splitting the income/loss from the activity based on their relative ownership %'s otherwise a partnership return is required. for 2021 it was due 3/15/2022. there are substantial penalties for filing late which can be about $210 per partner per month late 

[jmzollin]

Thanks for the reply-  I filed the extension in March. I went back to fix the return after realizing the taxes were incorrectly reported on the schedule C not E after reading your previous responses.