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.

Rental Property owned by a business

Hello, 

Me and my wife own a LLC and the rental property we own is in the name of that LLC. 

When filing for taxes should we file as though we own rental property or should we show rental income as business income?

Thanks for your help

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.

4 Replies
DavidS127
Expert Alumni

Rental Property owned by a business

Your LLC rental income will be reported on the LLC tax return (either a partnership or S-corp, depending on which type of entity you elect)

 

The LLC tax return will generate a K-1 for you and one for your wife, which you will then input into TurboTax for your personal tax return.

 

You can prepare the LLC tax return with TurboTax Business.

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

Rental Property owned by a business

David,

 

Last year the account we hired put all of the rents received as Gross Receipt of Sales which after the deductions made the result Ordinary Business Income (K1 box1) - This year TurboTax Business put it all as rental income (K1 box 2). Did he do my taxes wrong? or is there something I'm missing when doing my LLC's tax return?

DavidS127
Expert Alumni

Rental Property owned by a business

It depends on the nature of the rental property you own.  The choice to treat it like your accountant did last year is available "when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer". Otherwise, the property is treated as a rental property (reporting rental income or loss).

 

IRS Publication 527 at this link has this definition of "providing substantial services":

 

"Providing substantial services.

If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C. Use Form 1065, U.S. Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Substantial services don’t include the furnishing of heat and light, cleaning of public areas, trash collection, etc. For more information, see Pub. 334, Tax Guide for Small Business. Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040 or 1040-SR), Self-Employment Tax. For a discussion of "substantial services," see Real Estate Rents in Pub. 334, chapter 5."

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
Carl
Level 15

Rental Property owned by a business

Understand that owning rental property is a form of business income. There are basically two types of business income. Passive income, and non-passive income.

Non-passive business income is that which you earn when you go out and "do something" on a recurring basis to actually "earn" it. Non-passive income is also referred to as "earned income".  If self-employed, the income is reported on SCH C as a physical part of your personal 1040 tax return. In addition to regular taxes, this income is also subject to the additional 15.3% self-employment tax. The SE tax is basically the employer's side of your social security and Medicare tax. This type of income also counts when figuring your maximum allowed contribution to a tax deferred retirement account.

Passive business income is basically what a majority of rental property produces. That's because with rental income you generally don't "do" anything on a recurring basis to earn it. All you do is "sit there" (literally!) and collect the income every month, or every week, or whatever pay period is set up with the tenant.  This income is reported on SCH E as a physical part of your personal 1040 tax return.  Income reported on SCH E is *not* subject to the additional 15.3% self-employment tax. Additionally, this income does not count for anything when figuring your maximum allowed contribution to a tax deferred retirement account.

For rental income to be treated as non-passive (earned) income, you have to provide your tenants services that meet two conditions.

 - The services are "directly beneficial" to the tenant.

 - The services are provided on a recurring basis.

Examples of such services would be house cleaning services, laundry services, bad making services, etc.  In other words, the same exact services as are provided by a hotel. Now this does not mean you are the one who has to actually "do" those services on a recurring basis. It means in your "provide" those services to your tenants on a recurring basis, and the cost of those services is included in the rent they pay you each month.  So if you pay a third party to perform those services "on a recurring basis" the the fact is, 'you' are the one "providing" those services.

So if you are "in fact" providing your tenants services on a recurring basis, that makes the rental income, earned income and it would be reported on SCH C.

Since you and your wife own the LLC together, that means your have a multi-member LLC. Therefore all the business income and expenses gets reported on the IRS Form 1065-Partnership Return. The partnership will then issue each individual owner a K-1, and each owner will enter their K-1 on their personal 1040 tax return.

If the income reported on the K-1 is passive rental income, then it will end up on page 2 of the SCH E on your personal 1040 tax return.

If the income reported on the K-1 is non-passive income, then it will "NOT" appear anywhere on the SCH E of y our personal 1040 tax return. It will appear elsewhere on the tax return, depending on the explict type of business income it is. Could be earned income, or what's called "officer compensation" which is basically a guaranteed payment to the owners of the business.

Last year the account we hired put all of the rents received as Gross Receipt of Sales which after the deductions made the result Ordinary Business Income (K1 box1)

Just a guess based on assumptions, since I really don't have "the facts" of your situation to work with. But it sounds to me like your CPA took the lazy way out and incorrectly reported your rental income as earned business income, when in fact it was not. But then, if you did "in fact" operate the rental like a hotel, then the CPA was right and you are the one that messed up without realizing it. So if the CPA was right, let us know and we'll help you get it right on your 2019 taxes.

If the CPA was wrong, then you have a mess on your hands that will require professional help to make it right. I would suggest you not use the same CPA to fix this either.

Unlock tailored help options in your account.

message box icon

Get more help

Ask questions and learn more about your taxes and finances.

Post your Question