Rental property schedule E

[chelsatx13]

I purchased a rental property in 2021 with a few other people, and we have not yet started renting it out.  Do we report the purchase of the property on schedule E or do we wait until we start renting it out?  I understand we cannot record rental expenses until we start renting it out, so I am simply asking if we should record the purchase on our 2021 1040 schedule E, or should this be done in 2022 assuming we start renting it in 2022..

[tagteam · Accepted solution]

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@chelsatx13 wrote:

I understand we cannot record rental expenses until we start renting it out....

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You cannot deduct typical rental expenses (such as utilities, cleaning and maintenance, repairs) until the property is available for rent; it does not have to actually be rented (i.e., a tenant is occupying the premises).

[chelsatx13]

OK thanks.  It is currently NOT available to rent.  With that said, my question is; Do I need to fill out a schedule E on my 2021 1040 tax return and report the purchase of the home.  I understand I am not reporting the expenses, rather, the purchase of the home.  Or, do I wait to record the purchase during the tax year that the home becomes available to rent?

[tagteam]

If there is no tenant occupying the property and the property is not available for rent, then there is nothing to report.

The only expenses you are able to deduct would be mortgage interest and property taxes (subject to limitations).

[chelsatx13]

OK, thank you.  I read on Turbo Tax that you must enter the purchase price of your rental property house under "assets/depreciation" on schedule E including any home improvement costs.  That is what I am asking.  Do I enter the purchase of my home on schedule E as a depreciable asset in the year I bought it, or the year that it becomes available to rent.

[Carl]

Just a note at something that jumped out at me.

I purchased a rental property in 2021 with a few other people,

This sounds like a partnership to me. Especially if there's more than two owners. I would highly suggest you report this as a partnership, since that's probably what this is. By reporting all rental income/expenses/depreciation on a 1065 partnership return, the totals of "EVERYTHING" is entered on "ONE" tax return. Then the partnership will issue each owner a K-1 for there share of the income/expenses/depreciation on the property based on their ownership percentage (which does not have to be equal for all partners).

Each owner will need that K-1 before they can even start their personal 1040 tax return. It makes life a whole lot easier - especially when it comes to selling the property, having partners leave the endeavor, or bringing new partners into this.

Take note that the 1065 partnership return has a due date of March 15th each year. At this point, I see no need to file a 1065 for 2021, and not just because it would be late and incur late filing fees if you did so.  ($205 per partner, per month late). 

The only things deductible on the 2021 return at this point is mortgage interest and property taxes, and those are a SCH A itemized deduction. Splitting that among all partners (3 or more I presume) would most likely not be enough to get any partner's itemized deductions above their standard deduction anyway, and would most likely make no difference in the tax liability of any partner on their personal 1040 tax return. But since I don't know that for a fact, you should just split the property taxes and mortgage interest paid in 2021, equally among all the owners/partners.

[tagteam]

The mere co-ownership of property, even if used for rental purposes, does not automatically create a partnership.

See https://www.irs.gov/pub/irs-drop/rp-02-22.pdf

[Carl]

The mere co-ownership of property, even if used for rental purposes, does not automatically create a partnership.

Never said it did. But with each individual reporting on their own SCH E it does have the high potential of creating an absolute nightmare when unexpected things happen.

[tagteam]

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@Carl wrote:

The mere co-ownership of property, even if used for rental purposes, does not automatically create a partnership.

Never said it did. But with each individual reporting on their own SCH E it does have the high potential of creating an absolute nightmare when unexpected things happen.

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Forming a partnership with the attendant compliance costs (including having to file a 1065 each year) is even worse.

Do you believe that each partner owns real estate if a partnership is formed?

[Carl]

Forming a partnership with the attendant compliance costs (including having to file a 1065 each year) is even worse.

Must depend on the state. In FL, forming a general partnership takes about 10 minutes online and the registration/filing fee is $50. When I set up my LLC I did that online in about 10 minutes and it cost $125. Of course, a single member LLC is not anywhere near as involved as a partnership is. So setting up the LLC probably took about a minute or 2 less than it would have taken for a partnership.

All the forms are online, can be filled out online and filed online. So for FL, setting up a simple business structure for either an LLC or partnership is fairly easy. Of course, not all LLCs or partnerships will be easy or simple. There's usually a wrench that gets thrown in along the way. Regardless of the state, simplicity is rarely the norm. But not impossible.

[chelsatx13]

Thanks everyone! I’m well aware that simply purchasing property with other people doesn’t create a partnership, the plan is to file for an LLC ASAP.   I think as long as we’re organized we could avoid  a nightmare. I’m not sure if there’s a better option than an LLC, maybe an S-corp.   Appreciate the responses as my question has been answered! 

[Carl]

A multi-member LLC would probably be better on the legal front, than would a Partnership. either way, the LLC or Partnership stills files a 1065 return.

As for the S-Corp, nothing wrong with that. But the requirements that have to be met are a bit more stringent that for a multi-member LLC.

Getting professional help on this now, instead of waiting would be your best move at this point.

[chelsatx13]

I think we’ll continue with the LLC plan. Thank you so much for your input!

[tagteam]

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@Carl wrote:

As for the S-Corp, nothing wrong with that. But the requirements that have to be met are a bit more stringent that for a multi-member LLC.

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There are good reasons not to have an S corporation own rental real estate.

Do an internet eearch.

[tagteam]

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@Carl wrote:

Must depend on the state....

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It depends on the state. For example, some states have ridiculously high fees for filing an annual report and most also levy a tax on income from rental real estate. 

So now, with just a multi-member LLC, you have to prepare and file a federal income tax return and issue K-1s to the members and, most likely prepare and file a state income tax return and issue state K-1s to the members. Then, again depending on the state, the members might have to file individual income tax returns in the state where the property is located. F

Further still, the members now have to track their outside and inside basis. 

All of the foregoing simply a result of organizing a multi-member LLC. That is not necessarily a bad idea if there will be multiple rental units but, as a general principle, it is not exactly great for one long-term, single-family rental house.