Rollover passive income loss from 1040 to 1065

[texasbevo2]

We have passive income losses from rental properties occurred in 2024 and plan to rollover these passive losses in our personal tax return form 1040 (TT premier) for 2025 tax year due to depreciations and rental expenses were exceeding rental income.  In 2025, we decided to put these properties in partnership LLC. However, I'm still getting form 1098 mortgage interest statements from lenders as expected. I didn't want to trigger a taxable event should I decide to transfer rentals into an LLC. 

Question is should I continue filing rental income/expense/mortgage interests including prior year passive losses this year and form 1040 OR rollover rental passive losses including incurred last year expenses, depreciation and mortgage interests (while it is in my name) onto the new LLC and form 1065 (TT business)? I think the latter is quite confusing due to a) mortgage interests are in my name and b) passive losses from depreciation were previously reported at personal level return.  My end goal is to avoid unnecessary risk from being audited. 

[Mike9241]

see a real estate lawyer. Under the laws of at least some states, the transfers may trigger the due-on-sales clause in the mortgage agreements.  

There may be more than tax issues involved. 

[AmeliesUncle]

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@texasbevo2 wrote:

In 2025, we decided to put these properties in partnership LLC.

 I didn't want to trigger a taxable event should I decide to transfer rentals into an LLC. 

Question is should I continue filing rental income/expense/mortgage interests including prior year passive losses this year and form 1040 OR rollover rental passive losses including incurred last year expenses, depreciation and mortgage interests (while it is in my name) onto the new LLC and form 1065 (TT business)? 

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Can you clarify?  Did you transfer the property to the LLC or not?

For non-tax purposes, if you transferred the property to the LLC, then as Mike mentioned, your mortgage company may not allow the transfer and require your entire mortgage to be repaid immediately.

For tax purposes, if you transferred the property to the LLC, you need to file Form 1065 as a Partnership (unless you are in a Community Property State and the only members are two spouses).  It isn't an option to keep filing it on your personal tax return after it was transferred.  If it was transferred mid-year, you'll have a partial year on your 1040 and a partial year on the 1065.

Carryover passive losses are something that is only on a 1040.

[Mike9241]

how is the mortgage being paid? directly by you and the other members or by the LLC? 

The tricky part is handling the mortgage since it's in your personal name(s).  I think the proper way from an income tax standpoint, starting ASAP,  is for you and the other member(s) to each make capital contributions to the LLC in the amount of your respective ownership interests. Then the LLC "pays" the mortgage. This maintains the proper separation between personal and business finances. HOWEVER, this may raise a huge flag at the mortgage companies. 

[texasbevo2]

We hire a property management company to handle rent collection, mortgage payments, and all expenses such as repairs & maintenance. Back the original topic, passive income losses do not allow for rollover from personal  level to partnership return is what I'm hearing.