Tax Year Prior to 2020: My wife and i have two rental properties. We formed an LLC to manage these properties. How do I enter profit and loss for these two properties?

[VictorW9]

Well you have the option to file the rentals on a schedule E. Alternatively, you could file a partnership 1065 return. Since you are both husband and wife, you have the benefit of filing a schedule E. Otherwise all other LLC partnership entities with more than one partner, of which the other is not a wife or husband, will have to file a 1065 partnership return.

[varunagrawal]

Thanks VictorW9, Is the filining schedule E for a husband-wife LLC possible only under a community property state? I live in Vermont which is not a community property state. 

[DavidD66]

If you have a husband/wife multi-member LLC, and you don't live in a Community Property State, you will have to file using Form 1065 - Partnership Return.

[brickfoxproperty]

Hi. I have some related questions. My spouse and I formed an LLC to buy, rehab, and rent property. I have a house titled in my name that I had lived in for years, that we converted to a rental property in the middle of the year. We moved to a duplex (the title is in both of our names) and we live in one half and rent out the other.

In our operating agreement we counted the value of both houses towards our initial capital contributions to the LLC, with the intent that both properties be used to generate income for the business. We live in a non-community property state, so we have to file a 1065. I am entering the information for the part of the house we live in on Schedule A, and will put the rented half of that one, and the other house on the business taxes.

My question is, do we still have to file Schedule E, since the houses are titled in our names instead of the LLC, or only the 1065 and 8825, or the 1065, the 8825, AND the Schedule E? Or do we put it on a 8825 since we are using the houses in the LLC, and then it passes through on the K-1?

Does that mean we can only record non real estate business expenses on the 1065, which we basically don't have, since all of our LLC income and expense is real estate related? Does that also mean we won't be able to take business deductions such as depreciation unless the LLC officially holds the mortgages, despite our business' main purpose being renting real estate, and us both considering the properties to be commonly held for the business, and that is recorded in the operating agreement?

Thank you so much!

[nchabra7]

Thank You for your replies.  I, like many others, find them very helpful.  Issue I am having is I purchased the Home and Business version of the software.  We are husband and wife LLC with one property in Florida.  The property needed to be re-furbished and the expenses were more than we could handle.  We used some of our primary house equity for line of credit and I had to take up some side consulting work to help us out.  At the advice of others, the consulting work paid the LLC.  I am thinking the LLC is more of hassle then help in regards to the level of paperwork.

What are my options:

1.  Can I ignore the LLC and just go straight to Sch C and Sch E?  Can I dissove the LLC for future taxes?

2.  Does only the income from the consulting is to be entered into Form 1065?  That is income I performed so does 100% allocation for me and 0% for my spouse.  Then proceed with regular tax forms.

3.  Whatever you many suggest...

Thank You for your time

[Opus 17]

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@nchabra7 wrote:

Thank You for your replies.  I, like many others, find them very helpful.  Issue I am having is I purchased the Home and Business version of the software.  We are husband and wife LLC with one property in Florida.  The property needed to be re-furbished and the expenses were more than we could handle.  We used some of our primary house equity for line of credit and I had to take up some side consulting work to help us out.  At the advice of others, the consulting work paid the LLC.  I am thinking the LLC is more of hassle then help in regards to the level of paperwork.

What are my options:

1.  Can I ignore the LLC and just go straight to Sch C and Sch E?  Can I dissove the LLC for future taxes?

2.  Does only the income from the consulting is to be entered into Form 1065?  That is income I performed so does 100% allocation for me and 0% for my spouse.  Then proceed with regular tax forms.

3.  Whatever you many suggest...

Thank You for your time

---

1. "Can I ignore the LLC"  No.  Or maybe hell no.  You created the LLC under the laws of the state of Florida, you have to deal with the consequences.  

Can I dissove the LLC for future taxes?  Probably. That will be a matter for state law.  You should contact an appropriate expert in Florida.  You would need to file at least one more 1065 for all or part of 2020.

2.  Does only the income from the consulting is to be entered into Form 1065?  That was probably a mistake.  Where did you get this advice?  You can have an LLC for one business venture (such as managing rental property) and still be a schedule C sole proprietor for a different business venture.  But since you combined them, yes your consulting income is now LLC income. 

Form 1065 can only be prepared using Turbotax Business.  This is a separate program from H&B, and is only available for PC, not online and not for Mac.  As part of the 1065, you will issue a K-1 statement to each partner that goes on the personal tax return. 

Note that if you are only working on your 1065 now, it was due March 15 and the deadline was not extended for the coronavirus.  I believe the late filing penalty is $195 per month per member.  I think you need to take all your records to a professional (and apologize for not involving them sooner).  (You may be able to request a one-time penalty abatement if this is the first time you have owed a penalty.)

[Opus 17]

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@brickfoxproperty wrote:

Hi. I have some related questions. My spouse and I formed an LLC to buy, rehab, and rent property. I have a house titled in my name that I had lived in for years, that we converted to a rental property in the middle of the year. We moved to a duplex (the title is in both of our names) and we live in one half and rent out the other.

In our operating agreement we counted the value of both houses towards our initial capital contributions to the LLC, with the intent that both properties be used to generate income for the business. We live in a non-community property state, so we have to file a 1065. I am entering the information for the part of the house we live in on Schedule A, and will put the rented half of that one, and the other house on the business taxes.

My question is, do we still have to file Schedule E, since the houses are titled in our names instead of the LLC, or only the 1065 and 8825, or the 1065, the 8825, AND the Schedule E? Or do we put it on a 8825 since we are using the houses in the LLC, and then it passes through on the K-1?

Does that mean we can only record non real estate business expenses on the 1065, which we basically don't have, since all of our LLC income and expense is real estate related? Does that also mean we won't be able to take business deductions such as depreciation unless the LLC officially holds the mortgages, despite our business' main purpose being renting real estate, and us both considering the properties to be commonly held for the business, and that is recorded in the operating agreement?

Thank you so much!

---

I'm seeing this late and hopefully you completed your return.  I don't know how could include property as assets of the LLC without re-titling them to the LLC.  Your questions are good ones and I don't think any free answer from a guy on the internet is going to be much help.  Your questions show exactly why forming an LLC is not a DIY project.  I think you need professional tax advice.  

[Victor21]

Based on this answer in this thread it is clear to me that my LLC owned by husband wife in the state of CA (a community property state) will be treated as disregarded entity, so we should continue to file as before the LLC was formed (show rental expenses and income on schedule E of our joint federal and CA returns).

Questions

1. For Federal, are there any other obligations for the LLC (e.g., do we need to file schedule K-1/form 1065)? 

2. For CA, other than paying the business tax (FTB) dos the LLC have any other tax filing obligations? (we will still file our CA state return).

[AliciaP1]

You would qualify as a disregarded entity if you did NOT register as an LLC.  Once you become an LLC you are considered a separate entity regardless of community property state or not.

Per the IRS:

LLCs owned by a husband and wife are not eligible to be "qualified joint ventures" (which can elect not be treated as partnerships) because they are state law entities. For more information see Election for Husband and Wife Unincorporated Businesses.

As a multi-member LLC who has not elected to be treated as an S-Corp for tax purposes, you are required to file a Form 1065 for federal tax purposes by 3/15 (unless you file for an extension).  In CA the requirement is the CA partnership return (Form 565) by 3/15 and as an LLC you are required to file the CA LLC Return of Income (Form 568) by 4/15.

[Victor21]

@AliciaP1 = Thanks for prompt reply. I checked the link you provided and its second para is this (emphasis added):

A Business Owned and Operated by the Spouses through a Limited Liability Company Does Not Qualify for the Election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to married couple state law entities in community property states. 

Searching fpr that Rev. Proc. leads to https://www.irs.gov/pub/irs-drop/rp-02-69.pdf which clarifies that in community property states, such business organizations can be treated as disregarded entities. This is what other answers on this thread (provided by @DS30 and many others). 

Appreciate if you could clarify once again the federal tax treatment since your advice seems to be different than many other similar threads such as thread by @Opus 17  (CA obligations are separate and not in question).

Thanks

[ErnieS0]

Revenue Procedure 2002-69 does provide an exception that allows a husband-wife LLC to be treated as a disregard entity in a community property state @Victor21.

The procedure allows you to treat an LLC owned by a husband and wife in a community property state as either a disregarded entity OR a partnership.

.01 If a qualified entity...and the husband and wife as community property owners, treat the entity as a disregarded entity for federal tax purposes, the Internal Revenue Service will accept the position that the entity is a disregarded entity for federal tax purposes.

.02 If a qualified entity...and the husband and wife as community property owners, treat the entity as a partnership for federal tax purposes and file the appropriate partnership returns, the Internal Revenue Service will accept the position that the entity is a partnership for federal tax purposes. 

If you choose to report your rental as a disregarded entity on Schedule E, then you do not have to file a partnership return or issue Schedule K-1.

You do have to file a California Form 568 and pay your annual $800 fee.

See Single member LLC