Tenancy In Common

[globug666]

My friend and I have have a piece of real estate that we jointly hold title to at 50/50 for Tenancy In Common.  We also formed a LLC for this.  Do we file a Partnership tax return and claim all income and expenses there for this rental property?  I was researching some information and I am confused.  It is saying we put it on Schedule E on our personal taxes?  But if that is the case what about the LLC that we formed?

[RaifH]

Your LLC paperwork should provide the structure of your business. The C in LLC stands for corporation, which would suggest a C-corp or an S-corp, but there are LLPs as well. If you filed for an EIN the EIN paperwork you got from the IRS will tell you the business structure you filed as, the tax return you are supposed to prepare, and the due date. 

Generally how it works with S-corps and partnerships is that the organization files a tax return (1065 for Partnerships, 1120-S for S-corps), which is due 2 1/2 months after the organization's year-end, March 15 in most cases. Each shareholder or partner gets a K-1 for their share of the profits. The organization pays no tax, it is just reporting the income and each partner/shareholder is responsible for reporting and paying tax on their share of the income. In the case of income from a rental property, the information reported by the organization flows through to your individual tax return and gets reported on your and your friend's individual Schedule E. 

A C-corporation is different and pays its own taxes. There is more that needs to be done in setting up a C-corporation, so I doubt this is the business structure you and your friend elected. 

[globug666]

I have another entity that is a LLC and it does not stand for a Corporation - it is a single member LLC? It stands for Company not Corporation????? Wow, even I know that.

I think the questions was misunderstood here I am more concerned on if a "tenancy in common" can file the income and expenses from rental property on a form 1065 or does it go on each individuals personal taxes as a School E?    I am getting conflicting items when I visit IRS and various other sites.  If it goes on each individuals personal return, what do we file for the partnership?  https://clarknuber.com/articles/will-the-irs-uphold-your-tenancy-in-common-structure/ 

[KrisD15]

Yes

LLC stands for Limited Liability Company and is a State recognition. 

Shareholders of a Corporations already have liability protection, so there is no reason for a corporation to be an LLC. 

For tax purposes, the LLC must be a sole-propriety or partnership. 

The article you linked mentions Partnership, but in the context of that article, they are referring to holding title as a partnership. How property is held is governed by the state.

If your LLC is a "Single-Member" entity, it would file Schedule C. 

Form 1065 is for a "Partnership" entity. 

You would have had to set up the LLC as a partnership if there are two members (unless this is spouse and spouse) and you would have had to file a Partnership agreement and filed for an EIN. 

Since the property you refer to is held as 'Tenancy in Common" by two PEOPLE, each person would report the rental on their own Schedule E. 

You could set up a management service as a business, but the property would still be owned by the individuals and rent would still flow to the individual owners. 

The IRS has also ruled on when sharing rental property REQUIRES a Partnership, in which case the ability for each owner to sell their share is lost. 

IRS RULING 

If this is all about the liability, perhaps each owner should obtain landlord insurance on the property. 

This is a situation (with both state and federal implications) where you would be best served by a local real estate attorney. 

[globug666]

I guess nobody can read what I wrote.  We formed a Partnership already.  A Partnership files a 1065 - got it.  I knew that.  What I was asking was about the Tenancy in common. We were under the impression that we file the partnership with all income and expenses from the property held as Tenancy In Common.

I was wanting to know if we file all income and expenses for the property get filed under the partnership tax return or split its on the personal tax separately on Schedule E's(on each of our personal taxes).  If that is the case.  Do we report anything under the partnership?

I am reading different things regarding how to treat the Real estate held by "Tenancy in Common"

So with that being said are you saying the IRS ruling negates the Tenancy in Common if we file all of that under a partnership?

[GeorgeM777]

Yes, your comment in your earlier post was correct.  You report all income and expenses on the Form 1065 U.S. Return of Partnership Income and then the partnership will issue a Schedule K-1 to each partner reflecting each partner's distributive share of income and expenses from the partnership.  As tenants-in-common, the partner's may have equal (yet undivided) interests in the partnership property or such interests may be unequal.   Whatever percentage each partner owns in the property as a tenant-in-common is entirely within the discretion of the partners.  

Upon receipt of the Schedule K-1, each partner will prepare their own tax return.  

@globug666

[Carl]

The C in LLC stands for corporation, which would suggest a C-corp or an S-corp

I'm sorry, but that's just wrong and needs correcting. The "C" in LLC does not stand for corporation. It's stands for "Company". An LLC by default is not a corporation and is not incorporated unless separate actions are taken to incorporate it. 

For example, one can file IRS Form 2553 to have their LLC "treated like an S-Corp" for tax purposes. But it needs to be understood that when you do that, the business is treated like an S-Corp *FOR* *TAX* *PURPOSES* *ONLY*, and no other purpose. So for legal proceedings outside of taxes, the courts would most likely treat your LLC as a disregarded entity and/or pass through entity. Not a corporation.

See https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc for a bit more clarity on this. Basically the section called "Classifications".

[Carl]

Hi @globug666 Let's answer your question now. 🙂

Do we file a Partnership tax return and claim all income and expenses there for this rental property?

Yes. You'll need to complete a 1065 Partnership/Multi-member LLC tax return.

It is saying we put it on Schedule E on our personal taxes? But if that is the case what about the LLC that we formed?

In a way yes, but not as directly as your probably thinking. Here's the basics of how it works.

All rental income/expenses/depreciation will be reported on the 1065 return. Once that return is completed the partnership will issue each partner a K-1. Each partner will need that K-1 to complete their individual 1040 tax returns. After the K-1 is entered into your personal 1040 tax return, the information from the K-1 pertaining to the rental will end up on page 2 of the SCH E of your personal 1040 tax return.

Now when setting things up in the 1065, understand that absolute, total perfection in that first year is not an option. It is a *MUST*. Even the tiniest of mistakes will grow exponentially as the years pass. Then when you catch the error years down the road the cost of fixing it will be high.

So if you have questions, *ASK* the question. Dont care how dumb you may thing your question is either. Not asking it can (and probably will) cost you $$$MONEY$$$ later down the road.

[globug666]

Okay, but when I research the Tenancy in common, it says that you cannot file as an entity per IRS?  So I am confused on this.  If that is the case then We shouldn't file under a 1065 correct?

[Carl]

the Tenancy in common, it says that you cannot file as an entity per IRS?

So you will report it on SCH E as a part of your personal 1040 joint tax return. Assuming the rental property is the only thing owned by the multi-member LLC, I can't see any reason for that LLC to exist really, as you have absolutely nothing to report for the LLC. As you've discovered (and I wasn't aware until now) there is a difference between tenancy in common and jointly owned.

This is assuming the rental does not qualify as a Trade or Business. Typically for someone who owns 1, 2 or just 3 rental properties of the residential type, it is not common for it to qualify as a trade or business for tax filing purposes, while it may qualify as such under separate rules for the QBI deduction.