Can I change rental income from Schedule E to Schedule C?

[aljarah]

Last year I had a Lake property which I rented through AirBNB and reported income & expenses on Schedule E. This year I purchased a 2nd property and have extensive interaction with the short term guests and would like to report on Schedule C since I was unable to deduct loss last year due to high income limitation. Can I start reporting now on Schedule C and if so how do I carryover last year's loss?

[Leonard]

 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 (Form 1040), Profit or Loss From Business,

If you provided substantial services to your tenants in 2017 you can amend your 2017 tax return to report the services on Schedule C.  Each unit is treated separately so for 2018 you report your substantial services on Schedule C when you file your 2018 tax return.

The link below is to Publication 527 and has information,(page 12) that you may find useful.

[Edited 04/07/2019|11:24 am PDT]

https://www.irs.gov/pub/irs-pdf/p527.pdf

[Leonard]

I have added information to my answer that you may find useful.

[aljarah]

Thank you!

[Leonard]

You are welcome

[Portiasteve]

Do you know how to move depreciation schedules from schedule E to Schedule C to amend a return to report rental activity as a business?  Thanks

[caldwell68]

i would like to know this too

[LenaH]

No. You can only move assets manually from one business to another.

Please use last year's tax return and backup from your 2019 Schedule E to enter into your 2020 Schedule C. Put the date placed into service, cost, and useful life of the asset.

For the depreciation already taken, you will have to sum the 2019 year depreciation with the depreciation taken for years prior to 2019 to get to the amount of depreciation already taken as of January 1, 2020. 

After that is complete, please delete the asset(s) from your Schedule E.

@Portiasteve

@caldwell68

[Carl]

Depreciation schedules are not "moved" from one type of reporting to another. (SCH E to SCH C, or vice-versa).

Residential Rental Property reported on SCH E is a totally and completely separate business from Residential Rental property reported on SCH C.  You have to "close" the SCH E business entirely, and then "open" a completely new SCH C business.

All assets (including the property itself) on SCH E are converted to personal use on a given date. The date of conversion needs to be identical for all assets.  Once the conversion is complete, you then need the total amounts of depreciation taken on those assets. The total will be the sum of the prior year's of depreciation, and the current year's depreciation up to the date of conversion.

When you enter the assets on the SCH C, you must reduce your cost basis in those assets by the amount of depreciation already taken. The "in service" date for the asset on the SCH C *MUST* be at least one day *AFTER* you converted it to personal use on the SCH E.  Then the depreciation process starts all over from year one.

Passive rental assets on SCH E are depreciated over 27.5 years.

Your rental assets on the SCH C are required to be depreciated over 40 years. This is why you can't just transfer assets from one business type to the other and just continue depreciation from where you left off.

Take note that anything being amortized on the SCH E (such as the points) are not transferred. That's because when you convert the asset to personal use, the remaining amortized amount to be deducted, is fully deductible in the tax year of the conversion.

Finally, make sure you can support the change from reporting rental property on SCH E, to SCH C. It's a pretty good bet that you will be audited on it, anywhere from 24-36 months after you file the tax return reporting this change.

[KizzleMeister]

Thx for your detailed reply on this. Question for you: 

Why would an amended return from SCH E to SCH C be "a pretty good bet" for an audit in your opinion? I would assume amending a SCH E to a SCH C would cause an increase in taxes that you'd pay.  

[Carl]

Why would an amended return from SCH E to SCH C be "a pretty good bet" for an audit in your opinion? I would assume amending a SCH E to a SCH C would cause an increase in taxes that you'd pay.

Sch C Real estate assets are depreciated over 39 years. SCH E real estate assets are depreciated over 27.5 years. I have high expectation that if you do that, you'll be hanging out a sign that screams for an audit. But that's just me. Bottom line is, you're gonna do what you're gonna do. Makes no difference to me.

[Carl]

Why would an amended return from SCH E to SCH C be "a pretty good bet" for an audit in your opinion?

Keep in mind this is an "opinion" that you asked for.

When you've been reporting your rental income correctly on SCH E and then switch to SCH C, most of the time this is done so that the amount of social security paid is increased, and so the amount that can be contributed to a traditional or ROTH IRA retirement account can be increased, thus increasing the amount paid out by SS at retirement time, and decreasing the taxable income received in the year the income is reported on SCH C (because of your increased contribution to your traditional or ROTH IRA). This may have the potential to raise possible "fraud" flags which if it does, would trigger an audit.

If one is using a management company to manage the rental property, the management company typically issues the property owner a 1099-MISC every year, with the amount of rental income paid to/received by the owner reported in box 2 of that form. The issuer of the 1099-MISC also sends that information to the IRS. When IRS computers are doing cross-checks, they'll see that you were paid passive rental income. However, they'll also see that passive income is not reported by you on SCH E. I would expect that to trigger an audit for unreported income, at which time the burden of proof is on you to prove it qualifies as SCH C income.

[ekad4]

So if you do not report the 1099-misc in Schedule E but you do report it in Sch C would this not solve this specific audit concern then? 

And for the main " you would be hanging a sign ..."  argument:

reporting income in Sch C will have to  trigger self employment tax in order for you to end up increasing your SS benefits. So I do not see why the government should be thinking fraud when people volunteer self employment tax? 

[Carl]

Self-Employment tax is not money the government can spend willy-nilly.... at least not legally. The self-employment tax is the employer side contributions to "your' medicare and social security. Basically, with the self-employment tax you are paying your future self. At least, that's how it's supposed to be while we all know that congress has been basically stealing from the SS fund since it's inception. But that's not a subject of discussion proper for this particular forum.
Rental income is passive, as you don't really "do" anything on a continuing basis to actually "earn" that money. All you do is "sit there" and collect it every month.... and unfortunately, walking to the mailbox to collect that rent check doesn't count for earning it - and I'm gonna stop there as there's no need really to repeat what I'm confident you already know. Though I would not get upset at all if congress were to change the laws on that. 🙂