what forms should i use for rental property held by an LLC with its own EIN

[HE2]

Hello - i own a rental property held by a disregarded entity sole proprietor LLC. The LLC  has its own EIN.

The renter  was the Army Corp of Engineers and did issue a 1099-misc for the rent paid with the EIN of the llc associated. Also there are expenses i incurred prior to the creation of the LLC.

I have 3 other rental properties each held by a separate LLC again each having their own EIN.  These 3 were normal rentals to individuals without a 1099-misc being issued.

So for the 4 rental properties (4 LLC) what form do i use to declare income and expenses both prior to formation and after?  Where do i report the EIN of the LLCs?

Thanks

[HelenC12]

If these are all Single Member LLC's, report them on Schedule E, as in year's past. Putting the rental properties into a Single Member LLC doesn't change anything for taxes.

• You don't enter these LLC details for tax return reporting purposes for Schedule E. 
• A single member LLC is considered a disregarded entity by the IRS, which means that all tax reporting is done under the owner's taxpayer identification number.
• This doesn’t mean you can’t also have an EIN for a single-member LLC as there are cases where one can be required (for certain employment or excise tax issues or possibly state law requirements for opening bank accounts), but for tax return reporting purposes everything will flow to the owner’s SSN.

See this IRS Link for more information - Single Member Limited Liability Companies

Source: AnthonyC

[Carl]

Residential Rental Real Estate is reported on SCH E no matter what. So if this rental property is the only thing owned by your LLC, then you won't be reporting "ANYTHING" on a SCH C at all. Not one penny. It's also possible you may have created some major and $COSTLY$ legal mistakes too.

Additional Information For Rental Property Owners

Occasionally a rental property owner will be “convinced” they need to put their rental property into an LLC (be it single owner or multi-owner LLC) as a means of protecting themselves and their personal assets from legal litigation should they ever be sued by a tenant. The property owner is told the LLC gives them and their personal assets a “veil of protection” from any legal litigation that may arise as the result of legal actions perpetrated by a rental tenant. Nothing could be farther from the truth.  If you check court records (even in your local area) you’ll probably find numerous cases where a tenant sued their landlord and the LLC provided practically no protection of the property owner’s assets. Since an LLC is a disregarded entity, that “veil of protection” supposedly offered by an LLC is so thin, even a new first time lawyer has no problem piercing that veil and attacking the personal assets of the property owner on behalf of the tenant. In fact, most legal firms will give these cases to their newly hired lawyers right out of law school, as a confidence builder since they practically can't lose if they represent the tenant. There are other problems and issues with this too.

In order to legally transfer ownership of rental property to an LLC, the owner must have the permission of the mortgage holder. No lender in their right mind will give this permission either. Even if you think you can refinance the property or “sell” it to your LLC, unless your LLC has the cash on hand to pay for it in full, your LLC will never qualify for the mortgage loan. The lender doesn’t want to risk your LLC going under (by filing bankruptcy for example), and they lose money because of it. So I’m confident in telling you, that’s not going to happen.

When you create an LLC for your rental property, it’s generally understood that business income gets reported on SCH C as a part of your personal tax return. However, a SCH C business produces “earned” income, and a rental property produces “passive” income. What’s the difference?

Earned income is income which you have to do out and “do something” in order to earn it. This income is subject to regular income tax, and also an additional 15.3% self-employment tax. The SE tax is basically the employer side of your social security and Medicare. But rental income is not “earned” income, and therefore is not reported on SCH C. So if you create an LLC for your rental property, then absolutely nothing concerning that rental property will be reported on SCH C. Not one penny of rental income and not one penny of rental expenses.

Rental income is “passive”. That’s because all you do with rental property on a recurring basis is just “sit there” and collect the rent every month. You are not “doing anything” to “earn” it on a recurring basis. That’s why rental income is reported on SCH E. Rental income is subject to regular tax, but is NOT subject to the additional self-employment tax. This means that rental income DOES NOT COUNT for your social security account or Medicare contributions.

SO if you create an LLC for your rental property, there are two things that will NOT happen.
 - You will not be able to “legally” transfer ownership of the property from you, to the LLC unless you have a really dumb lender.
 - You will not report one penny of rental income or one penny of rental expense on SCH C.

So in the end, you will be filing a zero income/expense SCH C with your personal tax return.

Now let’s say you decide to file the 8832 to treat your LLC like an S-Corp, and then you transfer ownership of the property to your LLC. You can and will report your rental income on SCH E as a part of the 1120-S Corporate Return, and you will also report the K-1 on SCH E as a part of your personal tax return. But keep in mind that this is for ***TAX PURPOSES ONLY!!!****. So if a tenant sues you, I seriously doubt the courts will recognize your S-Corp, and I seriously doubt the court will recognize the S-Corp as a physically separate owner of the property. Remember, that 8832 Entity Classification Election is for “TAX PURPOSES ONY”. It has no weight at all for any and all other legal purposes – such as you being sued by a tenant.

SO if you want to do this (and it still makes no financial sense) then form an actual S-Corp and transfer ownership of the property to the S-Corp. More than likely the lender won’t allow the transfer. But you can sell the property to the S-Corp if the S-Corp can qualify for a mortgage loan.  Overall though, it’s still financially dumb to do this. Here’s why I say that.

When you move out of your primary residence and convert it to residential rental real estate, you have to convert your homeowner’s insurance policy to a rental dwelling policy. Or if you buy the real estate as rental property outright, then you have to obtain a rental dwelling policy at that time.  A rental dwelling policy will, at a minimum, include $300,000 of liability coverage. For most that will suffice. But if the property is in certain areas of the country you may want more liability coverage. I have three rentals myself and have a total of $1,000,000 of liability on each. It cost me less than an additional $100 a year on the insurance for each property. So for me, it’s worth it. It’s also significantly cheaper not only in money, but in time spent dealing with corporate taxes and all that other additional paperwork crap.

One mistake I see quite often is that when an owner converts their primary residence or 2^nd home to rental property, and they fail to update their insurance policy. This can bite when you have a claim. If the property is insured as your primary residence, but you are using it as rental property (which is other than it’s insured use) don’t be surprised when the insurance company denies your claim, and you can’t find any lawyers that will take your case.  If it’s a case of you being sued by a tenant, then to be honest and put it bluntly, you’re screwed.

[ptyler44]

Hi Carl:

I am wondering what your opinion is regarding how all this relates to QBI (Qualified Business Income).  I have a sole proprietor LLC where the majority of the income is from the rents I receive on rental property.   Based on what I have read, this rental income qualifies for the QBI deduction.  Would you agree?

Historically I have reported my income from these rental properties on Schedule E, but it was my understanding that I now needed to report this income and the associated expenses on Schedule C.   My understanding was that this would assure that I would be able to deduct the QBI deduction for rental properties.  

It doesn't really matter to me which schedule I use, as the numbers will be the same, but I want to assure that whatever I do qualifies me for the QBI deduction.

Thanks for any thoughts you might have on this.

[AlanT222]

You should report the income and expenses on Schedule E.  TurboTax will ask questions to qualify you for QBI.

[ScottTX]

Helen,

Can you please confirm that in this case we could just ignore the 1099-mics since they were issued to LLCs under a different EIN?  

Schedule E does not give the option to select any other name/EIN to associate the 1099s with. So the only way to report the 1099 income seems to be recording the rent as direct payment to me. 

To make things a little more complicated, is same still true if the single member LLC is owned by a living trust of which I am the grantor, and for tax purpose both the living trust and LLC are disregarded entity?

[GeorgeM777]

Not sure what you mean by "ignore the 1099-Misc," however, you would include the income on Schedule E, which it appears you are doing.  If the 1099-Misc were issued to your LLC with the incorrect EIN, then perhaps the best option is to have the individual who prepared the 1099-Misc to issue an amended 1099-Misc with the correct EIN.  Keep in mind that the IRS should have also received the 1099s at issue and consequently when you file your return, the income you include on your return will not match with the EINs (1099s) already submitted to the IRS.  Thus, get corrected 1099s.   

Yes, your LLC does appear to be a disregarded entity.  Your living trust with you as the grantor still represents just one member, and therefore, as a single member LLC, your LLC is a disregarded entity.  

@ScottTX

[ScottTX]

My LLC has its own EIN, and 1099 is associated with the LLC EIN. Are you suggesting that 1099 should be amended to use my SSN if the LLC is treated as disregarded entity?

[MarilynG1]

No, enter your 1099-Misc as received.

You can use either your SSN or EIN when receiving 1099-MISC income.

Just make sure to report all these 1099-MISCs under your Schedule C since they all relate to your LLC business income.

IRS language specifies that the 1099-Misc use the owner's SSN or EIN, and since the LLC's only owner is you, either one is acceptable. 

Here's more info on Single Member LLC's.

[rcman0730]

Thank you for the clarification.  So the income/expenses for the property, pre LLC Formation and post LLC Formation goes to the Schedule So for tax purposes, the LLC EIN is really never exposed?  That's surprising but I'm just a newbie on this.

[rcman0730]

Here is a link in reference to your topic.  There are specific reasons when an LLC is not being treated like a company and rather a part of a personal asset, which would make it open to be pierced.

https://romyjurado.com/can-a-single-member-llc-in-florida-be-pierced/#:~:text=However%2C%20although%....

[Anonymous_]

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@rcman0730 wrote:

There are specific reasons when an LLC is not being treated like a company and rather a part of a personal asset, which would make it open to be pierced.

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The reasons stated in the link you posted are essentially the same reasons the veil could be pierced on a closely held corporation (or other entity). 

However, due to a couple of court decisions and a loophole that was not closed in a revision to Florida's LLC statute, single-member LLCs in Florida do not offer the same protection as they do in other states.

[rcman0730]

Which is the reason why that my Florida Rental real estate is owned by the Florida LLC.  And that the member/owner of the Florida LLC is a Wyoming LLC.  

[Anonymous_]

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@rcman0730 wrote:

Which is the reason why that my Florida Rental real estate is owned by the Florida LLC.  And that the member/owner of the Florida LLC is a Wyoming LLC.  

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Fine, but another strategy (not involving a separate entity) is to max out the liability insurance on the property and also have a $5-$10 million personal umbrella policy. Further, tenancy by the entireties can be used if the owners are married to each other.

[rcman0730]

Getting an umbrella liability policy is an awesome idea.  I had a $5m umbrella policy, unfortunately, with real estate values increasing significantly, the total value of my assets increased to over $8m.  By splitting off the properties from one entity (me personally), into multiple LLC's, the $5m is now sufficient to cover the assets that is under each LLC.