WY, LLC has a rental property, but it is operated by TX, LLC. Where to file rental activity?

[FoxyLoxy]

My husband and I are residents of TX. In 2023 we acquired a rental property in TX. Because it would take a long time to open a TX, LLC, we used an online service to open WY, LLC in one day and closed the property into WY, LLC paying cash for it. So WY, LLC is the property owner, it has EIN, but has no bank accounts and it did not do any business in TX, received no income and had no expenses.

The property was managed under our TX, LLC, which is not related to our WY, LLC that holds the rental property. The property was leased right away, the lease is under TX, LLC name, which has a bank account, received all rents and paid for all expenses: taxes, insurance, HOA, repairs, etc. The expenses exceeded the rent, so with amortization we would report a loss on tax return. 

I think we will file 1065 partnership return for WY, LLC, as the state is not considered community property state, so WY, LLC can not be a disregarded entity. Therefore property acquisition and depreciation will we reported on 1065.

Question: Where do we report income and expenses from business rental activity. Does it go on 1065 of WY, LLC even though it did not have a bank account, or should we just report it on 1040, as our TX,LL that operates the property is considered a disregarded entity for tax purposes in a community property state? All the rest of our properties' rental activities are reported on Sch E, 1040, but we can not really do that for the property that is owned by WY, LLC at it requires a partnership return 1065.

[DMarkM1]

It appears you have a property owner (WY LLC) and a property manager (TX LLC).  The rental activity will all be WY LLC.  It is the TX LLC that doesn't appear to have any income.  Everything is flowing through that entity and the WY LLC is not paying the TX LLC any management fees; so no income.  The WY LLC will issue the K-1s to you with the net rental income (loss) to include on your Schedule E.  

If the WY LLC has outlived it usefulness you could consider shutting it down and moving the property to the TX LLC now that it is established.    

[FoxyLoxy]

Yes, thank you! WY, LLC is a holding company for 2023 and TX, LLC is managing and is doing all operating transactions and lease agreements. It has the money from operations in the bank.

So if I file business operations activity under WY, LLC and let's say my first 1065 gets audited, they will ask for a closing statement  (which I have in the name of WY, LLC), and may audit bank account statements with expenses... which WY, LLC does not have. What to do about it?

Yes, you are right, in 2023 WY, LLC was formed by mistake as a 2 partner entity. I did not pay attention that WY is not a community property state, so WY, LLC can not be treated as disregarded entity. A single member holding WY, LLC will be formed that will own a new holding TX, LLC. And the property will be transfered to this new TX, LLC, preserving anonymity of ownership as WY, LLC does not disclose it. An existing operating TX, LLC  will run business and everything will be considered as disregarded entities (both TX, LlCs and a WY, LLC), with filing income of 1040 Sch E. It is just last year I messed up setting up a WY, LLC as a 2 member company that is required to file a 1065. Dang!

[DMarkM1]

Understand.  So the WY LLC can report that it received rent (after all operating expenses) from the TX LLC via a 1099-Misc and on the WY LLC 1065 deducts the depreciation and property taxes (assuming WY LLC is paying the property taxes).  WY LLC will get an end of year statement from the property manager stating/showing the gross income and expenses that resulted in the net rent received.  

The TX LLC is reporting gross rents received and deducting all operating expenses including rent paid out to the WY LLC.        

[FoxyLoxy]

Got it! Thank you. Do you know of the best way to transfer the asset from WY, LLC to a newly formed TX, LLC in 2024 without triggering a taxable event on the return? 

[DMarkM1]

The best way generally is to make a non-liquidating distribution of the property (return of capital) to the partners. The partners then make a contribution to the new LLC of the adjusted property basis.  None are taxable events.  You should consult a real estate attorney to make the correct steps of ownership.  

Be advised if the title moves from LLC to LLC that will be a taxable event (sale) whereas a distribution (return of capital) to the partners is not a taxable event. 

In TurboTax business for the WY Partnership LLC  in the Federal Taxes tab edit the rental property and go to the assets section.  Select that you disposed of a property.  Show that you "disposed of the property by other means".  Enter the date and take note of the original cost, the depreciation and the adjusted basis. You can print the depreciation summary to show information as well.   

Next, in the Business Info tab, the partner info section, you will show a distribution of the adjusted basis share for each partner.  

In the TX LLC you will contribute that adjusted basis amount for each partner in the Business Info tab, the partner info section.  In the rental property tab you will enter the property/assets with the original date and costs and accumulated depreciation so that the new ownership LLC now has the same adjusted basis and depreciation continues.  

[FoxyLoxy]

Oh, that is very helpful, thank you, Sir.