Business income or rental income??

[TriciaNM]

I am sole proprietor of a mobile home park business which operates on land inherited by my sisters and I.  I rent lots to folks that own their own homes...I do not rent homes, just the land. Is this considered business income or rental income?  I maintain the Park's wells and water distribution to these lots, the landscaping of the 10 acres where these 27 lots are located, the septic system, electrical...all things to allow them to utilize the lot.  The more I read, the more confused I get.  I have no employee's, take a monthly draw and started out as business income but not sure if that is correct.  Please someone clarify my income status.

[ColeenD3 · Accepted solution]

The difference between business income and rental income is whether or not services are provided. Simple maintenance of the property is not providing services.

An example of a business would be running a motel where you would provide laundry services. Another might be a BnB where you provide meals.

[TriciaNM]

so the wells, pumps, septic, electrical, and maintenance of these quite costly things are deductions/expenses for  offsetting the "rental" income?  OMG...that means it has been done wrong for over 30 years...my parents and then my sister before me.  Back to the drawing board...changes in QuickBooks maybe/maybe not, but definitely need to redo what I have done in Turbo Tax.

[ZoltanB45 · Accepted solution]

Nothing should be changed in quickbooks. All the activity should always be recorded together. [edited 02-14-22) If you are performing substantial services that are primarily for your tenants' convenience then you can report those expenses on Schedule C instead of Schedule E. For example, professional fees such as accounting should go on the schedule c. I would not lose sleep over it. When you enter the rental income, add the expenses you alluded to earlier in the rental section as well.  

[TriciaNM]

Is there a way to trash the return I have started and just start over?  All this got stirred up because I had 2 separate tenants/leases pass away and their heirs decided to ignore the monthly billings for their parent's mobile home lot.  I know that I cannot write off those billings because they are not income received in my cash basis reporting.  But, because they never acknowledged anything, I have 2 lots tied up that I cannot rent due to 2 mobiles sitting there that I am not the owner of and can't touch.  I do have a legitimate loss of income, through no fault of mine.  After threatening with legal action and even filing some papers on one for abandoned property, they have both sent me the titles to the mobiles.  Unfortunately, they are not worth selling and I am paying to have them gutted, dismantled (they would fall apart if attempted to remove...one has been on same lot for over 35 years), and disposed of...more loss.  This Park has been in our family for almost 40 years and all my residents are seniors so rents are kept low...the business only generates $40-50k annually.  I am not trying to avoid taxes...just trying to do the right thing.  Some articles written by tax attorney's say that it is business income, not rental income...some say it is non-passive yet has to be passive to recoup some of what I have lost...was ready to confront the IRS but thought I would try the community.  Just wanted to put a little background in about all this.

[LeonardS · Accepted solution]

If you have been reporting the income from all your tenants on Schedule E then your income is rental income.  There appears to be no reason why you can not deduct the cost of removing the abandoned trailers as an expense on Line 19 Other (List) on Schedule E.

[TriciaNM]

The new sole proprietorship, under my name, just became established 4/1/2021. This will be my first filing so there is no history of schedule E, with me. I believe it became a sole proprietorship under my father’s name in 1987, he passed in 1998.  My step-mom was sole proprietor until her passing in 2010. My step sister was sole proprietor from 2010 until 3/31/2021, when she sold to me for $1. I established my sole proprietorship with the IRS and NM effective 4/1/2021. The difference is that all 3 previous dba’s had the property solely in their name. When my sister quit claimed the property to me, I turned around and deeded the property into all 3 of us, my step sis, my natural sis, and myself. They want nothing to do with the business so I lease the property for $1 from the JTWROS deed holders. In doing this, I surmised from my own research, that the income was no longer single owner rental income. Rather that it was business income on leased property.  I know just enough to be seriously dangerous so don’t 100% trust my interpretations on IRS guidelines. I just want to start off on the right foot. 

[ColeenD3 · Accepted solution]

Your property is a rental and belongs on Schedule E. Please see this HELP article. Just because previous owners treated it as a Sole Proprietorship, that doesn't mean that it was correct.

As far as the lease goes, it is not a true lease. There is no profit motive involved. A profit motive is an essential part of Schedule C.