Rental Income, LLC

[geekgirldany]

Client bought rental property. Went several months without it being rented. He wrote down the amount they would have received in rental payments if the property was rented. He wants me to deduct this. It is to my understanding that you can only deduct expenses that were paid while the property was listed for rental...correct? Utilities, mortgage interest, repairs, etc.

He says that 3 people told him he could deduct it and that he knows it can be deducted. I just want to be sure. He is insisting to deduct it. But I have never done this with a rental before or had someone ask me to do it.

Also he formed a LLC for this property. Since this is a passive activity it is listed on Schedule E correct? He said his wife and children are part of the LLC. But I assume it will still be correct to list as Schedule E.

[geekgirldany]

Okay little Edit here just found my answer in Pub 527 under uncollected rent.

[Matt Sova]

Yea right

Ask him how many returns these 3 morons do every year. Boy, if I worked that week of December that I was on vacation I would have made about $10,000 can I deduct that?

As far as the 2nd part he and his wife can put their share on their Schedule E and the daughter will report her share on her Schedule E.

Matt

[geekgirldany]

I asked him if they had someone prepare their taxes or did they prepare it. You know I don't mind telling a person I will research to make sure but when they insist it is correct... that irks me.

Just got off the phone with him and read exactly what it said from the IRS pub. He said he was still going to call them to make sure. I told him I would not deduct it. He didn't say anything but I will probably have to show him the IRS Pub before he will believe me.

Matt what if the children are under 14 then the income has be over $800 and reported on the parent's tax return as the "kiddie tax" or if over $1600 taxed at parents rate... correct?

[Matt Sova]

Kiddie Tax

This tax relates to investment income (Cap Gain, Int and Div).

[OldJack]

Partnership

Also he formed a LLC for this property. Since this is a passive activity it is listed on Schedule E correct? He said his wife and children are part of the LLC. But I assume it will still be correct to list as Schedule E.

If his wife and children are a part of the LLC, then you have a partnership tax return to prepare rather than page 1 of 1040 Sch-E with allocation of income/loss to each partner.

[Gretel]

Disagree

I respectfully disagree Old Jack.

If it's just rental income they can choose to report on Sch. E and are not required to file form 1065.

[Armando Beaujolais]

I respectfully disagree Old Jack.

If it's just rental income they can choose to report on Sch. E and are not required to file form 1065.

Ready, set, GO!

Is this the same argument that says you don't have to file a partnership return for a partnership because it's easier to just pretend the partnership doesn't exist and file two Schedule C's? I'm afraid it is.

I'm calling "Rudolf!"

You have an LLC with three members. If there was no election filed to be taxed as a corporation, the entity is taxed as a partnership for federal tax purposes. Unless we want to pretend that the partnership doesn't exist.

Let's take the taxation out of it for a moment. Why did these people form an LLC? (It sounds like they formed an LLC because the "tax expert" down at the corner bar said that's a great way to get out of paying taxes, but play along anyway). The LLC is formed to shield the taxpayers from personal liability, right? Same as a corporation.

If you form a corporation but don't act like a corporation, you intermingle funds, you intermingle all sorts of personal activities and assets, your corporation doesn't protect you a bit. An adverse attorney would get that corporate veil pierced so quick it would make your head spin.

Same with an LLC. If you want to file three separate Schedule E's, that's great. No problem if the property is owned three ways. But you might as well forget about that LLC.

[OldJack]

I respectfully disagree Old Jack.

If it's just rental income they can choose to report on Sch. E and are not required to file form 1065.

Every partnership that engages in a trade
business or has gross income must file an infor-
mation return on Form 1065 showing its income,
deductions, and other required information. The
partnership return must show the names and
addresses of each partner and each partner’s distributive
share of taxable income.

Gabriele, there are 3 partners and one exception to the penalty of $50 per partner up to 5 months (50*3*5=$750) is that all 3 partners must report the income on their own return. That in itself says the children have to file a tax return if not filing a 1065 even though they may otherwise not be required to file.

Additional penalties may apply for failure to furnish schedules k-1 to partners, not supplying a TIN, and not furnishing info on tax shelters. TTB, page 20-1.

Even though exceptions to "penalty" appears to indicate partners are not required to file a trade or business partnership form 1065, the code and pub 541 still requires partnership returns be filed.

And the last point is if the LLC wants to keep its protection (in court) under state law it has to act like a LLC with appropriate accounting, bookkeeping, and conduct business like a separate entity accounting for ownership equity of each partner. If you have to do that then why not just file the partnership tax return to also show the LLC is accounted for as a viable entity.

In my opinion it is easy and just plain dumb to not file form 1065.

[Gretel]

Partly agree

Armando and OldJack, your arguments about the liability protection is well taken. I am pretty clear on this when it is a business but wasn't, until now, in regards to a rental.

As far as the filing requirement goes (I am not talking about the filing penalty here) I still stay with my earlier post that you can report rental activity on Sch. E. See pg. 64 Pub. 17. "Part Interest".

[OldJack]

As far as the filing requirement goes (I am not talking about the filing penalty here) I still stay with my earlier post that you can report rental activity on Sch. E. See pg. 64 Pub. 17. "Part Interest".

Pub 17, "Part Interest" is talking about a "Part Owner" of rental real estate. These individuals in this post do not own real estate... they own a LLC taxed as a partnership (that just happens to own some real estate).

[Matt Sova]

Dumb not to file 1065?

My fee for a 1065 starts at $500. Here you would have 2 schedule E's (mom and dad on 1 attached to their return) add $50 to mom and dads return for the Schedule E. Kids return with Schedule E about $75. Now, which filing is dumb?

Matt

[OldJack]

My fee for a 1065 starts at $500. Here you would have 2 schedule E's (mom and dad on 1 attached to their return) add $50 to mom and dads return for the Schedule E. Kids return with Schedule E about $75. Now, which filing is dumb?

Matt

You as the tax preparer did not create the LLC-partnership and likewise should not ignore it. 1040 Sch-E is for property owned by title in the name of the individual (or joint individual ownership) not property owned by a LLC taxed as a partnership. If the taxpayer doesn't like paying for a form 1065 he should liquidate the LLC and have the title of the property returned to him personally (tax free property distribution). Form 1065 is the only correct form to file for the LLC regardless of how dumb you might think it is. The tax forms required to be used has nothing to do with your fee structure. BTW your fees are too cheap.

[Unregistered]

I agree with Jack. 1065 LLC return must be filed. Slight different twist. When you applied for EIN you have to indicate that you are multi member LLC. So IRS is expecting 1065 return for LLC unless you filled out 8832.

[geekgirldany]

Well more is added

Okay well I got the LLC paperwork. It currently only lists the one owner/member but it has one passage on there that states "all other members" in the liablity information. He told me the wife and children were part of it. But guess what the property wasn't bought in the LLC name... oh my... and what else "oh we forgot to open a bank account in the LLC name so I ran everything through my personal".

Here is the story.... They asked me if they could buy a 2nd house and deduct it on their tax return. I said of course as a vacation home. They would deduct it as they do now for their principal residence.

This got turned into buying a house to rent which of course changes everything. When he came for me to do last years tax return he said that he had formed an LLC with the wife and children listed (without talking to me) and bought this property. I told him I wished he would've talked to me about this first because it is alot different than what I originally told him. I said then for him to get a separate bank account. To run the LLC separate.

At that time I called the NATP because I was confused. One person told me to run the LLC through Schedule E. I called back later thinking this can't be right because of multiple members. So I called again and got what you guys have been talking about. To file a partnership return and do kids tax returns. That the mutiple members made it a partnership.

I am thinking of telling the guy to dissolve the LLC. He obivously did not buy the property or run anything through it.

Thank you all for responding.