rental property in LLC

[oceanlovin'ea]

I have had LLCs in the past that were set up to handle rental property. They were partnerships and so 1065 was filed with partnership expenses on the front page and rental expenses on the rental form. But this case it is a SMLLC and it was set up to handle house flipping and rental property. There is no house flipping any more and only one rental property. Last year they sold the last house that they tried to flip. I think they keep the LLC as liability coverage. SMLLC is just a schedule C and the rental income and expenses go on Schedule E. The income goes on the Schedule E so there is no income on the Schedule C, just expenses for taking care of rental.
So now I am thinking that I shouldn't file the schedule C any more. The expenses of the rental should just go on the rental. The only difference is that they took an office in home deduction before and they won't be able to now.
Am I thinking this out correctly? I don't want a schedule C in a return with no income and a lot of expenses.

Linda, EA

[Gretel]

I agree with your assessment, no more Schedule C, just Schedule E. If an home office can be claimed depends on facts and circumstances, not on the filing. If client still uses this office 100% for business (rental activities), I believe he still can claim OIH, if amount claimed is reasonable with income earned. There is no form on Sch. E but that does not mean it cannot be claimed.

[Roland Slugg]

There should not be a Schedule C filed for a taxpayer who doesn't own a business, and owning rental property does not constitute a "business." Rental property is classified as "income-producing property," and the owning and managing of income-producing property is rarely, if ever, a "business."

If you have prepared tax returns for clients and included both Schedules C and E when all they had was rental property, that was probably incorrect. Even house flipping may not constitute a "business" unless it is done on a regular basis. If someone buys rental property, then sells/flips it and buys another, that's probably not a business unless it is done on such a frequent and regular basis that the facts and circumstances indicate otherwise. It's simply the buying, owning and selling of rental property, with the sales reportable on F-4797, not on Schedule C.

Regarding the OIH deduction, it is not allowed for a taxpayer whose activity consists of managing his rental property. It's only allowed for employees or self-employed individuals, not as an expense for income-producing property.

[Gretel]

Regarding the OIH deduction, it is not allowed for a taxpayer whose activity consists of managing his rental property. It's only allowed for employees or self-employed individuals, not as an expense for income-producing property.

Roland, would you say this is also true for a real estate professional?

[oceanlovin'ea]

new client

This was a new client last year. Previous preparer took a lot of liberties in preparing return. I made a lot of changes last year and I had put in my notes that it was the last year for the LLC as schedule C. People think they are starting a business of flipping houses, Their goal is to make money and they get taken in by the flipping shows on tv that show big profits. They never made big profits on anything they did. The rental house wasn't part of the flipping business. So my post was to make sure i was thinking right and to back me up.

Would you take some of the expenses of having the LLC under rental expenses? For example, the annual state filing fee and they also purchased pre paid legal for the LLC.

Linda, EA

[Burke]

I believe you were on the right track insofar as the Sche C for flipping, and Sche E for rental. The SMLLC being a disregarded entity, and the only activity is now a Sche E, I don't see where else you could take these expenses except on Sche E.

[oceanlovin'ea]

I'm not sure they need to keep the LLC any more. But he is a deputy sheriff and so might be overly cautious about people suing. But if they can't write off the extra expenses of having it, they might close it.

Linda, EA

[Burke]

Instructions for Schedule E say to list "any other ordinary and necessary expenses" on Line 19. That's where I would put it.

[Bees Knees]

I would say house flipping is almost always Schedule C since there is almost always an element of fixing up the place and repairing stuff before putting it back on the market. Flip more than one house, and it is a business. Schedule E is for rental real estate with no services provided.

And the fact that he/she currently has no houses to flip does not necessarily mean no more flipping in the future. The minute you believe a client when they say they will never do that again, the first thing they do next year is come back with one more flip.

[Roland Slugg]

I would say house flipping is almost always Schedule C since there is almost always an element of fixing up the place and repairing stuff before putting it back on the market.

I disagree and would say it is almost never Schedule C ... especially for the common situation of buying rental property in a rising market, remodeling or fixing it up a little to enhance its rental appeal, renting it for a year or two, maybe sprucing it up a little more when the tenants vacate, then selling it to garner the profit. This does NOT constitute operating a "business."

Flip more than one house, and it is a business. Schedule E is for rental real estate with no services provided.

So one sale is not a business, but two sales is? Where does it say that in the Code or Regs?

An isolated transaction isn't a business. Even one or two isolated transactions per year don't make house flipping a business, as long as the property was rented for a reasonable time between purchase and sale or there were market conditions that dictated a quick sale. In the OP in this thread it doesn't say how many "flips" the T/Ps did, or how long they owned the property, or even if they were rented out for a while. But unless someone is doing nothing more than buying property, adding value by repairing and remodeling it, then selling it ASAP thereafter, with no renting or attempts to rent it out, I would characterize almost any house "flip" as a non-business transaction.