Warehouse being rented piece by piece

[taxgirl]

I'm asking for advice on how to proceed...

Client has a 15,000 square foot warehouse (with some office space) and is renting 576 sq feet (4%). He owns the building and uses most of it for his own business. Now going to start renting
1075 sq ft (7%) and 863 sq ft (6%). All separate tenants. I'm posting the income on schedule E with no % of expenses allocated due to the small percentage. The utilities are not separate and the tenants pay their own phone. Would you allocate property tax, mortgage interest, utilities etc at the respective percentages? Can they be lumped on one schedule E?

I appreciate your advice

[kathyc2]

I'm asking for advice on how to proceed...

Client has a 15,000 square foot warehouse (with some office space) and is renting 576 sq feet (4%). He owns the building and uses most of it for his own business. Now going to start renting
1075 sq ft (7%) and 863 sq ft (6%). All separate tenants. I'm posting the income on schedule E with no % of expenses allocated due to the small percentage. The utilities are not separate and the tenants pay their own phone. Would you allocate property tax, mortgage interest, utilities etc at the respective percentages? Can they be lumped on one schedule E?

I appreciate your advice

I assume client files a Sch C? IMO you could either report the rent income on C and not prorate expenses, or put rent income and allocated expenses on E.

[Kram BergGold]

Schedule E

I would report the rental income and deductions on Schedule E, it does not sound like the owner is performing any substantial services so this would not be a Schedule C activity. . Whether you use on column or multiple columns is up to you. For instance I had someone with a two family. She lived in one unit and rented the other. After 20 years she moved out and rented both units. For me it was simpler to use two columns and that is how I do it. Had I determined it was simpler to use one column I would have done it that way. In my case there is positive income from both units so passive loss issues do not come into play. Using two columns when losses are involved could complicate things, maybe.

[taxgirl]

He does operate a schedule C out of the majority of that building. Would you split out expenses then?

[kathyc2]

He does operate a schedule C out of the majority of that building. Would you split out expenses then?

Yes, I think you need to have the prorated expenses follow the income, including depreciation. Some things you would want to keep in mind: Putting it on E will avoid SE taxes, although if he already meets the SS wage limit, it would be minor. If the income is high enough to exceed SS wage base and to get into NIT, then it would likely work out better to put it all on the C. If after prorated expenses he has a loss, is his income low enough to take a passive loss? Also, looking ahead to 2018, you would need to take 199A into consideration. I believe the consensus is E income qualifies, but at this point that is just a presumption.

[Kram BergGold]

Prorate

Yes, expenses have to be prorated between C and E. You only put rent on Schedule C if it is equipment rentals or something like a B & B where personal services are involved. Assuming he is just renting space you put rents and expenses on E. I always try to make the net rent a positive. Also, if I am running a business and I pay rent to you, I am required to send you a 1099- Misc for rent. Then the IRS will be looking for E.