Converting Rental Property from Partnership to Sch E

[sami]

I saw a new client who owns rental property owned by husband and wife. On their own they formed a LLC and selected the entity to be taxed as partnership. They live in community property state. Now after two years of filing partnership tax returns on their own they want to convert it to Schedule E i.e disregarded entity. I am not sure how to proceed with something like this as I never came across this kind of situation. I know living in a community property state they should have elected LLC to be taxed as disregarded entity at the first place. Any suggestions if this can be reverted back to Schedule E oe not. Thanks

[TaxGuyBill]

It seems like they can make that election at any point (but can't undo it without IRS permission). But unless you file a "final" 1065, the IRS will likely be looking for a 1065. See this IRS page for details:

https://www.irs.gov/businesses/small...ted-businesses

[sami]

I will be filing the final 1065 tax return. Not sure how to make the election and where to make the elction to be treated as Schedule E for 2020 and not partnership. Any thoughts or hints? Thanks

[TaxGuyBill]

The way I read it, the election is made by just reporting it on Schedule E. No separate election statement is needed. Just be sure to check the QJV box (next to the number of rental days and number of personal days).

[AZUKHiker]

In a community property state husband and wife owning an LLC can flip back and forth between 1065 and Sch C/E as often as they want without IRS permission. All you have to do is follow the normal tax rules for partnership creation and dissolution. See RP 2002-69. No election needs to be filed or prepared.

Don't check the QJV box as this is not a QJV. An LLC owned by a husband and wife can't be a QJV. Instead of QJV you are using RP 2002-69.

[TaxGuyBill]

In a community property state husband and wife owning an LLC can flip back and forth between 1065 and Sch C/E as often as they want without IRS permission. All you have to do is follow the normal tax rules for partnership creation and dissolution. See RP 2002-69. No election needs to be filed or prepared.

Don't check the QJV box as this is not a QJV. An LLC owned by a husband and wife can't be a QJV. Instead of QJV you are using RP 2002-69.

That's not how I read it. RP 2002-69 just makes the LLC a "Disregarded Entity". That then allows them to file as a QJV.

And if it is a QJV, once you make the election it is permanent and you need IRS permission to change it.


But I suppose we should back up a bit. If the rental doesn't rise to the level of a "business", it wouldn't necessarily need to be on a Partnership return or QJV. It is just ownership by two people.