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Yes - LLC would be disregarded entity for tax purposes and all income and expenses would be passed through to members.
Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional. Losses from these activities are not limited by the passive activity rules.
For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. If you were a real estate professional for 2007, complete line 43 of Schedule E (Form 1040).
As that is a rental property - you generally should use schedule E and not schedule C.
If a married couple who file a joint tax return elect to conduct their business activities as a qualified joint venture, (a trade or business entity in which the husband and wife materially participate in such venture), the spouses must divide the items of income, gain, loss, deduction, credit and expenses in accordance with their respective interests in such venture.
Husband-wife partnership. If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. If so, they should report income or loss from the business on Form 1065. Each spouse should carry his or her share of the partnership income or loss from Schedule K-1 (Form 1065) to their joint or separate Form(s) 1040.
line 43 referenced above is on the schedule E - http://www.irs.gov/pub/irs-pdf/f1040se.pdf that should be attached to the form 1040 - it is not on the form 1040.
The form 1065 is use to file a tax return for partnership. The TurboTax is correct - the Small Business and Work Opportunity Tax Act of 2007 affect changes to the treatment of qualified joint ventures of married couples not treated as partnerships - the provision is effective for taxable years beginning after Dec 31, 2006. However that is not schedule C instead 1065 - you just may not to file 1065 and K-1 if you are eligible and if you elect so.
The provision generally permits a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership for Federal tax purposes. A qualified joint venture is a joint venture involving the conduct of a trade or business, if (1) the only members of the joint venture are a husband and wife, (2) both spouses materially participate in the trade or business, and (3) both spouses elect to have the provision apply.
As stated above - If a married couple who file a joint tax return elect to conduct their business activities as a qualified joint venture, (a trade or business entity in which the husband and wife materially participate in such venture), the spouses must divide the items of income, gain, loss, deduction, credit and expenses in accordance with their respective interests in such venture.
This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. Please see more details here - http://www.irs.gov/businesses/small/article/0,,id=177376,00.html
As you are in the rental activity - the income and expenses should be reported on the schedule E and not on the schedule C.