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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I have a general question about LLCs. I would like to place

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I have a general question about LLCs. I would like to place my real estate investment properties in to an LLC which would have an additional member other than myself. In additon, I would have another LLC to handle rent collection and bill paying, but no wages would be paid to me as manager of this LLC.

Currently, all of the rental income is considered "passive" and no self-employment tax is paid. Also, as "mom and pop" investors, we are not currently required to file 1099s for our sub-contractors. Would this LLC structure change any of that?
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.

Hi and welcome to Just Answer!

Rental activities are specifically defined as passive activities by the law - regardless if these are activities are run via the LLC.

However because the LLC is generally treated as a partnership - all income and losses are passed to members - rental passive activities are reported on individual levels. There will not be self-employment taxes on rental income.

 

The LLC doesn't pay wages to members - but report pro-rata share of income to each member on schedule K-1 - www.irs.gov/pub/irs-pdf/f1065sk1.pdf

As you see - rental income is reported in box 2 - separately from other business income.

If you pay sub-contractors in the course of your business activity (including rental activity) more than $600 per year - that payment is required to be reported on from 1099MICS.

That is regardless if you pay as a physical person or via your LLC - so there is no difference.

 

Let me know if you need any help.

Customer: replied 2 years ago.
I understand that currently small mom and pop type rental owners are not required to file 1099s. So, is that wrong or are you saying that would change? And you mentioned that income from rentals is reported on a K-1. I assume that means net income or does each member show on a sch E the total income and expenses since the LLC does not file a return?
Expert:  Lev replied 2 years ago.

I understand that currently small mom and pop type rental owners are not required to file 1099s. So, is that wrong or are you saying that would change?

I believe you either misunderstood or had incorrect information.

There will not be any changes.

If you pay sub-contractors in the course of your business activity (including rental activity) more than $600 per year - that payment is required to be reported on from 1099MICS. That is regardless if you pay as a physical person or via your LLC - so there is no difference.

And you mentioned that income from rentals is reported on a K-1. I assume that means net income or does each member show on a sch E the total income and expenses since the LLC does not file a return?

The LLC with several members is generally treated as a partnership. Th e partnership DOES file income tax return - but does NOT pat income taxes - all income and losses are passed to members - rental passive activities are reported on individual levels.

 

A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.

Some additional information about partnerships may be found in IRS Publication 541 - http://www.irs.gov/publications/p541/index.html

All business income and expenses are reported on the partnership tax return form 1065 - http://www.irs.gov/pub/irs-pdf/f1065.pdf

Partnership should issue schedules K-1 to each partner reporting pro-rata share of net taxable income - http://www.irs.gov/pub/irs-pdf/f1065sk1.pdf

 

Let me know if you need any help.

 

Customer: replied 2 years ago.

LEV, thank you for your answers and patience.

 

I think I am a bit confused. Currently, I fill out Sch E Part 1 with income, expenses, and depreciation for each rental unit. But the K-1 information from an LLC would be inserted in Part 3 on the back of Sch E instead. I do not think that the LLC files a tax return, only a 1065(?). So does the income/expense info get reported anywhere?

Expert:  Lev replied 2 years ago.

The LLC that is treated as a partnership files its own tax return - the partnership tax return form 1065 - http://www.irs.gov/pub/irs-pdf/f1065.pdf

On that form the LLC reports all income and expenses.

This is a form that should be attached specifically for rental actifities - http://www.irs.gov/pub/irs-pdf/f8825.pdf

Customer: replied 2 years ago.
I have always been required to show the breakdown of income, expenses, and depreciation for each property on my personal Sch E. I do not believe the 1065 shows this. And I don't think the K-1 does either, it just shows totals. So does taht info not get reported?
Customer: replied 2 years ago.
OK. So the 1065 is more extensive than I thought and does report that information?
Expert:  Lev replied 2 years ago.

When you show the breakdown of income, expenses, and depreciation for each property - that is not done on your income tax return - from 1040 - but is done on attached forms and schedules.

 

Very similar - for the partnership tax return - you will have attached forms and schedules depending on your circumstances.

For rental expenses - you will use form 8825, for depreciation - you will use form 4562, etc.

 

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22749
Experience: Taxes, Immigration, Labor Relations
Lev and 4 other Tax Specialists are ready to help you
Customer: replied 2 years ago.
Ah! OK. I see it now. Thanks for your responses and your patience.
Expert:  Lev replied 2 years ago.

I am glad to be helpful.

Please be sure to come back if you need any help with tax related issues.

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