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Lev
Lev, Tax Preparer
Category: Finance
Satisfied Customers: 29952
Experience:  Personal Investment, Tax Preparation
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I purchased two investment properties with the equity of the

Customer Question

I purchased two investment properties with the equity of the prime residence in December 2016. I established the LLC for managing those properties and they are in the middle of transferring the titles from me as an individual to the LLC. As you know, when I reported the 2016 tax to the IRS, my profit was less than 1k but still they were under me as an individual.Currently, I am working on my kid’s FAFSA. Do I need to fill out the number for the profit from 2016 tax form? And, do I need to report my investment proper or report as a small business?
Submitted: 1 month ago.
Category: Finance
Expert:  Lev replied 1 month ago.

The issue is that a single member LLC is a disregarded entity unless you specifically elected it to be treated as a corporation.

Disregarded - generally means ignored for income tax purposes - so all assets owned by such single member LLC and all income received by that LLC - are considered as owned and received by the owner - and are reported on owner's individual tax return as if there were no any LLC.

So - yes - you are treated as the owners of these investment properties and as a recipient of investment income - for tax reporting and FAFSA purposes - regardless if you have an LLC or own these assets directly.

Another question - if these are rental properties or you are running a business?
Rental activity is specifically classified as passive - so that passive income is NOT subject of self-employment taxes, while business income will be subject to both - income taxes and self-employment taxes.

Questions?

Customer: replied 1 month ago.
There is another member who is my husband.
I am kind of part-timing to manage the properties.
To make clear to me, you meant that I cannot not categorize this LLC as a small business on the FAFSA form regardless the titles are under me as an individual or underthe LL, right?
Expert:  Lev replied 1 month ago.

First of all - you MAY categorize this LLC as a small business IF the LLC runs business activity.

If the only activity that LLC participates is rental - that would be be passive activity - unless you are a real estate professional.

Generally - for FAFSA purposes - it doesn't matter if you run an activity as a physical person or run it though the LLC - it will be classified as business or as passive rental activity based on your specific circumstances.

Expert:  Lev replied 1 month ago.

Regarding tax treatment - depending on the state you are living that LLC still may be treated as disregarded entity if only members are husband and wife,

But generally - such LLC is classified as a partnership and files its own partnership tax return (form 1065) and issues K1 statements to each partner.

When you run the LLC as business activity - on K1

https://www.irs.gov/pub/irs-pdf/f1065sk1.pdf

business income or loss will be reported in box 1 and in box 14 as Self-employment earnings.

If FAFSA will verify your tax return - they will be looking for these amounts as an indication of having a business.