Rental gain on Schedule E, wholesale business on Schedule C?

Question

Hi I have rental, operated under LLC. I also do wholesale and the wholesale business is operated under the same LLC.

Do I report both on Schedule C as business or do I separate them, rental in Schedule E, wholesale in Schedule C?

I work full time, but actively participate in rental (I manage) and wholesale at my spare time. Can I use the loss from LLC to offset my income?

Jon Holdman · Answer

For tax purposes the LLC is a pass through entity and has no effect on your taxes at all (assuming you've not elected it to be taxed as an S-corp or C-corp).

Rental income or loss goes on E.  Business income or loss goes on C.  The results then end up on your 1040.  Income from wholesaling is ordinary income and subject to federal, state, and local income taxes as well as self employment income (i.e., social security plus medicare, both halves, since its self employment income.)

Passive losses from rentals can be used to offset ordinary income under limited circumstances:

1) If your AGI is under $100K you can take up to $25,000 in passive losses against ordinary income.  Over $150K AGI and you cannot take anything.  Between those two number the $25K special allowance phases out by $1 for every $2 in AGI over $100K.

2) If you're a real estate professional you can always take the passive losses.  To be a RE professional you must be able to document at least 750 hours spent on real estate activites AND more hours than on any thing else.  So, if you have a full time W2 job, 2080 hours per year, you must spend at least 2081 hours doing real estate activites.

If you cannot use the passive losses you carry them forward until you sell a rental. Any rental, not necessarily the one that generated the losses.  Then you can use them to offset gains.  Realize also that as you depreciate the rental that it decreasing your basis and increasing your gains when you sell.  That applies even if you don't actually take the depreciation.

Good rentals actually generate income, not losses.  Hopefully you weren't sold a bill of goods about the "tax benefits" of rentals and convinced to buy a crummy rental by some tax benefit lipstick.

Eve W. · Answer

Thanks.

My rental was gain, my wholesale business was a loss.

Steven Hamilton II · Answer

@Jon Holdman covered it all.