How to file Sch E when moving rent to LLC mid year

Question

Hello - My rental property has been rented for most of last year. In the middle of the year we moved it from our personal names to an LLC. The LLC was opened up in both my name and my husbands. Do we file one LLC and continue as normal on our 1040 or do we have to create a new schedule E from when the property became an LLC. And since the LLC is under both of our names do we have to create two Schedule Es under the LLC to reflect each of our shares and split everything 50/50? Thanks!

Linda Weygant · Answer

So... since the OP is in New Jersey (which is not a community property state.  I had thought it was, but clearly it isn't).

For the period of time before you held it in the LLC, you'll report in on the Schedule E.

For the period of time after it was held in the LLC, the LLC will need to file its own tax return (but pay no taxes).  Each member will get a Schedule K-1 which will be used to report the income on the personal tax return.

Dave Toelkes · Answer

@Donald Dienst

I disagree with @Stone Teran.  The LLC is a business entity governed by state law.  Conventional mortgage loans are given to individuals, not to businesses.  Individuals get consumer loans, businesses get commercial loans.  The bank that sells its mortgages to Fannie Mae or Freddie Mac can only sell them consumer loans, not commercial loans.  The LLC will have to qualify for a commercial mortgage if you want to finance a new property acquisition or refinance an existing mortgage loan in the name of the LLC.

Chris Mason · Answer

Congratulations! Your finances are now sufficiently complicated, and you have been successful enough, that you should be using a CPA.

Sooo yeah, get tight with your CPA.

If you think you might want to buy another property within the next two years or so, get your CPA and your go-to lender on the phone to talk our mystical language with each other and ensure you aren't shooting yourself in the foot in terms of ability to qualify for a conventional mortgage during the next two years.

Alex M. · Answer

@Linda Weygant, if I understand this correctly, the property's income and expenses before it was moved to the LLC are reported via my personal Schedule E and everything that was after is via Form 1065 (including property taxes, insurance, and depreciation), right?

Sorry, one more question, do I need to report the property on Form 4562 for the LLC the year it was moved over or not?

Rose Parc · Answer

Thank you everyone for your input. I think @Linda Weyganthas the correct scenario.  While I would like to keep it as simple as possible and would love to put it into a schedule E, I don't think the IRS rules allow me to do that being in a non community property state.  I guess it's necessary to have schedule K's issued even though we are husband and wife?

Stone Teran · Answer

It doesn't.

As for the original question, it looks like you're trying to keep things simple and safe.  I'd use an LLC but keep it a disregarded entity.  Why make it a partnership and have to file a 1065 unless marital issues are forcing it?

Donald Dienst · Answer

I would like to hear more about this shooting ones self in the foot thing.

If rental income covered expenses how would holding property in an LLC disqualify you from a conventional mortgage?

Linda Weygant · Answer

@Dave Toelkes - correct you are.  The answer is only for community property states.  If you are not in a community property state, then a multi-member LLC (regardless of whether the members are married to each other) should submit a Form 1065 and related schedules.

In case anybody is wondering, here is what google has to say about community property states:

There are nine community property states: Arizona, California, Idaho,Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.  Alaska is an opt-in community property state that gives both parties the option to make their property community property.

Here's the direct IRS quote (I've underlined for emphasis):

Joint Ownership of LLC by Spouse in Community Property States

Rev. Proc. 2002-69 addressed the issue of classification for an entity that is solely owned by husband and wife as community property under laws of a state, a foreign country or possession of the United States.

If there is a qualified entity owned by a husband and wife as community property owners, and they treat the entity as a:

• Disregarded entity for federal tax purposes, the Internal Revenue Service will accept the position that the entity is disregarded for federal tax purposes.
• Partnership for federal tax purposes, the Internal Revenue Service will accept the position that the entity is partnership for federal tax purposes.

Dave Toelkes · Answer

@Rose Parc

Cameron's response only applies to spousal owned LLCs in community property states.  If an LLC is owned by husband and wife in a non-community property state, the LLC should file as a partnership (Form 1065).  Last time I checked, New Jersey is not a community property state, so your spousal owned LLC is now a partnership (unless you elected to be treated as a corporation).  You file your rental income and expenses on Form 1065 and issue yourselves a Schedule K-1.

Consult your CPA for specific details.

Linda Weygant · Answer

You can choose to keep it all on Schedule E as a disregarded entity or you can choose to have the LLC file its own tax return and have the income reporting flow through to you on a K-1.  Each scenario has benefits and drawbacks.  Depending on what else you have going on in your tax world, either scenario could work for you.  I would consult with a CPA about it, discuss your short and long term goals with them and then move forward based on their advice.

How to file Sch E when moving rent to LLC mid year

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