Disregarded LLC Tax Reporting Issue - How Have You Reported?

[Account Closed]

Some background before I post - I am a tax guy - started at Ernst & Young in 1993 and have been in the tax business since.  My full time day job is to argue with tax auditors.

I have a situation that I'm curious how others have handled this (I can't be the only one in the same situation).  I've reached out to various friends and colleagues who are CPA's and I've even reached out to friends who work in "the service" (IRS) as collection agents and prior help desk folks.  I can't get a straight answer and I'm on the verge of requested an opinion letter from the IRS directly.

Here's the situation -

I have a single member LLC (disregarded) that wholly owns the following:

• Three rental properties
• A second single member LLC (disregarded) not involved in real estate
• A third single member LLC (disregarded) - construction company

How do you report this on your 1040? At first glance, the response is 3 Schedule C's and 3 Schedule E's.  I'm not buying that position....

Rentals are GENERALLY (not always) reported on Schedule E.  Per instructions to Schedule E, this is where generally you place that real estate.

Instructions to Schedule C indicate you CAN report real estate rentals on Schedule C for very specific reasons - first, if you are a "real estate professional" (of which I am not - read above, I still get a W-2 from my employer), second if you hold the properties for "speculative purposes" but the test is your rents must be 2% or less than the lowest of your basis in the property, or fair market value....I buy very low and I'm closer to 18-20% (the LLC owns the property outright with no financing...I don't plan to finance).

Here's where it gets sticky...the LLC that owns the rental properties also owns a phone system, and various tools used to rehab/repair/maintain the properties - most of which are capitalized (table saw, miter saw, job site boxes, etc). Since I'm not a flipper (more buy and hold), this Schedule C WILL NEVER SEE A PROFIT (despite the company being profitable) because the associated income from the rental properties is reported on Schedule E and the expenses from depreciation associated with tools/phone system, org costs, etc. are all Sch C attributable and not allocable to Sch E. Businesses that don't make a profit get flagged for hobby losses....however all of these properties will see income because they are not financed.

If I report all on Schedule C, the income will be classified as "ordinary" and I'll have to pay the SE tax...not to mention it will get flagged because I'm not a "real estate professional".  Schedule E identifies the income as "passive" which means no SE tax.

I'm sure there are other folks in the situation - but I haven't been able to find any court cases or determination letters that point to guidance.

How are other folks dealing with the situation?