LLC, rental property, taxes, argh! very confused....

Tax, SDIRAs & Cost Segregation
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LLC, rental property, taxes, argh! very confused....

Tom V.
Torrington, CT · Member since 2013 · 26 posts · 4 votes

Hi guys. Found the forum through google, seems like a place I can learn from.
I've been reading this forum forever, and find myself more confused than when I started. Ugh.
Anyway, I need help on understanding taxes regarding a rental property I bought, and it's affect on our personal taxes, and the best way to go about this.

Details:
My girlfriend and I have been together 11 years, and have 2 children. We are NOT married. However, everything we have is in both of our names.

Previous to our endeavor, we had NO real estate experience as an investor. We are just starting out.

We bought a rental house, a 3-family multi, in July 2012.
Upon suggestion and explanation (which may not have been entirely accurate) we formed an LLC for the purchase, and to hold the property.
We are both equal holders of the LLC.
It was set up as a "pass-through" LLC, as the attorney explained it.

Rental income is 2300 monthly total.
(I've seen others stating phantom losses due to maintenance and months of open tenancy - but don't get it - someone explain?)

We perform all of the maintenance on the property ourselves.

We remodeled the 1st floor apartment, my gf and her brother did most of the work (I helped paint) at a cost of roughly 2500 for materials. No labor, except for 500 to a friend to redo the hardwood floors. (total cost of remodel 3k)

Her income from her daily job (active income) is 37k annually.
I have no income - disabled, and my social security hearing isn't until 2014. Until then, I've got nothing. Which is why we bought the investment in the first place, to replace my lost income.

So, we are at 65 annually total, well under the 100k limit for passive activity losses.

Where i'm confused is, the taxes. I have no tax return, as I have no income. But - since we are BOTH on the LLC, do I now have to file a tax return?

Obviously, as we are NOT married, we previously had filed our own, separate tax returns, as single.

What I'd like to do, is just do the rental income on her taxes, as i've seen most others doing. Do it as passive income, and go from there. But not sure if we can do that, since I am also on the LLC.

I want to take the deduction for all of the mortgage interest and fees i've paid, everything allowable by law.

At the same time, I want to maximize my return.

And I have no idea what to do.

To make matters even more complicated, we ALSO purchased our main living home in April 2012, and I also want to deduct the mortgage interest and all allowable fees for that property as well.

I've tried doing this all in turbotax premiere, but it just doesn't ask the right questions or give the right options.

Well, i'm sure I have not given all relevant info, or even asked the right questions.

So please, need any more info, just ask.

Please guide us, we're confused as hell.

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Account Closed
Residential Real Estate Broker · Oklahoma City, OK · Member since 2011 · 114 posts · 38 votes
13y

Here is how the tax will work on your LLC. Your LLC needs to file its own tax return, on Form 1065. It will taxed as a partnership. You and your girlfriend will each receive a Schedule K-1 from the LLC, which is how the income passes to your individual return. The TurboTax program for individual tax returns will not help you with this process.

To complete the partnership return, you first need to calculate your basis in the property. This is your purchase price, plus all of your other expenses (closing costs, interest, utilities and renovation expenses, including labor) incurred up to the day you put it into service as a rental. The "phantom" expense you referred to is called depreciation, and it is calculated from your basis. You depreciate the value of residential rental property (minus the value of the land, which doesn't get depreciated) over 27.5 years, but your depreciation will be a bit complicated to calculate, because you put your rental into service in the middle of a year. The IRS puts out a publication (I think it's Publication 527) that explains how to calculate your depreciation. Your depreciation will be deducted from your rental income. You can also deduct your property tax, insurance, maintenance, interest and other expenses incurred after you put the property into service. After you determine the LLC's income, you will assign half of it to each member and send them a K-1. This is passive income from a rental, so you will not have to pay FICA on it.

Hopefully Steven Hamilton will drop by and correct anything I've gotten wrong here.

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  • Nick Johnson
    Omaha, NE · Member since 2012 · 29 posts · 8 votes
    13y

    Without knowing how to answer ANY of your questions, I would suggest getting a good accountant to do your taxes for you. I'm willing to bet the benefits of using a good tax preparer will far outweigh the costs.

    1Reply
  • Tom V.
    OP
    Torrington, CT · Member since 2013 · 26 posts · 4 votes
    13y

    We are on the hunt for a good CPA.
    As i'm sure you know, there's good ones, and bad ones.
    I want to get all the info I can, so we can do all the numbers ourselves first, to get a baseline of where we stand.

    That way, I have some info to go on when we do get a CPA, so I can know if i'm getting hosed or not.

    Besides, I'm the type who wants to learn and know as much as I can.
    And we intend on growing the business, we have some good reserves, and want - and are on track to - acquire one rental property per year going forward.

    Any help I can get to learn as much as I can now will help greatly in our future endeavors.

    0Reply
  • Account Closed
    Residential Real Estate Broker · Oklahoma City, OK · Member since 2011 · 114 posts · 38 votes
    13y

    Here is how the tax will work on your LLC. Your LLC needs to file its own tax return, on Form 1065. It will taxed as a partnership. You and your girlfriend will each receive a Schedule K-1 from the LLC, which is how the income passes to your individual return. The TurboTax program for individual tax returns will not help you with this process.

    To complete the partnership return, you first need to calculate your basis in the property. This is your purchase price, plus all of your other expenses (closing costs, interest, utilities and renovation expenses, including labor) incurred up to the day you put it into service as a rental. The "phantom" expense you referred to is called depreciation, and it is calculated from your basis. You depreciate the value of residential rental property (minus the value of the land, which doesn't get depreciated) over 27.5 years, but your depreciation will be a bit complicated to calculate, because you put your rental into service in the middle of a year. The IRS puts out a publication (I think it's Publication 527) that explains how to calculate your depreciation. Your depreciation will be deducted from your rental income. You can also deduct your property tax, insurance, maintenance, interest and other expenses incurred after you put the property into service. After you determine the LLC's income, you will assign half of it to each member and send them a K-1. This is passive income from a rental, so you will not have to pay FICA on it.

    Hopefully Steven Hamilton will drop by and correct anything I've gotten wrong here.

    4Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    I will reply as soon as I get to a computer. John P is on track.

    -Steven

    [email protected]224-381-2660
    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    Tom V.,

    You will not file a joint tax return.

    Being that you two are not married, you have entered into a partnership in regards to the LLC. That means you must at least file Form 1065 US Partnership Tax Return.

    All incomes and expenses will be reported on this form and that income will pass through to the both of your personal tax returns based upon your ownership percentage.

    The limit is different for one person versus married.

    Your biggest mistake is using a program to answer your questions.

    I represent taxpayers(individual and business) before the IRS.

    -Steven

    [email protected]224-381-2660
    1Reply
  • Xing Zhu
    Durham, NC · Member since 2012 · 498 posts · 48 votes
    13y

    To call IRS directly is also very helpful. One time I had a very long conversation with a representative. I was amazed that he was so patient.

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    Xing Zhu,

    I would be very careful with the information you get from a CSR with the IRS as often times they do not have adequate tax training. They mostly know very little except general concepts.

    That said there are some who really know their stuff.

    -Steven

    [email protected]224-381-2660
    0Reply
  • Xing Zhu
    Durham, NC · Member since 2012 · 498 posts · 48 votes
    13y
    Originally posted by Steven Hamilton II:
    Xing Zhu,

    I would be very careful with the information you get from a CSR with the IRS as often times they do not have adequate tax training. They mostly know very little except general concepts.

    That said there are some who really know their stuff.

    -Steven

    ------------------------------------------------------------

    Unfortunately, the same can be said about a tax accountant.
    At one time many years ago, I had an difficult issue that everyone
    had a different answer because the law was not clearly written. I finally found an attorney in DC working for the federal government, who told me that he was in charge of interpreting that part of the law.
    He told me that I could include his name and title in a letter to irs with his interpretation, and the problem was resolved. That person was so nice that he even called back later to ask me if the issue had been resolved. Sometimes, you have to do your own work:)

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    Xing Zhu,

    I will not argue that at all. I know many of tax preparers and accountants who should never be allowed near a tax return.

    Anything that I remotely need an official position on I have court cases researched in order to provide me a solid position.

    -Steven

    [email protected]224-381-2660
    0Reply
  • Bob Efaw
    Washington, PA · Member since 2013 · 4 posts · 0 votes
    12y

    Steven Hamilton II, i know that i am a little late for this conversation but i also have some questions. My wife and i Bought a rental this year, formed an LLC and normally file a Joint return. We are equal owners of the property. My question is do we still file a joint return??

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    12y

    @Bob Efaw - the answer from @Account Closed applies. You will have the LLC complete the 1065 form and you and your spouse will each be issued a K1. Since you are in PA, there are also some PA specific forms. You might want to look into getting a good accountant who understands real estate investing.

    0Reply
  • Duncan Taylor
    Real Estate Investor · Member since 2013 · 866 posts · 487 votes
    12y

    @Tom V.,

    With an LLC profits do not have to be divided in the same percentages as ownership.

    Talk to the attorney who formed your LLC. They can give you guidance and recommend a good CPA.

    0Reply
  • Bob Efaw
    Washington, PA · Member since 2013 · 4 posts · 0 votes
    12y

    @Steve Babiak,

    Thanks Steve, we are looking into some accountants in the area but I also like to have as much info as I can for my own comfort. So this would not be filed with our Joint Personal Income Tax Return?? Also does the K1 form come later after we file??

    0Reply
  • Rodney Getsy
    Real Estate Investor · LA, AL · Member since 2014 · 50 posts · 12 votes
    12y

    You need to file the business 1065 before you file personal. The K -1 forms have a deadline to file. Seek assistance in understanding the business tax requirements for the IRS and possibly your state.

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    12y
    Originally posted by @Bob Efaw:
    @Steve Babiak,
    Thanks Steve, we are looking into some accountants in the area but I also like to have as much info as I can for my own comfort. So this would not be filed with our Joint Personal Income Tax Return?? Also does the K1 form come later after we file??

    Bob,

    You will have to file the partnership return first before you complete your own return. A k-1 is issued, think of it like a dividend statement from your brokerage; however, it is from your business.

    As far as finding an accountant:

    Do not feel like you need to use someone local. Many of us accountants have clients worldwide. Payroll, bookkeeping, etc can mostly be done remotely.

    Here is a great list of questions to ask a potential accountant:http://www.biggerpockets.com/forums/51/topics/70447-questions-to-ask-a-cpa

    Also check out the www.NAEA.org page in your search. It should help you find someone local. If someone comes to me, I'll send them your way.

    If you need help in your search or want to verify something don't hesitate to ask.

    A great is example is I have clients worldwide and things are just as easy as I e-mail them, talking on the phone. I even use Skype and TeamViewer to communicate with clients so I'd highly recommend looking for one of the best with great references that interviews well with you. So look for someone you can connect with that works out for your situation.

    [email protected]224-381-2660
    0Reply
  • Daniel H.
    Investor · San Jose, CA · Member since 2013 · 37 posts · 5 votes
    11y
    Originally posted by @Account Closed:

    Here is how the tax will work on your LLC. Your LLC needs to file its own tax return, on Form 1065. It will taxed as a partnership. You and your girlfriend will each receive a Schedule K-1 from the LLC, which is how the income passes to your individual return. The TurboTax program for individual tax returns will not help you with this process.

    To complete the partnership return, you first need to calculate your basis in the property. This is your purchase price, plus all of your other expenses (closing costs, interest, utilities and renovation expenses, including labor) incurred up to the day you put it into service as a rental. The "phantom" expense you referred to is called depreciation, and it is calculated from your basis. You depreciate the value of residential rental property (minus the value of the land, which doesn't get depreciated) over 27.5 years, but your depreciation will be a bit complicated to calculate, because you put your rental into service in the middle of a year. The IRS puts out a publication (I think it's Publication 527) that explains how to calculate your depreciation. Your depreciation will be deducted from your rental income. You can also deduct your property tax, insurance, maintenance, interest and other expenses incurred after you put the property into service. After you determine the LLC's income, you will assign half of it to each member and send them a K-1. This is passive income from a rental, so you will not have to pay FICA on it.

    Hopefully Steven Hamilton will drop by and correct anything I've gotten wrong here.

    Thanks Jon.

    Should you also deduct the full mortgage payment on the investment property from rental income for purposes of calculating K1 profits?

    0Reply
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