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

[Tom V.]

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.

[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.