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Question

LLC - Rental Income vs. Ordinary Income

Forum|Forum|4 years ago
March 12, 2022
4 replies
0 views

Hi.

My husband and I own a property with his parents (mortgage and title under all four of our names). We rent this property out in FL. To keep things clear we created an LLC for banking issues. All of our airbnb payments and expenses flow through the LLC. (We have yet to take any income from the rental).

My question is:

1) Rental Income - Since the home is in our name and not the LLC - do we complete the form 8825?

2) Where to place the income: Do we consider the rental income/payouts from Airbnb as LLC "gross receipts/sales" - ordinary income? Or do we place this as Schedule E - Part I - personal rental income?

Part 2: If we put the rental income under Schedule E - personal, than do we put no income for the LLC on Form 1065 (remember, the Airbnb payouts go to the LLC directly).

THANKS!

Not A Product Question

kkletcherAuthor

LLC is used for property management issues - this just keeps everything separate and clear.

Mike9241

since the property is held by the 4 of you directly, the LLC is irrelevant (why do you even have it a joint a/c would probably accomplish the same thing)? a partnership return is required. the question is do you provide services to the AIRBNB users

According to the IRS: “Generally, Schedule C is used when you provide substantial services [i.e. hotel like services] in conjunction with the property

Do short-term rentals go on Schedule C?
Renting for Less than Seven Days When your average rental period is seven days or less per tenant, the IRS deems the activity to not be a rental activity under the passive activity rules. Because of this, many CPAs put short-term rental activities on Schedule C.

Is an Airbnb rental considered a business?

Typically since Airbnb requires active management, it is considered an active trade or business. This classification renders hosts as self-employed businesses. As a self-employed individual you are responsible for reporting and remitting your taxes on your own

thus these activities of an AIRBNB would get reported on page 1 of form 1065 not form 8825

any net income would be subject to self-employment tax

the partnership will issue each of you a k-1 which you use to report on your personal tax returns,

since you control the LLC, distributions from the partnership would be treated as if they had been made to each of you directly. (like the LLC was a management company)

tccpg288

I have a similar scenario.

The host does provide the services and has a 1065.

I am assuming this could qualify for active activity.

Would the activity be reported on the 8865 for each building then? Or on Page 1 of the return? Does all activity go in the 1065, or is some reported on Sch. C?

Mike9241

this is for schedule C but would apply to a partner who provides substantial services.

If you provide substantial services for the convenience of your guests,
your short-term rentals can be re-classified as a Schedule C business
activity subject to self-employment tax. For example, the operation of
the rental in similar fashion of a bed and breakfast will typically be
considered to be the provision of substantial services.

thus for preparing a partnership return the activities would not be entered on form 8825 buy on page 1 of the 1065. then this would flow to the k-1 as business income and also box 14 of k-1since it would be subject to self-employment taxes.

what if some partners are not active. then an allocation would need to be made between page 1 and form 8825.

this is an opinion. I'm not citing anything authoritative.

Carl11_2

Employee

SCH C does not apply here, since this is a multi-member LLC or Partnership. Basically, a 1065 Multi-member LLC/Partnership return is completed and filed.

If the rental income is passive, it's reported on IRS Form 8825 by the multi-member LLC/Partnership. Then the MMLLC/Partnership will issue each member/partner a K-1 with the income/expense/gain/loss information on it. Each partner will enter the information from that K-1 into their personal 1040 tax return.

Take note that the filing deadline for the 1065 multi-member LLC/Partnership tax return is March 15. The late filing penalties are $205 per member for each month late. So file on or after March 16th and with four members you're looking at a late filing penalty of $820.

If the rental income qualifies as non-passive, the form 8825 will not be used for that specific non-passive activity.

Generally speaking, rental income is passive. However, with an AirB&B or VRBO property, if you provide services that are "directly beneficial to the tenant", then it could qualify as a non-passive activity.

kkletcherAuthor

Hello- and thank you!

1) Form 8825- I was under the impression this form was only to be completed if the rental property is owned through the partnership? As this is considered passive income, if you placed this on the form 8825 and it counted as rental income on form 1065 then would the gross receipts/sales on form 1065 line 1 be “0” since the LLC only made rental income and no other income.

kkletcherAuthor

@Carl11_2

AmeliesUncle

First thing you need to determine is if "services" are provided. Maid service and meals are the most common, but there could be other factors that determine if "services" are provided. For the rest of my comments, I will assume that "services" are NOT being provided.

It needs to be on a Partnership return (Form 1065): The two options are Form 8825 (which is part of the 1065), or on page 1 of the 1065. It is not an option to enter the rental on page 1 of Schedule E of your personal tax return.

Although I personally think Form 8825 makes most sense, the Instructions for 8825 may make that approach questionable.
If you report it on the 8825, I suspect when you enter the K-1 on your personal tax return that it will be difficult to tell the program it is NOT passive income.
If you report it on page 1 of the 1065, it may be tricky to tell the program it is NOT subject to SE tax (it should not populate Box 14 of the K-1.

In either case, when you enter the K-1 on your personal tax return, the amounts will flow to page 2 of Schedule E on your personal tax return.

Anonymous_

Employee

@AmeliesUncle wrote:
If you report it on the 8825, I suspect when you enter the K-1 on your personal tax return that it will be difficult to tell the program it is NOT passive income.

I agree. This would essentially require entering false information, such as indicating the property is a self-rental.

@AmeliesUncle wrote:
If you report it on page 1 of the 1065, it may be tricky to tell the program it is NOT subject to SE tax (it should not populate Box 14 of the K-1.

I agree and this scenario is even worse since, I believe, it would require overrides in Forms Mode if Box 14 is populated.

AmeliesUncle

@Anonymous_ wrote:

I agree. This would essentially require entering false information, such as indicating the property is a self-rental.

If there are not any rentals on page 1 of Schedule E, I would go the Real Estate Professional route because that does not show up on the tax return (it just makes it non-passive).