Form 1065 Filing Requirements for LLC

[fred7777]

My sister and I set up a two Member NJ LLC for estate planning reasons. The only asset is a small vacation home that was owned by our now deceased parents. It is not a business and the house is only used about 30 days a year by immediate family members (our siblings, our kids and grand kids). The LLC does not (and never will) have any income or deductible expenses. My sister and I did open a checking account for the house expenses and periodically make joint deposits to cover the annual expenses for real estate taxes, utilities, insurance, repairs, etc. IT IS NOT AND NEVER WILL BE A BUSINESS.

Because we are a partnership (and NOT a domestic partnership), the IRS told me that we must file an annual Form 1065 and two Form 1065 Schedule K-1s even though everything will be $0. Is that correct?

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Here are two cut and pastes from my Google searches...

1. "Filing requirements for an LLC partnership... An LLC partnership is considered a pass-through entity and must file an informational partnership tax return on Form 1065 unless it did not receive any income during the year AND did not have any expenses that it will claim as deductions or credits".

2. Do I have to file an LLC partnership return if there is no activity?
"If an LLC elects to be treated as a partnership for tax purposes, and the business did not generate any income during the taxable year, it is generally not necessary to file a tax return, unless there are business expenses to be treated as credits or deductions".

[Jim-from-Ohio]

sounds like you did some good research.  I concur, no 1065 required.. some preparers would still file to stay off non -filing letters but if you do that may get substantial late filing penalties.

[msmith7305]

Are you planning to deduct the real estate taxes? How does that fit into your analysis?

[George4Tacks]

I think you got it right. Key phrase 

1. "Filing requirements for an LLC partnership... An LLC partnership is considered a pass-through entity and must file an informational partnership tax return on Form 1065 unless it did not receive any income during the year AND did not have any expenses that it will claim as deductions or credits".

I would also ask, how is the ownership recorded with the county? Will each member/partner contribute money to pay utilities, insurance, taxes, etc? Will it ever be occasionally loaned out to friends?

[fred7777]

The real estate taxes are about $1,000. I would not report these (or any other expenses) because we are not a business. If I do itemize on my personal 1040, I would probably just deduct 50% of the $1,000 on Schedule A as 2nd home prop taxes. But as two retired seniors filing married joint, the standard deduction is almost $30,000, so probably won't even itemize.

[fred7777]

George, thanks for taking the time to reply. Your questions:

1. how is the ownership recorded with the county?

This NJ entity is filed as a "Two Member LLC" that the IRS told me must be classified as a Partnership (but not a domestic partnership). Thus, IRS said I should file an information return even though my sister and I will not "receive any income during the year AND did not have any expenses that it will claim as deductions or credits".

Would you file an information return with basically all $0 amounts?

2. Will each member/partner contribute money to pay utilities, insurance, taxes, etc?

Yes, my sister and I equally periodically contribute money to a checking account for household overhead expenses.

That said... and if I do file a Form 1065... it will have $0 income and $0 expenses. But I probably should prepare a very simple Schedule L Balance Sheet. Projecting Assets to be about $7,500 "Cash" and $80,000 "Other Assets". Maybe I'll breakout the "Land" portion of the $80,000 but the home is not a depreciable asset, so I'll report as "Other".

If I were your client, would you recommend doing a Balance Sheet, or just leave the Schedule L blank and keep it super simple? After all, it is not (and never will be a business).

3. Will it ever be occasionally loaned out to friends?

No, never. And for insurance liability reasons, it's only used by our immediate family members (our kids, grand kids, and siblings). No friends... that's the rule!

[BobKamman]

I was confused by the assertion that this is not a domestic partnership, because last I heard New Jersey is still part of the US, even though its inhabitants are not allowed to pump their own gas.  But I think the helpful IRS taxpayer service representative (who would call them to ask, anyway?) was thinking of two people who are not married but living together in an arrangement close to it.  Not, a domestic partnership as distinguished from a foreign partnership.

You seem certain that this property will never be sold, but families have a way of going in different directions when the first (or in this case, second) generation dies.  And how does placing it in an LLC affect stepped-up basis?  Also, is the insurance policy issued to the LLC, and so it doesn't cover the individual owners who would certainly also be sued?  Does your umbrella policy cover that situation?  

Apparently NJ requires you to get an EIN before filing for an LLC.  I'm sure IRS appreciates that extra work.  Maybe it would be required anyway.  Speaking of extra work, have you filed the BOI report yet? And NJ has a $75 annual fee for an LLC?  That's not as bad as California, where this would not be the solution to estate planning for co-owned property.  

[fred7777]

George, I saw your initial reply and thank you for that. Did you reply to my followup questions in RED?

[fred7777]

Bob, thanks for replying.

1. Yes, the IRS taxpayer service rep was referring to two people who are not married but living together when talking about a domestic partnership. Don't want to make any Jerry Lee Lewis jokes here, but my sister and I don't qualify for the "domestic partnership" exclusion.

So yes... we do need to file a Form 1065????

2. Insurance will be in the name of the LLC.

3. Already filed a BOIR with finCEN.

4. Yes, NJ has some type filing so they can gouge us $75. Not due until September.

5. Yes... my wife will get stepped up basis for my 50% ownership.

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Question... would you file Form 1065 if you were me?  If yes, would you prepare a Balance Sheet or leave everything $0?

[George4Tacks]

@fred7777 I don't see a reply by me, but I am getting old. 

1. Yes I would file with zero for federal, just to be safe

2. Ultimately you do need to do an accounting and posting it on a 1065 ain't a bad idea. 

3. No response needed.

Later you talked about NJ.  I do not get the impression this is a "business" and you might interpret that NJ does not require registration, but you already have. Maybe you take the stand that you are now a general partnership which seems to make it even worse with NJ. Maybe file with NJ and pay the $75 fee as a form of insurance. All of that is really outside my experiences. Bob has a much better handle on the estate planning than I do. 

Possibly doing a LLC was not a good decision. Paying for a big liability insurance policy would have been a better choice with the two of you as tenants in common. That is what I would do. 

Best of luck. 

P.S. you don't want to do Jerry Lewis jokes. I was really trying to restrain myself from referring to "Song of the South"' and Tar-Baby. This reminds me of Brer Rabbit's encounter with Tar-baby. I guess I have failed. 

[BobKamman]

How does your wife get stepped-up basis?  Partnerships are awful ways to do business and LLC's aren't much better, so I avoid clients who want them and I usually only deal with dying partners when there are PTP's.  Something about the partnership having to elect stepped-up basis before the partner can claim it.  Maybe someone here has some insight.  But how do you know your wife is going to outlive you, anyway?  Or your sister?  But then, what do you care?  You'll be dead anyway.  

[George4Tacks]

Personally I have to die last. My wife says if I die first, she will kill me!! I believe her, but I am not @fred7777 

[Accountant-Man]

Why LLC? To limit liability? That's what insurance is for. Perhaps a Joint Venture would have been sufficient, but again, it's not a business.

LLC is a business, and the $75 Annual Report fees for LLCs in NJ prove it. But without any income there really is no need to file 1065 or NJ-1065, other than to get them off your back.

You must have a lawyer in your family to suggest the LLC.

[BobKamman]

You must have a lawyer in your family to suggest the LLC.

Or someone who buys seminar tickets.