Husband-and-wife LLC partnership

[Greta]

Husband and wife formed LLC 50-50 partnership. Should I file a separate Form 1065 for them, or can I include as a Sch C (or E) and simply check the box that it's husband+wife owned? They are wealthy, and I want to protect their other assets in case of lawsuit. I assume keeping funds strictly within an LLC bank account should work in either 1040 or 1065?

My second issue is that they want this property for: long term rental, short term rental, and wedding venue. How to handle a switch back and forth from C to E?

[PATAX]

Greta, if you have a separate partnership entity set up then I would imagine you would just file a 1065 partnership return with the applicable K-1 forms. And yes a partnership can have rental real estate income and regular business income, I.E. it will be segregated on the K-1 form which has separate lines for each of the aforementioned. Also I would imagine a partnership LLC has the same legal protection as a sole proprietor LLC... just my opinion... Happy New Year

[Greta]

Thank you for your response. It's an LLC is all I'm told.

1) I could either include in their personal return or prepare separately 1065. Any advantage to either?

2) What depreciation do I choose if purpose is either rental or commercial. 27.5 or 39 yrs?

3) In 2021 all that was done is the purchase and renovations, no business yet. Do I wait till 2022 to report anything.

[PATAX]

Greta remember a partnership return has to have at least two partners, IE you cannot file a partnership return with one owner. So it sounds like there would just be one partnership with the K-1 forms going to the two owners. Residential real estate is 27.5 years and Commercial Real Estate is 39 years. Just my opinion

[dkh · Accepted solution]

Ask the client for all the documentation for the LLC - Articles of Organization, SS-4 letter, etc

those documents will help you understand what the LLC filing requirements will be  - 1040 or 1065

Answer for Q 2)  27.5yr is Residential Rental Real Estate      does that apply to this property ?

Answer for Q 3)  Is IRS expecting a F1065 return from this LLC ...... you need the LLC documents                                         possibly you will need to file a return with $0 activity

[Greta]

Re depreciation: If client switches back and forth from residential to commercial use, how do I adjust the depreciation. I will get the LLC organization and SS4 documents!

[Greta]

One more question: If clients are still renovating the property and have not yet offered it for business, when I file a zero activity 1065, can I put the cost basis and depreciation as a deduction, or wait till next year.

[IRonMaN]

Depreciation doesn't start until the asset is put into use.  If they are still renovating, the depreciation isn't going to start until next year.

[JRC]

Husband and Wife and (Spouses) LLC's in "Marital Property States" may treat the LLC as a disregarded entity. Either way I would look at the advantages of doing either for the client.

The IRS has issued a special rule applicable to LLCs owned by married couples who live in community property states. Under this rule, a married couple can treat their jointly owned business as a disregarded entity for federal tax purposes if: ... the business is not otherwise treated as a corporation under federal law.

[Greta]

So this rule is only for community property states? My client lives in DC but property is located in NY. Is either a community property state?

[dkh]

Can't flip/flop from residential rental to commercial rental.   Can the cost be allocated - is there one portion that is always residential and one portion that is always commercial? 

[Greta]

I am getting this depreciation issue now that more folks are switching to AirBnb from long-term rentals, and vice versa, as they sour on the AirBnb. The entire property, not a portion. The recent client wants to occasionally use as a wedding venue.

[JRC]

I have no idea on DC, but NY is not. I would look at filing a 1065 especially since the property is located in a different State. 

[IRonMaN]

https://www.thebalance.com/community-property-states-3193432

[TaxGuyBill]

Because it is a LLC, the Qualified Joint Venture option only applies to Community Property States ( a non-LLC can do it in all states).  So that does NOT apply to your situation, so you must file a Partnership return.

If "services" are provided, the goes on Schedule C.  If "services" are not provided, it goes on Schedule E.  For the determination of self employment tax (Schedule C versus Schedule E) does not matter if it short-term or long-term (although short term increases the likelihood that "services" might be provided).  If "services" are provided for the weddings but not for the other tenants, then you enter the wedding would go on Schedule C, and enter the business percentage on both of the Asset Entry Worksheets.

The default depreciation is 39 years.   If 80% of the rent is from the dwelling units (people living in it WITHOUT "services" being provided, rather than used for weddings or providing "services" to the tenants), it changes to 27.5 years.  If it qualifies for one length of depreciation one year, but changes to a different one the next year, well, that gets more annoying, but you have the option to keep using the longer depreciation period.