Residential Rental Properties in an LLC -

[AZ25]

In 2021, my husband and I created 2 separate LLCs (2 member) for our 2 residential rental properties in Arizona which we have owned for many years and have reporting income/expenses on  Schedule E on our personal income tax return.   The LLC was created in late 2021 so we only have the expenses for establishing the LLCs.

When we created the EIN for the LLCs for banking purposes, we accidentally selected multi-member LLC which indicates a partnership for federal tax purposes requiring a Form 1065 filing.  Since we are the only owners of the properties and in a community property state, I'd like to change the reporting to a disregarded entity for federal income taxes purposes so that we can continue to report our rental income/expenses using Schedule E on our personal tax return and not have to file Form 1065.  It doesn't seem like there is any tax benefits, just more paperwork with filing taxes.  How do we go about to make this change?  Do we need a new EIN or is there a form that needs to be submitted to change the classification?   With the deadline for filing Form 1065 coming up in a few weeks, what is your recommendations since we don't have any income to report for the LLC in 2021?  

Also, do we also need to file Schedule C?

Thanks for your help!

[Carl]

SCH C does not come into play here at all.

As a multi-member LLC (Accident or not) you are correct that a 1065 needs to be filed. Then each partner is issued a K-1 which gets entered on the 1040 joint return. All the K-1 information ends up on page 2 of the SCH E.

Now I'm not familiar enough with community property state rules, so I don't know if you can just report it as you always have on SCH E, then select the option (available in forms mode only) to identify it as a Qualified Joint Venture. But I do know nothing concerning the rental gets reported on SCH C. Therefore a SCH C does not even need to be completed.

@tagteam ?

[tagteam]

Rev. Proc. 2002-69 controls this scenario:

See https://www.irs.gov/pub/irs-drop/rp-02-69.pdf

The election referred to in the Rev. Proc. would apparently be the same as it is for a QJV.

See https://www.irs.gov/businesses/small-businesses-self-employed/election-for-married-couples-unincorpo...

However, it appears that the spouses must materially participate in the jointly owned and operated rental real estate business.

See https://www.irs.gov/instructions/i1040se#en_US_2021_publink24332td0e205

Regardless, a Schedule C would not be filed for this scenario unless significant services were being provided to the renters.

[Carl]

Regardless, a Schedule C would not be filed for this scenario unless significant services were being provided to the renters.

Generally, I find that for long term residential rentals, significant services aren't provided. I see that more for short term rentals like AirB&B and VRBO, as well as vacation rentals sometimes.

[tagteam]

Yes, I think it would be rather unusual for a tenant on a long-term lease (such as an annual lease) to be receiving daily maid service, meals, and the like.

There are a plethora of short-term rentals that do not provide anything other than a furnished residence with utilities and a cleaning after departure (I actually own one of those, currently).

[Carl]

There are a plethora of short-term rentals that do not provide anything other than a furnished residence with utilities and a cleaning after departure

I know a number of STR owners around here, mostly with beach front properties. I'm also a member of an STR group on FB. There's actually a few that think that "they personally" have to provide the recurring services to qualify as a SCH C business. They don't realize/understand that if they contract those services out, they are "in fact" providing the services. Nothing I find actually says the owner has to "perform" the service - just provide it. 🙂

[tagteam]

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@Carl wrote:

Nothing I find actually says the owner has to "perform" the service - just provide it.

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Yes, providing those services can either be done personally (by the owner) or by anyone, or a firm, hired by the owner.