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HUSBAND AND WIFE LLC RENTAL PROPERTY


MOBEE

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I have a husband and wife setting up a LLC just for rental property.  Can the LLC be used on schedule E on the 1040 since they are husband and wife... or would it be best just to set up Partnership or S-corp and have them as 50-50 owners.  Thanks for any assistance. 

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If they're not in a community property state and have a multi-member LLC, then it defaults to a partnership.  It can elect S- or C-corp.  If it were a single-member LLC it would default to "disregarded" and file on 1040 Schedule E.  If it had not organized as an LLC or any other entity in their state, they could be a qualified joint venture and use Schedule E, but they wouldn't have the liability protection.  LLC is no substitute for good insurance, however.

If in a community property state, wait until someone else jumps in.

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If it is a Husband and Wife, Wife/Wife or Husband/Husband situation, filing a joint return, you just go with the disregarded Single member LLC.  Then no extra tax return.  If they change to MFS, or get divorced then you make the election to file 1065.  If they elected 1065 when getting the EIN, then elect back to SMLLC.

Keep it simple.

Rich

 

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Determining whether or not a husband-wife LLC is a disregarded entity is a matter of state law. If the LLC is formed in a state that is NOT a community property state, the LLC defaults to a partnership unless an election is made to be treated as a corporation.

The exception is where the LLC is set up in a community property state and meets the exceptions in Rev Proc 2002-69.  If it meets the criteria, it is considered a "qualified entity" and may be treated as a disregarded entity for federal tax purposes.  The IRS will accept this position for federal tax purposes. Likewise, LLC may file as a partnership for federal tax purposes and the IRS will accept that position also.  Consistency in filing from year to year is key, otherwise a change in filing is considered a conversion of the entity.

The requirements under 2002-69 for the LLC to be a "qualified entity" are:

  • The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or a possession of the United States;
  • No person other than one or both spouses would be considered an owner for federal tax purposes; and
  • The business entity is not treated as a corporation under the applicable Treasury Regulations.

 

None of the above addresses state reporting. Please check your state's law to verify that filing as a disregarded entity is acceptable.

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I posted many times on this and you can do a search but I would always do a 1065 and infact if one spouse wanted to own it outright I would suggest the other get .0001 percent just to use a 1065.  Gets large amounts and schedules off of the 1040; easier to transfer shares to kids etc down the road; eliminates the appearance of co-mingling deductions; in any sort of lawsuit, protects the necessity of showing you whole personal return, etc etc etc

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I also prefer doing the 1065. It is FAR easier if they sell / gift a portion of their ownership to another person or bring in another partner. Makes it look cleaner. I've had condo associations require a copy of the tax return be filed when you submit a copy of your leases to show you are meeting the requirements. FAR FAR easier with the 1065. 

Also, what if they decide to move somewhere down the road to another state that has a different requirement?

 

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And, of course, although not a controlling factor, it's a simple fact that the IRS audits fewer 1065s than they do 1040s.  So you get a cleaner 1040, and, in my experience, if the 1040 is audited, often they will just accept the K-1 as satisfying that info in the 1040.  

So you get an extra fee, but the client gets a real value, also.  I've never understood why so many try to find a way to NOT do a 1065?

 

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