David Posted February 29, 2016 Report Share Posted February 29, 2016 Clients purchased a rental property in 2015 in their personal names. They registered an LLC with the state and IRS and received an EIN. They also filed a 2553 to have the LLC taxed as an S Corp and they received IRS approval. The property is still in their names and they haven't transferred it to the LLC. I just found out about this. I asked them for copies of all the documents they filed with the state and IRS. Is there an easy fix to correct this error and have the entity taxed as an LLC in 2015? Thanks. Quote Link to comment Share on other sites More sharing options...
mircpa Posted March 1, 2016 Report Share Posted March 1, 2016 If the property is not deeded in LLC's name go with Sch E OR if it has to be under S corporation, rental income losses under 8825 and under both circumstances would be subject to passive activity loss limitations 8582. 1 Quote Link to comment Share on other sites More sharing options...
Abby Normal Posted March 1, 2016 Report Share Posted March 1, 2016 There's no such thing as 'taxed as an LLC'. They own it personally so straight to Sch E. 1 Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted March 1, 2016 Report Share Posted March 1, 2016 I agree Quote Link to comment Share on other sites More sharing options...
Lee B Posted March 1, 2016 Report Share Posted March 1, 2016 There are procedures to revoke an S Corp election, which I had to use last year. I followed the instructions in The Tax Book. It needs to be filed by 3/15/16 to be effective 01/01/16. Then they could transfer in the property this year. As far as last year, I agree with Abby & Terry 1 Quote Link to comment Share on other sites More sharing options...
David Posted March 1, 2016 Author Report Share Posted March 1, 2016 Since they filed a 2553 and the IRS expects an 1120S to be filed, they should file a zero 1120S tax return for 2015? If the property isn't deeded to the company they set up then can't the 2015 1120S zero tax return be filed as an initial and final tax return? Then they can create an LLC company this year and transfer the property to the LLC. Will this be an acceptable way to handle this situation? Quote Link to comment Share on other sites More sharing options...
Randall Posted March 1, 2016 Report Share Posted March 1, 2016 Side question. Can they transfer title of property from personal to LLC if there's an outstanding mortgage in their personal name? Would they need the approval of the lender or actually take a new mortgage in the LLC name and pay off the mortgage in their personal name? I've heard they can do the title transfer and the lender probably wouldn't care as long as they're being paid. The lender would still have a lien on the property. Quote Link to comment Share on other sites More sharing options...
michaelmars Posted March 1, 2016 Report Share Posted March 1, 2016 David has the right answer, anyone that advised them to put real estate in an S corp better have a very good reason or very good mal practice insurance. Randall...usually the banks don't care as long as the individuals remain personally liable. Everyone of my clients [that talk to me first] have their mortgages contain a clause that they can change the title to an LLC and can add members [for their kids] at any time. 1 Quote Link to comment Share on other sites More sharing options...
jklcpa Posted March 1, 2016 Report Share Posted March 1, 2016 Michael is right on with his answer also. Be aware that if they contribute the property to the LLC, the 1098 will be issued in the name as shown on the original mortgage because the banks don't change the mortgage or name and EIN on the mortgage. I had a H-W commercial rental that they contributed to their LLC, and each year I'd attach an explanatory note to the 1040 and 1065 when I deducted the mortgage interest on the 1065. IRS never questioned it in the 10 or so years that this was an issue, but I wanted to make sure there was a trail and explanation attached with each year's returns. Quote Link to comment Share on other sites More sharing options...
David Posted March 1, 2016 Author Report Share Posted March 1, 2016 Thanks everyone for your help on this. I will double check with them but I think they paid cash and don't have a mortgage on the property. So that makes things a little easier. Regarding my last question - can I simply file an initial and final 2015 zero 1120S and be done with that? Whoever was advising them told them to put the property in an LLC or S Corp so they could take the losses. They are high income so they will have to suspend any losses. As far as I know there is no difference between them reporting the property on a Sch E vs 1065. The losses will still be suspended unless there is other passive income, correct? Thanks. Quote Link to comment Share on other sites More sharing options...
Lion EA Posted March 1, 2016 Report Share Posted March 1, 2016 Make sure they dissolve the S Corp with their Secretary of State. The LLC gives them some legal protection and separation from their personal, if they do not comingle. But it is not a substitute for good insurance. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted March 1, 2016 Report Share Posted March 1, 2016 49 minutes ago, David said: Thanks everyone for your help on this. I will double check with them but I think they paid cash and don't have a mortgage on the property. So that makes things a little easier. Regarding my last question - can I simply file an initial and final 2015 zero 1120S and be done with that? Whoever was advising them told them to put the property in an LLC or S Corp so they could take the losses. They are high income so they will have to suspend any losses. As far as I know there is no difference between them reporting the property on a Sch E vs 1065. The losses will still be suspended unless there is other passive income, correct? Thanks. I see it was someone else that brought up the mortgage discussion. Anyway, it's useful advice for anyone else reading the topic in future. Yes, they can file the 1120S as first and final if that is what you are going to do. As Lion said, if you file a final return, be sure to dissolve with the Sec of State so that it is truly out of existence. However, I would follow the advice cbslee gave above for filing the LLC return as an S corp with no activity for 2015, terminating the S election beginning 1/1/16 and contributing the property into the LLC. The LLC entity offers some liability protection. That is what they were designed to do. For 2015 the H/W-owned activity should be reported on Form 1065 unless they meet the criteria to be a qualified joint venture. The material participation test might be an issue precluding them from QJV reporting. Safe link to IRS site on QJV rules: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Election-for-Husband-and-Wife-Unincorporated-Businesses Quote Link to comment Share on other sites More sharing options...
David Posted March 1, 2016 Author Report Share Posted March 1, 2016 I don't think they can file a 1065 for 2015, can they, since the property is in their name and not the LLC? They are planning to transfer title to the LLC now. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted March 1, 2016 Report Share Posted March 1, 2016 18 minutes ago, David said: I don't think they can file a 1065 for 2015, can they, since the property is in their name and not the LLC? They are planning to transfer title to the LLC now. It would be a different, new partnership in their names only for 2015 because they are already acting as a partnership without having formalized it. This partnership I am talking about is not the existing LLC. Quote Link to comment Share on other sites More sharing options...
David Posted March 1, 2016 Author Report Share Posted March 1, 2016 Wouldn't 2015 be file on Sch E since it is a H&W property? Quote Link to comment Share on other sites More sharing options...
David Posted March 1, 2016 Author Report Share Posted March 1, 2016 I wish clients would talk to me first before doing these real estate deals. I just heard from another client who set up an LLC (2 brothers) in 2015 and purchased property in their name instead of in the LLC's name. They have a mortgage on the property. They just tried to transfer the property to the LLC but the mortgage company won't allow them to transfer the property. I guess the brothers can contribute the property to the LLC in 2015 and file the 1065? Thanks. Quote Link to comment Share on other sites More sharing options...
David Posted March 1, 2016 Author Report Share Posted March 1, 2016 However, they aren't getting the legal protection since the property is in their names, are they? So maybe it is a moot point to have the LLC and file a 1065. Just file 50% ownership on Sch E? Thanks. Quote Link to comment Share on other sites More sharing options...
David Posted March 2, 2016 Author Report Share Posted March 2, 2016 Now this is getting to be ridiculous. I just received information from another client who set up an LLC for rental properties with two other members. However, he says the properties are titled in their individual names due to mortgage company rules. What do others do in this case? I think they have to file on Sch E and dissolve the LLC, don't they? Since no property will be titled to the LLC then they won't get the legal protection even if the members contribute the property to the LLC, will they? Sort of defeats the purpose of forming the LLC, doesn't it? Thanks for your help. Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted March 2, 2016 Report Share Posted March 2, 2016 Why is this any different than a shareholder of an S-Corp or managing member of an LLC guaranteeing a loan? Most new companies can't demonstrate credit worthiness upon startup and it usually takes some time for them to stand on their own. Yes the S-Corp and LLC are designed to give some protection. As I see this, the managing members of the LLC would transfer the property to the LLC once it is paid for. No, the managing members will not get the protection for those loans they personally guarantee. Regardless whether you are using Sch E or form 8825 for the LLC, the bottom line effect is the same for the members. Because these folks are indeed acting as a partnership form 1065 should be used with the rental activities being reported on form 8825. Operating expenses will flow thru to the members as well as the rental income/loss. Rental income/loss is shown on line 2 of the K-1 which goes to Sch E page 2 for the 1040. When you calculate the partner's basis part of the calculation includes recourse and non-recourse debt. 1 Quote Link to comment Share on other sites More sharing options...
Roberts Posted March 2, 2016 Report Share Posted March 2, 2016 21 hours ago, David said: can I simply file an initial and final 2015 zero 1120S and be done with that? Yes. If the IRS is expecting an 1120S - give them one even if it is just zeros. Quote Link to comment Share on other sites More sharing options...
Roberts Posted March 2, 2016 Report Share Posted March 2, 2016 13 hours ago, David said: Now this is getting to be ridiculous. I just received information from another client who set up an LLC for rental properties with two other members. However, he says the properties are titled in their individual names due to mortgage company rules. What do others do in this case? No. In the 1065 you write a note explaining the situation and how they are electing to have the property taxed. The property should ideally be attributed to the LLC name but it doesn't have to be as long as you maintain separation. For example if you have a mortgage tied to your personal residence and then pay 100% cash for a rental property - you can still include the mortgage on the 1065 even though it's in your name and tied to different property. Just inform the IRS this is what you are doing. 1 Quote Link to comment Share on other sites More sharing options...
David Posted March 2, 2016 Author Report Share Posted March 2, 2016 Thanks for your help. Doesn't the property have to be in the LLC's name in order for the asset, depreciation, rental income/expenses, etc. to be reported on 8825? I thought if rental property was titled in individuals' names then it had to be reported on Sch E with each person's % owenership. Is the reason that the property can be reported on 1065 because the individuals and the H&W set up an LLC with the intention of reporting the property under an LLC? In each case, the TPs main reason for setting up an LLC was to get legal protection. For instance if someone falls and hurts themself will they still get the legal protection? Thanks. Quote Link to comment Share on other sites More sharing options...
Roberts Posted March 2, 2016 Report Share Posted March 2, 2016 If the asset isn't titled under the LLC, there will be no legal protection. I hope you aren't offering legal advice without a law license. If they set up the LLC, I'd report everything through the LLC tax return. What if they change the title in 2 weeks? Now you have to change tax forms next year? Consistency. Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted March 2, 2016 Report Share Posted March 2, 2016 <<<<<<<Doesn't the property have to be in the LLC's name in order for the asset, depreciation, rental income/expenses, etc. to be reported on 8825? I thought if rental property was titled in individuals' names then it had to be reported on Sch E with each person's % owenership.>>>>>>>>> No, just as Roberts said, report it all on the 1065 and 8825. You will show the percentages of ownership on form 8825 as well. Again, no legal protection. Go with the consistency idea. I have clients who do this and have been filing this way for a few years now. I have had zero problems and no IRS notices. <<<<<In each case, the TPs main reason for setting up an LLC was to get legal protection. For instance if someone falls and hurts themself will they still get the legal protection?>>>>> This will fall under their homeowner (landlord's) insurance. Has nothing to do with the legal protection under the LLC umbrella. The home is in their name(s) they provide the insurance. If the home is in the LLC name, then the LLC provides the insurance. Quote Link to comment Share on other sites More sharing options...
David Posted March 3, 2016 Author Report Share Posted March 3, 2016 I appreciate your help. Thanks for clarifying everything. Quote Link to comment Share on other sites More sharing options...
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