Married Couple Revocable Trust Owns LLC in Non-Community Property State

[G2R]

As the title says Married Couple's Revocable Trust Owns "Rental Property LLC" in a Common Law State. (So, No Community Property State, No QJV) 

Ignoring the trust part for a second, couple is then required to file 1165 partnership rtn because they are a multi member LLC.  

But there's always a monkey wrench that makes me go . 

Is the TRUST considered a single entity, so then the LLC is considered a disregarded entity and can forego the 1165, filing Schedule E direcly on the married couple's 1040?  

My gut says no, but maybe there's a legal element in play that someone's seen before?

[Lee B]

As long as the trust is revocable, wouldn't the trust be disregarded and the LLC be required to file an annual Form 1065?

[Abby Normal]

If you have the EIN letter for the LLC, what form does it say the IRS is expecting?

[Lion EA]

Is the Trust the ONLY member in the LLC, so it's a SMLLC?

Or, does the Trust AND the husband AND the wife own the LLC, so it's a MMLLC?

[G2R]

20 hours ago, Lee B said:

As long as the trust is revocable, wouldn't the trust be disregarded and the LLC be required to file an annual Form 1065?

Great point. 

18 hours ago, Abby Normal said:

If you have the EIN letter for the LLC, what form does it say the IRS is expecting?

They are still looking for it. The did all this last year, and did not mention it to me till Tuesday. 

8 hours ago, Lion EA said:

Is the Trust the ONLY member in the LLC, so it's a SMLLC?

Or, does the Trust AND the husband AND the wife own the LLC, so it's a MMLLC?

The LLC has one owner, the revoc trust. The revoc trust's grantors are a married couple.

This is where my uncertainty stemmed from.  If I look at the LLC ownership 1st (and only), there's a single owner (the rev trust) so ... it's a SMLLC.  But as @Lee B pointed out, drilling down deeper, the trust is disregarded bc it's revocable, so then the grantors of the trust are LLC owners. Married couple, thus two people, common law state so MMLLC.  

 

Thank you everyone for your input.

[jklcpa]

Revocable trust is a grantor trust and is generally ignored for tax return reporting unless it has an EIN and requires a separate 1041 for income to pass through.  As you said, QJV is off the table because you are dealing with a non-community property state. Trusts are precluded from holding business property that elects to be QJV anyway. 

With all of that in mind and being a revocable trust, then the LLC reporting falls to state law.  If this had been a SMLLC, then it would certainly be reported on 1040 Sch E.

Because it is a MMLLC, then you would look to state law which probably says that the multi-member LLC (even H-W) would default to a partnership unless the LLC had the ability and elected to be taxed as a corporation.  In your client's case, it sounds like this should be on a 1065 using form 8825 with the husband and wife each receiving a K-1 from the partnership. 

[G2R]

18 hours ago, jklcpa said:

Trusts are precluded from holding business property that elects to be QJV anyway. 

I learn something new everyday.  Thanks!

[jklcpa]

1 hour ago, G2R said:

I learn something new everyday.  Thanks!

I worded that very poorly. I revocable trust can have biz prop that is QJV, but it can't be in an LLC, rather it must be operated in an unincorporated entity. So in your case, QJV would be off the table on 2 scores: because the rental is in an LLC and because the client is in a non-community property state.  

Sorry for the confusion.

[Abby Normal]

I thought an LLC was an unincorporated entity because it's a partnership.

[DANRVAN]

An LLC has no bearing on tax reporting since it is the underlying entity that counts.

In this case the entity is a Joint Revocable Trust, which is also disregarded for tax purposes due to its grantor status.  Therefore the grantor is treated as the owner(s) for tax purposes.

Since the husband and wife are the actual owners for tax purposes, they meet the requirement of sec 761(f)(2)(a) for a QJV as I see it.

I don't see where community property state vs non comes to play under sec 761.

Based on that, I would report on Schedule E.

[Lee B]

We don't know when the LLC was set up  or when the Trust was set up.

Has the LLC previously been filed as a 1065 or as a Schedule E?

[jklcpa]

@DANRVAN Dan, IRS information page on QJVs says it can't be held in a state-recognized entity such as an LLC. Are these IRS pages incorrect?  This rental the OP asked about is in an LLC owned by the rev trust. According to the original post, this is in a NONcommunity property state. Do you still think it goes on Sch E and not on 1065?

 

[Lee B]

Also see this article in The Tax Advisor:   https://www.thetaxadviser.com/issues/2019/apr/llc-spouses-partnership-joint-venture/