Rental within LLC

[Margaret CPA in OH]

Nice clients decided to form an LLC, purchase a house within it, fix it up and rent...to son. But for market rate. So far, so good. About mid-year, son begins slacking off and finally stopped paying altogether. Parents initially "gifted" rent to son but after a couple of months, only added enough to bank account to meet bills.

Market rate would be $6000 per year, LLC "received" $3975. Easy enough to handle on Sch E for personal use but how to do this on 1065 and 8825?

Thanks for direction.

[RoyDaleOne]

In the IRS instructions require a supplemental schedule to any K-1 to report to a member any items which are necessary information so that member can properly prepare that member's return. This includes any item that maybe treated differently in that member's return. Items so reported basally would not included elsewhere in the partnership return.

Consideration of this instruction may be appropriate for this situation.

[mlinder42]

Nice clients decided to form an LLC, purchase a house within it, fix it up and rent...to son. But for market rate. So far, so good. About mid-year, son begins slacking off and finally stopped paying altogether. Parents initially "gifted" rent to son but after a couple of months, only added enough to bank account to meet bills.

Market rate would be $6000 per year, LLC "received" $3975. Easy enough to handle on Sch E for personal use but how to do this on 1065 and 8825?

Thanks for direction.

If LLC did not chose to file as S corp only need Sch E. Did they file with IRS to b taxed as S corp

[Margaret CPA in OH]

Duly chastised, RoyDaleOne. I have now read the instructions through but still have a concern about allocation of mortgage interest, etc. It would seem a straightforward cutoff after April when the last fmv rent payment was received would be the clearest. All expenses and income from May onward would be treated as personal use. Thanks for the nudge... Any other nudges or chastisements most welcome.

mlinder42, they file default partnership with Form 8825 per instructions on page 11 foro Form 1065.

[kcjenkins]

Remember too that the LLC is a separate entity, and LLCs do not have sons. So the issue is not 'personal use', it is whether the house is still 'business property', if it is not rented for profit.

[Margaret CPA in OH]

I know the LLC doesn't have sons but the instructions seem to deal with just this situation under Passive Activity Reporting Requirements, #4: Identify the net income (loss) and the partner's share of partnership interest expense from each activity of renting a dwelling unit that any partner uses for personal purposes during the year for more than the greater of 14 days or 10% of the number of days that the residence is rented at fair rental value. (I interpret the personal use as the use by the members/partners son at less than fair rental value. Is this incorrect?)

They are "evicting" the son if they haven't already and it was rented previously at fair rental value. What is the decision criteria for "business property" when the clear intent is to rent for profit? The son was paying full value for several months, lost his job and couldn't pay. How is this significantly different from my other clients who have apartment buildings and far too often go 3 months or more without receiving rent from non-paying tenants while they go through the courts for eviction?

Thanks for the push on this. As the temperature rises, I really don't want to think so hard!

[kcjenkins]

In that case I would say it is still 'business property', and I agree with your reference to Passive Activity Reporting Requirements, #4. But as long as they 'gifted' him the difference, it's not a factor. Look at it both ways, and then take whichever works best for them.