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Rental Real Estate CPA discusses Form 8825 preparation for Form 1120-S or Form 1065 | Rental Real Estate Red Flags

Form 8825 discusses rental real estate IRS red flags

Gary Bode, CPA: if you run into trouble preparing Form 8825, consider calling (910) 399-2705 for a free phone consult.

Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation

S Corporations and Partnerships use Form 8825 to report rental real estate income and deductions. They just attach Form 8825 to their Form 1120-S or Form 1065. So, track rental property transactions separately from other business activities of the parent company.

Hi, I’m Gary Bode, a rental real estate CPA accountant with a virtual office to serve your Form 8825 wherever you’re located. Here are some of the IRS red flags to watch for.

Form 8825 and possible IRS Rental Real Estate Red Flags

  • Losses. Especially if you’re deducting them.
    • Understand the passive loss rules.
    • With the new investment tax in 2014 consider becoming a real estate professional per the IRS definitions.
  • Missing information. The IRS obviously looks for items on Form 8825 that shouldn’t be there. But I think missing information, like real estate taxes for example, might trigger an audit.
    • After all, if the tax preparer forgets a deduction on Form 8825 what else might be wrong?
  • Low rental income. You don’t want the IRS thinking :
    • You’re not trying to actively rent the property.
    • Using it personally.
    • Renting to a related party at a discounted rate.
  • Out of range figures on Form 8825. Like say $20,000 of auto expense for a duplex rental property.
  • Depreciating land.
  • Presenting depreciating capital assets as expenses. For example, a new air conditioning system. Remember the new rules on capitalization vs. expense go into effect in 2014.
  • Round figures. Round figures imply estimation.
  • Figures that don’t match IRS records. Common examples include inconsistent depreciation from your earlier tax returns and rent that’s lower than the total of your Form 1099-MISC(s).
  • Not properly allocating overhead expenses if the S Corporation or Partnership has multiple rental real estate properties.

Rental property CPAs look for red flags and proactively address them. If the red flag figure is correct and legitimate, we provide supplemental documentation to the IRS to head off a potential audit.

Where do I get Information for Preparing Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation?

  • The IRS publishes Audit Technique Guides.
    • These explain how an IRS Agent approaches Form 8825 if your S Corporation or Partnership is audited.
  • Read the Form 8825 instructions.
  • Read the passive activity limitation section in the Form 1120-S instructions or Form 1065 instructions.
  • Publication 946 helps explain depreciation expense for Form 4562.
  • Look at websites for examples on specific issues on Form 8825. Beware of outdated postings.
  • Buy an appropriate tax book. Make sure it is the latest edition. Form 8825 tax consequences deserve due diligence. Books usually cover all aspects of rental real estate and show concepts using clear examples. Be sure to understand all possible deductions.
  • Call the IRS. Beware you can’t rely on verbal advice from them if you’re audited.
  • Read the Schedule E instructions for Form 1040. Which is equivalent to Form 8825 for individual taxpayers.
  • Consult with a rental property CPA.

Where Does the Information on Form 8825 Flow?

  • It integrates into the parent tax return, Form 1120-S for S Corporations or Form 1065 for Partnerships.
  • Both Forms 1120-S and 1065 then generate a Schedule K-1 to the individual shareholders and partners. Schedule K-1 reports the personal tax figures for the year, from the parent return to the shareholders and partners. The IRS gets a copy, too, of course.
  • Shareholders and partners bring the Schedule K-1 information into their personal Form 1040 via page two of Schedule E.

Why am I a rental property CPA? Because I have a rental property in my extended family, so, I have to keep up on emerging Form 8825 issues, or else!

Through our virtual office, we offer you excellent, responsive CPA services regardless of your location. Usually we prepare Form 8825 as part of Form 1120-S or Form 1065. My experience? I was controller for a luxury construction firm with 30+ rental property LLCs.  We offer a free initial phone consult at (910) 399-2705.

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67 comments to Rental Real Estate CPA discusses Form 8825 preparation for Form 1120-S or Form 1065 | Rental Real Estate Red Flags

  • Roy

    I have a 2-member LLC for secondary income. We (the LLC) own and rent one property and manage 3 others. We just established the LLC in 2011. The units are condos at a ski lodge in WV. I’m preparing my 1065 and am confused by the rental activity rule. Since our average period of customer use is less than 7 days, we’re NOT a rental activity, right? I think 721110 should be our Business Code Number. But when I get to line 15 (Interest) on page 1, the instructions say I should use Form 8825. But 8825 reads like it’s for rental activity. My partner and I conduct all bookings, transactions, approve all maintenance and improvements, advertise, etc., so we shouldn’t be caught up in Passive Activity regulations. I see several options…
    1) I’m NOT a rental activity and should ignore Form 8825
    2) I’m still wholly a rental activity and should primarily use Form 8825
    3) I need to split out my ownership revenue/deductions on Form 8825 and my LLC and management revenue/deductions on the 1065.

    • Gary Bode CPA admin

      Hi Roy: even with continuing education and personal interest in Rental Property, I have to use a tax database for research on the details sometimes. I don’t understand the first question and have no opinion on the business code. But it sounds like you had rent income. It sounds like you have management income. Therefore it sounds like option 3 to me. Remember the first return is the hardest; it gets easier!

      • Roy

        Thanks Admin. I see why you’re saying option 3. Unfortunately, my poorly described first question impacts which of the 3 options is best. I realize I didn’t give you quite enough info.
        The 1065 instructions say that “an activity involving the use of real or personal tangible property is not a rental activity if…The average period of customer use…for such property is 7 days or less.” Since our average period of customer use is 3.8, the IRS instructions tell me we’re NOT engaged in a rental activity. This average period of customer use is below 7 days for our unit and for the units we manage. Since Form 8825 is generally used for rental activity, I shouldn’t have to use it.
        Later on though, the instructions point me to use Form 8825. The instruction on page 18 for deducting interest on the 1065 says “Do not include interest expense on the following…Debt used to purchase rental property or debt used in a rental activity.” Based on this line, even though we’re not a rental activity, the mortgage intertest on the 1098 has to be recorded on the Form 8825. But this brings me full circle back to the fact that Form 8825 is for rental activities and, based on IRS rules, we’re NOT a rental activity.
        The IRS makes my head hurt. Should I fill out the 8825 for rental income (not managed rental income) despite the fact that the IRS says we’re NOT engaged in rental activity based on the 7 day rule?

  • Do IRS CI field agents ahve to fill out form 8825? form 8825 vehicle expense

  • gm

    I used a personal loan to make a cash purchase of a rental property that I
    now own. Although the loan was personal, my rental property company pays the
    monthly payment on the loan. Since there is “NO” 1098 generated for this personal
    loan, can I claim the interest that my company pays on Form 8825 for this rental
    property?

    • I’m not sure where the loan comes in Matthew if you made a cash purchase. But I think you could deduct the mortgage interest. I don’t know what the IRS would do on an audit but they seem to be OK with this sort of related transactions in other tax areas.You might have to be very formal in the way you approach it, through corporate minutes or through Partnership notes. The tax would have to be the same as if everything was setup properly at first. Hope that helps.

      • GM

        Hi Gary,

        I posted the question on January 5, 2013. Let me attempt to restate it to see if
        your advice is the same. Buying real estate with cash tends to make the process
        of acquiring real estate easier and quicker. Since my company had no funds to purchase
        real estate, I took out a personal loan, then loaned those proceeds to my company to buy rental property. Since the proceeds for the loan were used by the company, my company is responsible for paying back the loan. I just wanted to know if I can claim the interest that the company is paying on Form 8825.

        • I think this is a common scenario. I think the answer is yes. But I would have clear documents about it if the IRS audits you. This might be Corporate Minutes or a partnership meeting. Plus a written agreement between you and the company. Hope that helps!

  • Neil

    Hello, I just set up a (multi member) LLC for our rental properties. We are purchasing our first one in a few weeks. My questions is…should I make the election to be taxed as an S Corporation to save the self-employment tax on profits? What are some major differences in tax treatment of rental property between partnerships and scorps that I should consider? Any help would be appreciated. Thank you.

    • Hi Neil:Congrats! It sounds like you won’t have to make that decision until tax time next year? So I’d keep your options open and then run comparitive Form 1120-S and Form 1065 to see what’s best tax wise. In your case a Partnership might be better to attract new investors. If you have other activites in the LLC, an S Corporation might save on self employment taxes. Hope that helps.

  • Tia

    My husband and I own/operate a music/dance school. We own a commercial space which includes a dance studio that we rent for a couple hours a week to a yoga teacher. We are directly involved in every aspect of running our business and facilitating the rental of the space. We have received a 1099-M for the payments of rent that we’ve received. My question is if this rental constitutes a separate trade/business “activity” (and thus, justifies completion of form 8825) or if it meets the criteria for exception to the rental activity classification because the studio is used primarily in our own business. The space is not rented exclusively to the individual supplying the 1099-M for rent.

    If we are able to treat the rental income as part of our main business activity, where do I report the 1099-M? Just include the totals with income from the main business? Thanks.

  • Tia

    Thanks Gary. If that’s the case, how does one allocate expenses for a rental that consists of an hour a day or so? What constitutes a day? 24 hours? I’d like to offset the rental income with expenses as passive income (over a certain amount) disallows the EIC on our personal returns, which we kind of need in our situation.

  • Theresa

    Hi! I have a question. If a schedule 8825 is showing on Other Rental Expense line item a “rent modification” expense, is this something specific just for deducting expenses for tax purposes or actually something towards the property’s expense? Thanks!

  • By completing the 8825 for rental units on the 1120S return, where assets are over $250,000 but total receipts are under $250,000 are completion of Schedules L, M-1 and M-2 required?

    • I don’t know Jack without looking it up. The reason I don’t know is that we always complete the Balance Sheet for S Corporations and Partnerships. Some states require it even when the IRS doesn’t. Hope that helps.

  • Ben

    Started TurboTax this year after using CPA for many years. I have a rental property (S-corp) and my CPA reported income/expense on p.1 of 1120s (I believe this is wrong. If all I do is rent the property, should that not go to form 8825 and p.1 of 1120s is blank. Consequently, income has been in box 1 of K-1 not box 2.

    Also, should 4562 line 22 and 8825 line 14 be the same amount?

    Thanks.

    • Hi Ben. Yes you should use Form 8825 for the rental properties. Which flows into Line 2 of Schedule K-1. Rental loss is subject to the passive loss rules, so reporting it in the Form 1120-S mis-characterizes the income. Hope that helps.

      • Ben

        Hi again Gary. Thanks for your answer to my previous question. Just one more, if you don’t mind. I have a rental property that I own in an S-corp. The 8825 line 14 is showing the depreciation but my 4562 is blank including lines 17 & 22. Does that seem possible/right? I thought the line 17 would show the depreciation amount shown on the 8825. I use TT. I’m stumped because I also have another property I own personally and TT shows the deprecation on the 4562 on the schedule E. Thanks.

  • Becky Laskody

    We transferred our two rental properties that we had been reporting through our Sched E into an LLC, so now we fill out 1065 to get K-1s for reporting. We transferred mid-year. Is it better to set up a new calendar year with the LLC, or to apportion the income/expenses between the Sched E and the 8825? On Schedule B, does question 3b apply to individuals or estates outside of the partnership? We just have two 50% partners involved in our partnership, so I think we answer 3b on Sched B as no; do you agree?

    • Hi Becky: we try to start new entities on 1/1 for that reason. Calender year best, different tax year is seldom worthwhile. But it depends on circumstances. Maybe you have seasonal rental for example where a fiscal year is more natural. It sounds like the question is correct. Hope that helps.

  • Amy Gill

    Hello! Would you consider a Self-storage business as rental activity?? The previous accountant always filed the business on Form 1065, but I’m thinking it should actually go on Form 8825? Any advice or help would be greatly appreciated.

  • Jason

    My wife and I are 50/50 shareholders of a sub s that hold real estate for investment purposes. Would this be considered self employment since the income isn’t subject to self employment tax? I ask because I filled out a government application for benefits that specifically ask for the “Last 5 years of employment and self employment”. I didn’t not list the sub s, because it had not generated any net income and if it had, that income wouldn’t be subject to self employment taxes; hence not self employment right ??

  • Daniel Xu

    Hi Gary! we have a C corporation. its main income is from financial planning service. it also owns some rental properties. what form we can use to report rental business here? Can we use 8825 under 1120? Thank you!

  • Peter R

    Hello

    My wife is a non-resident US citizen and I prepare the tax forms which she submits (married filing separately). For some years she has been reporting her share of our foreign partnership income in a non-rental business on Schedule E Part II.

    More recently we inherited some money and in 2012 purchased a small house which we are currently using solely as a vacation rental property (no private use). We run it ourselves, conducting all advertising, cleaning and bed-making, maintenance, arrangement of repairs, meeting customers on arrival, etc. We made a loss of a few hundred dollars in the first year, and in the second year we have only had about 10 weeks rentals so even if we make a profit it will not be large. Should we report these figures as passive income/loss or nonpassive? It is unlikely that my wife will have enough income in the near future to ever pay US tax, as her earned income is excluded under Form 2555, so she can set the whole of the standard deduction of $5950 and exemption of $3800 against other income. So my main concern is to report correctly from the start in case circumstances change in the future.

    In addition to answering the question about which boxes to use on Schedule E, am I right in thinking we don’t need to fill out any extra forms now that we have Vacation Rental Property managed by us as part of the activities of our foreign partnership?

    • Hi Peter: the rental income is passive. But there’s an exception where you can claim an ordinary loss up to $25K per year from rental property, unless your adjusted gross income is too high, That takes active participation, which it seems you have covered from the comment. For the future I’d read up on the material participation requirements where you become a “real estate professional” and can write off all rental losses as ordinary income. Hope that helps.

  • Hi!
    My husband and I are converting a second home into a sort of vacation rental situation. We are renting out each room in the home under short term leases and charging a daily rate. My question. I set up an LLC for this but I am not sure how to file for a tax ID, should I file for an LLC run as an S-Corp, or as an individual? Which would help me pay less taxes?
    Second question- We have had to put a lot of money into furnishing the home, is that considered a write off?
    Third question- We continually will have to hire professionals (cleaning service, landscapers, etc) to maintain the home as well as provide cleaning supplies and toiletries, etc for the home- is this a write off as well?
    Fourth Question- My husband will have to fly to help maintain the property about 7 plus times per year as we are military and move frequently and will be out of state, is the flight and expenses to the stay in the area write offs?
    THANKS SO MUCH FOR YOUR HELP

    • Hi Danielle:
      The type of business taxation depends a bit on what you want the LLC to accomplish in the future. An S Corporation can save a lot of self employment taxes now. And you can switch to a Partnership if you need to attract investors.

      Some of your expenses seem like capital expenses which means you must depreciate them or use Section 179.

      Travel expenses are deductible subject to reasonability.

      Hope that helps

  • Nan

    Hi – I own 4 rental properties. On Schedule E, how should I report expenses incurred that can’t be allocated to a specific property such as office supplies, postage, prospecting mileage expenses etc.

    I paid an accountant last year and they entered my primary residence as a “rental property” for these expenses and now when I’m trying to purchase another rental, the mortgage co. underwriter thinks our home property is a “rental.”

    Advice? Thanks.

    • Hi Nan. Well generally I split those overhead expenses in proportion to the rent each property generated. Just setup a spreadsheet for that. Maybe you need to amend that tax return if the discrepancy warrants it. Hope that helps.

  • SD

    Hello Gary,
    A quick question regarding Multi State Tax Return for Rental Property Income

    I own Rental Properties in AZ and PA and I’m a CA resident.
    Each property is owned by a Single Member LLC in every state. (SMLLC in AZ and SMLLC in PA).
    All properties are pass-through and reported on my 1040 Schedule E.
    All properties generate positive income, and I currently file Federal and CA returns.

    Should I also file personal tax return in both AZ and PA, since the generated income comes from these 2 states?

    Thanks much for your help!

  • Hello and thanks for the site and the answers!

    I just bought a building through my S-corp in mid-2013.
    It wasn’t ready for leasing and I started some restructuring which continues today in 2014.
    Of course real estate taxes, utilities etc. are running and generating losses and since said S-corp has lived its active business days it just turns up a loss this year (first time ever).

    My question is if I still have to use Form 8825 on this year of acquisition?

    On one hand I do have a building which does generate expenses which cause the total loss.

    On the other hand I have not actually entered “in service”, do not accumulate amortization and most definitely do not use it for anything, personal or not.

    What’s your take?

  • Kunal

    Hello,

    I am a Canadian resident with a LLC established in Florida. I purchased a property in October that was transferred from my brother-in-law to the LLC and have been receiving rent since. The forms I would need to file is the 1065 and 8825 – is that correct? And is that all?

    Thanks

  • Christopher Francis

    Hi Gary,
    Hopefully an easy one: I received an insurance payout from a person who ran into my rental property with their car. Since this income is specific to one of several rental properties, wouldn’t it go on my 8825, and if so, where? Would my insurance deduction become “negative”?
    Thanks!

    • Hi Christopher. The insurance payment rarely matches the actual repair costs on rental property. I’d claim it as income, with an explanation and then include the expenses on Form 8825. That way you’re covered whether you broke even, paid more expenses or paid less expenses.

  • I have an LLC that owns a multifamily property. I am filling out form 8825. Under Auto and Travel, I should be able to deduct standard mileage on my POV that was used for Apartment business. For instance, I traveled 9000 mile last year for the apartments so in line 4 for auto and travel, I put a deduction of 5085 (9000*.565). Correct?

  • Jonathan

    Gary,

    I have a commercial property in a S corp. Taking care of all the rental activities is my only “job”. I spend between 900 to 1000 hours every year do this. Because of depreciation and maintenance I run a $20,000 or so loss. My other income (outside of the S corp) is over $150,000 from interest and dividends. Am I considered a real estate professional since I spend so much time on this property management? Also if I turn a profit in 2016, do I have to pay myself a salary for all of my property management work?

    • Hi Jonathan. Well the IRS real estate professional status is tricky. If I was your CPA I’d check that closely. My guess is that you are or could probably become one easily. If you have an S Corporation you’re supposed to take formal paychecks. Even if you don’t turn a profit. Go figure.

  • FRANK

    We have an LLC that files a 1065 that owned a commercial rental property. The property was sold in 2012 but we received a property tax refund for 2011 based on a tax appeal. Would we still report this on the 8825 for the property in 2013?

  • shaw

    Hi Gary,

    We have a rental only LLC. We park our rent income in an interest bearing INCOME. How do we show the interest income on the 8825. The interest income is reported by the bank on a 1099-INT on the LLC account, not on any of the members.

    We need to show that interest INCOME on the LLC account. There is no line for that on the 8825 or the 1065.

    Please provide guidance

  • shaw

    Hi Gary,

    In reference to my previous post, can we use Line 7 (Other Income) on the 1065 for the Interest Income?

  • Michael

    Hello, I have a client that started a partnership in 2013 for the purpose of rent to own portable storage buildings. I am trying to figure out how to fill out Form 8825. Do I need to list each building separately, or can I combine all of the buildings under lease into one entity. They have 93 buildings under lease at different addresses. I can’t seem to find much about rent to own tax return prep. Thank you in advance.

    • Always happy to help another CPA Michael. Well you’d to track each building separately somewhere anyway correct? At least in a spreadsheet or QB contractor edition. But I’d research that a bit and hope that presenting the aggregate figures on a single Form 8825 is allowed.

  • George

    A guy came to my VITA site. He is filing his first tax return for a small trailer park he just purchased (the only activity in the partnership LLC). He has completed Form 8825 with all per-unit income/expense like rental receipts, repairs, depreciation, taxes, etc but he has these other expenses that are not automatically allocated to rental units like management fees, trash removal, start up cost amortization, depreciation for storage sheds, costs related to common areas, etc. I want to tell him the right thing. Should he try to allocate these costs across income producing units or just enter these items on page 1 of the 1065? Thanks

  • Janna

    Is Form 8825 required even if rental real estate is the principal business of the partnership?

  • Silver

    Hello George,

    I have an LLC and an S-corp whose only operation is ownership and rental of 2 properties. If I use form 8825 the whole return will be blank except for form 8825. Should I still use form 8825?

    Thanks

    Silver

  • Steve

    Gary,
    We purchased rental property the end of 2012. We had a cpa fill out the forms last year and got behind the eight ball this year so I am using last years as a template. This past year we spent about 36,000 on improvements (i.e.: Drywall, kitchens, appliances, doors, windows, etc.) Do I need to depreciate them on the 4562 as a separate item and how long, or is it not included at all on this report. It is on our Balance Sheet as Capital Improvements. Thanks!

    • Hi Steve. I think maybe you should have a CPA prepare those taxes, eight ball or not. Your question may seem simplistic but the IRS regs on this issue are anything but simple. Wish I could be more help.

  • Ally

    My husband, brother in law and father in law recently purchased a vacation rental property in 2014. I am attempting to register for a retail license to be able to file sales tax monthly. During this process, it requires me to specify the business type and owners.

    I figured we would track our income and expenses and when it comes time to file the annual return each person would put their portion of the income and expenses on schedule e. Is this inaccurate? Do I really need to apply for an fein and file a form 1065 every year?

  • Sarah

    Hello – I sublet one room in my office (healthcare office) and would like to know if I should list my rental income on Line 5 of 1120S (other income) and attach 8825. Or does this income go only on Schedule K? Or both 1120s and K? Thank you!

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