Gary Bode, CPA: if you'd like a free initial phone consult on Form 8825, please call us at 399-2705.
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, as an attachment to their Form 1120-S or Form 1065. So track these items separately from other business activities. Usually a CPA prepares Form 8825 as part of the parent 1120-S or Form 1065. But folks do prepare these forms themselves.
Key Red Flags on Form 8825
- Losses. Especially if you’re deducting them.
- Missing information. The IRS 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.
- Low rental income. You don’t want the IRS thinking a) you’re not trying to actively rent the property, or, b) using it personally.
- Out of range figures. Like say $20,000 of auto expense.
- Depreciating land.
- Presenting depreciating capital assets as expenses. For example, a new air conditioning system.
- Round figures. Round figures imply estimation.
We look for red flags and proactively address them. If the figure is accurate and legitimate, we provide supplemental documentation to the IRS to head off a potential audit.
Where do I get Information for Preparing Form 8825?
- Read the instructions for Form 8825. It is only one page.
- Read the passive activity limitation section of Form 1120-S or Form 1065 instructions. If your rental real estate generates a loss, you want to claim active participation of it. Why? Rental real estate losses are only deductible under certain conditions. It pays to understand them.
- Publication 946 helps explain depreciation expense for Form 4562.
- Look at websites for examples on specific issues. But don’t rely on them as definitive or comprehensive. Beware of outdated postings.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 demonstrate 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 up on Schedule E for Form 1040. Which is equivalent to Form 8825 for individual taxpayers. Here’s a link to our post on Schedule E of Form 1040.
- Consult with a 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 issue Schedule K-1 to the individual shareholders and partners. This reports their tax figures for the year from the parent return. 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.
We’re a CPA Firm in Wilmington NC that offers Form 8825 Preparation – but you don’t have to live in Wilmington!
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. We offer a free initial phone consult at (910) 399-2705.
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.
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!
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