Form 8825 CPA discusses LLC Advantages for Rental Property

Form 8825 CPAs know that “nearly 50%” (per the IRS) of Partnership tax returns (Form 1065), including LLCs, deal with real estate. So what advantages does a LLC offer for rental property owners.

Flexibility for LLC Members

In my experience, most rental property LLCs choose to be taxed as a Partnership, and file Form 8825 with Form 1065. LLCs can elect to be taxed as S Corporations. S Corporations are rigid; if a Member owns 20% of the stock, that member owns 20% of assets, owes 20% of the liabilities and pays taxes on 20% of the profit.

But in a LLC Partnership, filing Form 1065, each Member can have a different percentage of assets, liabilities and income e.g. 30% of profit, 10% of assets and 5% of liabilities. The LLC can change these percentages at any time for almost any reason. This makes it easier to attract new members, terminate current members or change a Member’s percentages secondary to a change internal LLC structure or Member disbursement.

Pseudo Legal Protection

The LLC legally restricts a Member’s liability to the Member’s basis. Basis is the dollar amount a Member has invested in the LLC. But don’t be lulled into a false sense of security. Should a lawsuit occur the opposing lawyer will try to prove the LLC wasn’t run as a true business entity. Why? Now the plaintiffs can attach to your personal assets too. Moral of the story? One, don’t get sued and two, understand the rules for a LLC and follow them.

“Note that the IRS has now delayed changes to the capitalization vs. expense rules until 2014. But in 2013, rental property LLCs and Partnerships have unique potential tax strategies.”
- Gary Bode, Form 8825 CPA

Taxation

There’s no tax per se on Form 1065 and Form 8825. Form 1065 incurs no tax itself, so the income and capital gains flow to the Member. Your CPA generates a Schedule K-1 for each Member while preparing Form 1065, suing the percentages existing on the last day of the LLC’s tax year.

Note your State probably requires and annual fee to maintain your LLC.

Fewer IRS Tax Audits with Form 8825 and Form 1065?

No guaranties of course. But I suspect there are fewer audits of Form 1065 and Form 8825 then there are of Form 1040 and Schedule E (the personal equivalent of Form 8825).

Cons of LLC Partnerships?

Each Member pays self-employment tax based on what Form 1065’s Schedule K-1 reports. In an S Corporation some of that self-employment tax can be negated through proper tax positioning. So family owner rental property might be better off as an S Corporation. CPAs charge to prepare Form 1065.

Why am I a Form 8825 CPA? My extended family own rental property so you know I’m in trouble if I don’t stay current on Form 8825 issues. I was also a Controller for a for a real estate developer with over 30 LLCs and Partnerships. For a free consult call (910) 399-2705.

Your location in’t a barrier to us providing you Form 8825 and Form 1065 services. And our virtual offices makes our services more convenient. If you don’t already have a Form 8825 CPA for your rental property, consider calling us.