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, you must track rental property transactions separately from other business activities of the parent company.
Hi, I’m Gary Bode, a rental property CPA with a virtual office to serve your Form 8825 needs wherever your rental real estate property is. Here are some of the IRS red flags to watch for.
Key IRS Red Flags on Form 8825 and Rental Real Estate
- Losses. Especially if you’re deducting them. Understand the passive loss rules.
- 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 a) you’re not trying to actively rent the property, or, b) using it personally.
- 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).
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.
“Unique tax positioning strategies exist in 2013 for rental property and Form 8825. While the new capitalization vs. expense regs go into effect in 2014, the IRS says you can pick and choose between the old and new Regs in 2013.”
- Gary Bode, Form 8825 CPA
Where do I get Information for Preparing Form 8825?
- The IRS publishes Audit Technique Guides. These explain how an IRS Agent will approach Form 8825 if your S Corporation or Partnership is audited. I think every rental property CPAs reads them.
- 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 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 up on Schedule E 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 issue a 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.
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 with 30+ rental property LLCs. We offer a free initial phone consult at (910) 399-2705.
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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
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.
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!
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.
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.
Hi Tia: since you got a Form 1099-MISC I would put it on Form 8825. It’s just another Form to attach to your business return. Hope that helps.
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.
Maybe you’d not claim any expenses against it per se. Schedule E and Form 8825 are required for rental income. Hope that helps.
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!
Hi Theresa. I’m sorry but I don’t understand the question as stated. Can you give me some more info, or a copy of the Form 8825?
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.
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.
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.
Sorry. Turbo Tax is good software. But we use something else. Sounds like you need to call their support. Hope they can help.
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.