How landlords own residential rental property affects the tax returns you must file each year.
How landlords file their taxes depends on how their rental property is owned: individually or through a business entity.
Rental Property Owned Individually
Rental property is owned by individuals when the owner or owners take title in their own names, not in the name of a business entity such as a partnership or limited liability company. Individuals file IRS Schedule E, Supplemental Income and Loss, to report their rental income and expenses. On this form you list all your expenses and income you received during the year from all your rental properties. If you earned a profit, you add this amount to your other income (such as salary from a job, interest income, or investment income) and report the total on IRS Form 1040. If you incurred a loss, you may be able to deduct it from your other income, but there are severe restrictions on such deductions.
Two or More Co-Owners
If you own the property with one or more co-owners, each co-tenant reports his or her share of the income and deductions from the rental property on his or her own tax return, filing Schedule E. Each owner’s share is based on his or her ownership interest (which should be listed on the property deed). Say, for example, that you take title as a tenant in common with your brother, and you own a 60% interest in the property and your brother 40%. Your brother would list his 40% share of the income and deductions from the co-owned rental house on his Schedule E and pay tax on that amount. You would list the other 60% on your own Schedule E.
If one co-tenant pays more than his or her proportionate share of the expenses, the overpayment is treated as a loan to the other co-tenants and may not be deducted.
Co-Ownership by Spouses
If a married couple who jointly own rental property file a joint income tax return, as most do, their joint ownership produces the same tax result as individual ownership by one of the spouses. This is because the spouses’ shares of the income and deductions from the rental property are combined on the joint tax return. The couple reports their income and deductions from the jointly owned property on a single Schedule E they file with their joint return.
Rental Property Owned by a Business Entity
Landlords who own their properties through business entities don’t use individual Schedule Es to report their rental income or losses. Instead, the partnership, limited partnership, LLC, or S corporation files IRS Form 8825. Rental Real Estate Income and Expenses of a Partnership or an S Corporation, to report the income and deductions from the property owned by the entity. This form is very similar to Schedule E.
Partnerships and Limited Partnerships
These must file an annual tax form with the IRS (Form 1065, U.S. Return of Partnership Income ). Form 1065 is used to report partnership revenues, expenses, gains, and losses. The partnership must also provide each partner with an IRS Schedule K-1, Partner’s Share of Income, Credits, Deductions, etc. listing the partner’s share of partnership income and expenses (copies of these schedules must also be attached to IRS Form 1065). The partners must then file IRS Schedule E, Supplemental Income and Loss. with their individual income tax returns, showing the income or losses from all the partnerships in which they own an interest. Partners complete the second page of Schedule E, not the first page, which individuals use to report their income and deductions from rental property.
These entities must file information returns with the IRS on Form 1120S. U.S. Income Tax Return for an S Corporation. showing how much the business earned or lost and each shareholder’s portion of the corporate income or loss. (An information return is a return filed by an entity that doesn’t pay any taxes itself. Its purpose is to show the IRS how much tax the entity’s owners owe.) Like partners in a partnership, the shareholders must complete the second page of Schedule E, showing their shares of the corporation’s income or losses, and file it with their individual tax returns.
Limited Liability Companies
LLCs with only one member are ordinarily treated like a sole proprietorship for tax purposes. The member reports profits, losses, and deductions on Schedule E. An LLC with two or more members is treated like a partnership for tax purposes, except in the unusual situation where the owners choose to have it treated like a C or S corporation .
For more information on how property ownership affects taxes, see Every Landlord's Tax Deduction Guide . by Stephen Fishman (Nolo). Also, see the IRS website for tax forms mentioned here.