Discussion:S-Corp rental payments on building personally owned by shareholders
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Discussion Forum Index --> Consumer Questions --> S-Corp rental payments on building personally owned by shareholders
| 28 September 2006 | |
| I have an S-corp with two shareholder/employees. In 2006, shareholders purchased a condo (each with a 50% interest) to be used as an office exclusively for their S-corp business. The S-Corp pays the mortgage, taxes, utilities, etc. What is the correct way to report this? Does the S-Corp deduct all of the expenses as rent and shareholders each report 50% as rental income on Sch E? Can the rental income be the same as the expenses paid? And, if there is net income reported on Sch E should it be non-passive because of the self-rental rules? | |
| September 29, 2006 | |
| Assuming that this condo isn't their home, which would change everything, this needs to be arm's length. By that, I mean that the corp enters into a lease agreement with the landlord, like any other. Set the rent at fmv, based on what similar space is renting for, and the landlord pays the mortgage, etc. while the corp pays rent. Note that we're now recommending that landlords own their properties in LLC's. And yes, the rental activity all shows up on the Sch. E. | |
Bottom Line (talk|edits) said: | 29 September 2006 |
| Don't know what state you're in. In Florida, you have to pay sales tax on commercial rentals. You may want to check your state. | |
| 5 October 2006 | |
| Thank you for the replies. Condo is not their home, they purchased it strictly for a business office. I did check on the sales tax and they will be liable. So, I will have the S-corp/shareholders set up a lease agreement and establish a FMV rent amount in which the S-Corp will pay the rent to the shareholders and shareholders will pay the sales tax. Since the shareholders currently own the condo 50/50 wouldn't it be better to have them put the condo in an LLC (not good to put the condo in the S-Corp, correct?) and have LLC collect rents?
Since the S-corp has been making all the mortgage payments, etc. to date this year, should these payments be reclassed to distributions until formal rent agreement is set up? | |
| October 5, 2006 | |
| Yes, most of us are recommending that RE go into an LLC, which would be disregarded for tax filing on the joint return. Just a Sch. E rental property. As to the prev. part of the year, if what they've paid is close to what the rent should be, just call it rent...on the Sch. E, then, you'll pick up the interest, depreciation, and unless the corp pays them direct, the prop. taxes, assoc. dues, and insurance...many of us have the corp pay those directly, tho' to get more cash out of the corp. Or raise the rent to cover, either way's the same I guess. | |
| 5 October 2006 | |
| Just make sure that the rental is adequate to the market in their area. I had a client that insisted on renting her building to her business for the minimum amount possible but yet the rent in the area was very expensive to rent. Coincidently that year they got audited (good thing I wasn't their accountant back then) and the IRS reinstated the rental income and part of their expenses deduction from their business return to her personal schedule E.
So at least, if they need to rent their condo to their business and both are owners FMW should be considered. | |
| 5 October 2006 | |
| Thanks again. Another question... will the shareholders PAL created from this activity be eligible for the $25,000 allowance? (This activity will still have a loss even with the FMV rent and expenses (interest only mortgage)). They actively participated in this activity, right? But since they are in effect renting to themselves, does the loss just carryforward? The self rental rule says income would be non-passive, but loss would be passive. | |
| 5 October 2006 | |
| Won't the LLC need to be reported on a 1065 rather than going directly to the Sch E?? (Two owners). | |
| 5 October 2006 | |
| The LLC hasn't been set up yet. The two shareholders currently own the condo 50/50 as joint tenants w/ right of survivorship. | |
Michaelstar (talk|edits) said: | 5 October 2006 |
| MarieR - you are correct on the self rental rules. The loss would c/f if they were not able to deduct the PAL under the rules. I would classify the net rental loss (if they ended up with a loss)as a rental loss with active participation.
As for the LLC (if that was used) - this would need to be reported on a 1065 and then passed out on the K-1 to the members. I do not believe it s/b treated as a disregared entity - maybe JR1 can help us out with why he feels it could be treated that way. Even if they were married (which in this case I did not read that into the post) I believe they would still not be able to treat the activity as a disregared entity - but if so I'm happy to learn that one. I also do not feel that the t/p should go to all the extra cost of forming an LLC, paying to have LLC returns prepared every year when they could just individually report the rental directly on their Schedule E (as a joint venture) and save themselves the extra expense. | |
| 27 January 2007 | |
| The LLC is for liability protection, not tax savings. JR1 is probably referring to the opt out provisions of filing a 1065 for real estate. | |
Cyberjamin (talk|edits) said: | 2 April 2007 |
| I'd like to throw a twist on this subject.
I have an S-corp with two shareholder/employees. Last month, outside of the S-corp, we purchased a condo (each with a 50% interest) to be used as a fully-furnished executive rental in FL. Since the market in this area is over-saturated right now, it is tough to rent it out . Can we lease it to our S-Corp? If we can, we are already contracted with the largest Property Management company in the area, would it be best if we went through them for the lease? Would we still be eligible to claim losses, i.e. this is a fully furnished unit with start up costs of approx $28k, monthly rental rates do not cover out total monthly output, etc. My understanding is that the S-Corp would pay us the monthly lease amount and we would pay the mortgage. Because it is a rental, we still write-off expenses and losses incurred. | |
| 5 May 2008 | |
| I'd like to revive this older discussion. I have a H/W client that are trying to purchase a rental property. The property is currently residential but it is in a commercial zone, so they may choose to convert it at a future date. Their attorney has recommended they form an LLC, but he did not go further to discuss whether it was a SMLLC or a MMLLC, or how it was to be taxed. The couple would like to both own the property. This is not a community property state.
1. I am guessing they need to title the home in the LLC name, and also obtain financing in the LLC name? Also, I have been doing some reading, and one article questioned whether LLC's would be able to qualify for a 1031 LKE. They definitely want to keep the door open for this, so that is a concern. Has anyone run into this? I'm continuing to look, but wanted to post during the daytime hours. 2. From a tax perspective, I'd like to be able to avoid the 1065 for them (cost, complexity). I understand that LLC's don't qualify for the QJV, but I think I've read that there's an exclusion for partnership rentals to opt out of the 1065 for a Schedule E instead? I have been looking at a couple of articles, but they seem to contradict each other a lot: http://blogs.nolo.com/llc-corporation/2008/04/21/are-property-llcs-worthwhile/ http://www.bizfilings.com/products/articles/real_estate.asp http://www.lawproblems.com/Protecting_Personal_Assets_From_Suit.htm http://ezinearticles.com/?The-Benefits-of-Organizing-Your-Rental-Property-as-an-LLC&id=528340 I would greatly appreciate any pointers on this. | |
| 7 December 2008 | |
| Anyone
So what does the law mean "No Rent dedcution if real estate owned"? Is Pass Through ownership like 1065, S Corp and LLC included? R114 | |
| 7 December 2008 | |
| R114, what IRS Publication or form instruction is that statement in? | |
| 9 December 2008 | |
| Kevinh5
Internal Revenue Code Section 162(a)3 (Second sentence) Also in a number of IRS Pub. Including 535 R114 | |
