Filling out IRS tax forms every year isn’t fun, but it’s a necessary part of investing in real estate. Thankfully, rental property tax forms are not complicated. If you are investing as a member of a partnership or as an S Corporation, you must report your earnings on Form 8825.
It is very important to make sure that you have completed the Form 8825 correctly. Accurate financial reporting is required and helps determine whether you qualify for certain tax deductions.
What is Form 8825?
IRS Form 8825 is a special tax form for reporting rental income and expenses of a partnership or S Corporation. This form allows you to record financial information for eight different properties. Additional properties can be reported on the second form 8825 if there are more than eight.
Form 8825 should not be used by sole proprietorships or single member LLCs. If you are filing as a sole proprietorship or individual member LLC, record rental property activity on Schedule E (Form 1040) used to report supplemental rental property income and expenses.
Who Uses Form 8825?
Form 8825 reports rental income for a U.S. partnership or S corporation. Suppose Company S owns two apartment buildings, one self-storage facility, and three single-family rental homes. In that case, you will need to fill out a form with income and expenses for each property.
If you are reporting partnership income, you must attach Form 8825 to Form 1065 (U.S. Partnership Income Statement). If you are reporting S corporation income, you must attach Form 8825 to Form 1120S (U.S. Income Tax Return for S Corporation).
Note that Form 8825 may be used if the partnership is an LLC, but it is not required to be used for all LLCs. For example, a single-member LLC uses Schedule E (Form 1040).
What types of expenses are included on the Form 8825?
The IRS tax rental property activities only on net income earned. Net income is simply gross income minus expenses. To derive your net taxable income, Form 8825 contains lines for entering specific expenses such as:
- advertisement
- car and travel
- cleaning and maintenance
- commission
- insurance
- Legal and Other Professional Fees
- interest
- repair
- tax
- public works
- wages and salaries
- depreciation
- other
If you are unsure whether a particular business expense is eligible, please check the Internal Revenue Service website. You can also consult a tax professional, such as a chartered accountant, to clarify any issues.
How do I fill out Form 8825?
IRS Form 8825 may look a little intimidating at first glance, but it’s not complicated. The format is logical and easy to understand. The required information for each line is clearly labeled and an explanation is included when you download the form.
- Enter your name and Employer Identification Number (EIN). It is important that you include this information on all tax forms that you submit. This helps prevent errors and delays if a form is lost or misplaced.
- List the physical address of each property you own. The type of property (multifamily, single-family, short-term rental, etc.) should also be included. You must also specify the number of days you rented the property and the number of days you used it for personal use (if any).
- Enter the total income for each property. Be sure to match the right income with the right assets. For example, the income listed in column A should match the assets listed in row A.
- Enter all expenses for each property. Any unlisted costs can be included in the section labeled “Other”. Add all costs for each property to determine the total. Next, calculate the profit and loss by subtracting the total expenses from the total income for each property.
- Add gross rental income (row 2, column AH) and gross rent (row 16, column AH).
- Enter the net profit or loss from the sale of the rental property. This information is provided on Form 4797, Part II, line 17.
- S Enter the net profit or loss from rental property activities from partnerships, properties, or trusts in which the corporation or partnership is the beneficiary or partner. This information is taken from Schedule K-1.
- Enter the name and EIN of the partnership, estate, or trust obtained in the previous step.
- Calculate the profit or loss of a rental property. This is done by adding all of steps 5-7. Then enter the amount on Form 1065 (for partnerships) or Form 1120S (for S corporations).
What does a working example look like?
The best way to understand how to fill out Form 8825 is with a working example. Suppose you are in a real estate partnership that owns the following properties:
- 1 housing complex
- 3 detached houses
- 2 self-storage facilities
Because you are in a partnership and your rental property activity is not from a sole proprietorship or single member LLC, you must complete Form 8825 to report rental property income.
After completing the Form 8825 with your name and EIN number, enter the address and number of days rented for each property on lines A-H. List each single-family home and storage facility separately.
Then enter the gross rental income and gross rental expense for each property in columns A through H to calculate the net profit or loss. Then enter the profit and loss for Schedule K-1 on line 20a. Enter each partner’s name and her EIN, joining lines 18a-20a. Then enter your results on Form 1065 (for partnerships) or Form 1120S (for S companies).
That’s all. Many tax forms have a reputation for being difficult and time consuming, but Form 8825 is simple and easy.
How do I list my LLC on Form 8825?
Many real estate investment partnerships form limited liability companies (LLCs) to protect personal assets in case of litigation. If someone slips and falls in a rental home, a successful lawsuit protects the owner’s bank account, home, and other personal assets. An LLC can be either single member (one owner) or multiple members.
Form 8825 is for partnerships or S corporations only, so only LLCs that are partnerships or S corporations will be listed on the form for tax purposes. If you have a single member his LLC, rental income will be reported on Schedule E (Form 1040).
Is Form 8825 the same as Schedule E?
Form 8825 and Schedule E (Form 1040) are similar in that they are used to report rental property income. But they are two separate and distinct formats.
The main difference between the two forms is that Form 8825 is used when filing on behalf of a partnership or S Corporation. Schedule E, on the other hand, is used to report private owner earnings. Schedule E is also used to report other forms of supplemental income.
The process for reporting rental property income and expenses on Schedule E is similar to Form 8825. You must include the actual address of each property, its type, and the number of days it was used as a rental. Then enter the total rental income and itemize the expenses to determine the profit and loss for each property.
What is Schedule K-1?
Schedule K-1 is the form you must complete to obtain important information contained on Form 8825. This form determines net gains and losses from rental property activities from partnerships, properties and trusts. Schedule K-1 determines each partner’s share instead of reporting full income or loss.
Assume the partnership has four members and an annual revenue of $200,000. Each partner completes Schedule K-1 and as separate earnings he reports $50,000 (assuming earnings are split equally). This amount will be forwarded to him on line 20a of Form 8825.
Conclusion
If you are a sole proprietorship or individual member LLC, you do not need to worry about Form 8825. However, if your rental property activity is part of a partnership or your business is his S corporation for tax purposes, you must include the form when filing your income tax.
Thankfully, form 8825 isn’t complicated or hard to understand. It only takes a few minutes to fill out so you can finish paying your taxes and get back to doing what you do best: closing more deals and growing your portfolio.
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Note by BiggerPockets: These are opinions written by the authors and do not necessarily represent the opinions of BiggerPockets.