LLC for Each Rental Property: Books, Bank Accounts and Returns

Does each rental LLC file its own tax return?

A one-owner LLC that has not elected corporate tax files no federal income tax return of its own. The IRS treats it as a disregarded entity, meaning it is ignored for income tax, so its rent and expenses go on the owner's Form 1040 (IRS: single member LLCs). An LLC with two or more owners is a partnership unless it elects otherwise, and it files Form 1065 (IRS: LLC filing as a corporation or partnership; 26 CFR 301.7701-3).

Federal income tax does not call for one LLC per rental: one ignored LLC can hold several rentals, each in its own Schedule E column. Whether to use an LLC at all is a state-law, lender and cost question, covered in rental property in an LLC.

A husband and wife who are the only owners and hold the LLC as community property may treat it as disregarded or as a partnership, and the IRS accepts either; a later change is treated as a conversion. In other states a two-spouse LLC files as a partnership (IRS: single member LLCs). See spouse and family LLCs.

A case is not simple when:

• The books or accounts already cross. One account has paid several LLCs' bills, or money moved between LLCs or to you without a record. The transfers have to be sorted before any return is right.
• A preparer quotes a return for every LLC. Which LLCs file depends on owners and elections, not on the number of properties.
• A second owner joins. From the day a one-owner LLC gains a second member it is a partnership (26 CFR 301.7701-3(f)): its rental goes on Form 8825 of a Form 1065, not in a Part I column of the first owner's Schedule E. If no Form 1065 was filed, see the last section before the example.
• An owner leaves and one owner remains. The LLC is ignored again once only one member is left (26 CFR 301.7701-3(f)). The partnership generally files a final Form 1065, due the 15th day of the 3rd month after the month the partnership ends (IRS: Form 1065 instructions; 26 CFR 1.708-1), and the owner reports the rental on Schedule E from then on. See recording a partner buyout.
• A holding LLC owns the rental LLCs. If the holding LLC is taxed as a partnership, owns each rental LLC alone and none of them elected corporate tax, the rental LLCs are divisions of it and one Form 1065 can cover every property (IRS: single member LLCs). A rental LLC with another owner or a corporate election follows its own rules.
• An LLC filed Form 8832 or Form 2553. It then files a corporate return, and the default no longer applies (IRS: Form 2553 instructions). A Form 8832 election takes effect on the date it names, from 75 days before filing to 12 months after. Every owner, or an authorized officer, manager or member, signs it, and the LLC's property is treated as moved into the new corporation that day, so the books need a cutoff then (26 CFR 301.7701-3(c) and (g)). Form 2553 is due 2 months and 15 days after the start of the year it first applies to.
• A state asks for more. An LLC the IRS ignores can still owe state fees or a state return (see below).

Gather first: operating agreements with the dates owners joined or left, EIN letters, any Form 8832 or Form 2553, bank and mortgage statements for each LLC, and the last return. The full list is in the year-end section below.

How does a single-member rental LLC go on Schedule E?

Three LLCs with one rental each and one LLC with three rentals look the same on Schedule E: each rental property gets its own column, A, B or C, in Part I. Schedule E lists properties, not LLCs (IRS: Schedule E instructions). A page holds three properties; attach more pages for more.

The property address goes on line 1a, rent on line 3, and each expense in that property's column.

If the LLC gives tenants substantial services, such as regular cleaning or linen changes, the income may belong on Schedule C instead (IRS: Publication 527). See rental property taxes.

Passive loss limits apply on the owner's return, not the LLC's. A rental loss not allowed in a year carries forward until it is used or the entire interest in the activity is sold in a fully taxable sale to an unrelated party (IRS: Form 8582 instructions), so records by property, or by whichever rental activities you group together, show which carryforward belongs where.

What changes when a rental LLC has two or more owners?

The LLC files Form 1065 and gives every owner a Schedule K-1, the form that shows that owner's share of income and deductions, even if it owns one house, unless it received no income and had no expenditures treated as deductions or credits for the year (IRS: Form 1065 instructions; IRS: Publication 527).

Ordinary rental real estate goes on Form 8825, the partnership's rental real estate form, not page 1 of Form 1065. Form 8825 has one column per property, even when the LLC treats several buildings as one activity for passive loss purposes (IRS: Form 8825 instructions). Its net result lands on Schedule K, line 2, and in box 2 of each K-1. An activity the instructions do not treat as a rental activity, such as stays averaging seven days or less, or short stays with significant personal services, is a trade or business reported on page 1 and in box 1 of each K-1 instead (IRS: Form 1065 instructions); see rental property taxes. Each owner then reports the K-1 on Schedule E, Part II, of the owner's own return (IRS: Schedule E instructions).

The penalty counts everyone who was an owner at any time in the year. The owners, not the LLC, apply basis, at-risk and passive loss limits to their shares (IRS: Form 1065 instructions; IRS: Schedule E instructions).

For the return itself, see how partnerships are taxed. For owners who share a rental without an LLC, see co-owned rental: Schedule E or partnership return.

Do I need separate books for each LLC, or one file with a class for each property?

An LLC that files its own return needs records that stand on their own. For one-owner LLCs the IRS ignores, a separate set per LLC is the simpler way to keep each column clean; that is practice, not a tax rule.

Publication 583 says an owner of more than one business must keep a complete and separate set of books and records for each business, and it accepts any system that clearly shows income and expenses. A rental is not always a trade or business for tax purposes (IRS: Schedule E instructions), but the property-level split is needed either way: Schedule E and Form 8825 both use one column per property.

The test is whether each LLC can produce its own profit and loss, balance sheet and bank reconciliation without the others. A spreadsheet can hold the same split if every row names the LLC and the property; see spreadsheet or software for rentals. For the books themselves, see separate books for each company and chart of accounts for rental property.

Do I need a separate bank account for each LLC?

Tax rules ask for records that clearly show income and expenses, not a particular account setup. Publication 583 advises keeping business money in a business account apart from personal money, and marking each deposit as business income, personal funds or a loan.

A partnership LLC's records must support every item on its return (IRS: Form 1065 instructions), which is easiest when its receipts and bills trace to that LLC alone. What breaks the books is one account paying several LLCs' bills: each such payment usually has to be sorted into a loan, a contribution or a distribution. Liability protection is a state-law question this page does not cover. When separate accounts are worth it, and how to keep rent apart from personal money, is covered in a separate bank account for each rental property.

Does each rental LLC need its own EIN?

Not always. For federal purposes, a one-owner LLC the IRS ignores needs an EIN only if it has employees or owes certain excise taxes. Otherwise it uses the owner's Social Security number or EIN for income tax (IRS: single member LLCs). A bank or a state may still require one, and the LLC can then apply. On a Form W-9 for an ignored LLC, give the owner's number, not the LLC's.

An LLC taxed as a partnership files Form 1065 under its own EIN, applied for on Form SS-4 with Partnership checked (IRS: Form SS-4 instructions). An ignored LLC that already has its own EIN keeps it when it gains an owner and becomes a partnership; if it never had one, it must get one (26 CFR 301.6109-1(h)). A change of owners that does not end the partnership does not call for a new EIN (IRS: when to get a new EIN).

How do I keep each property's rent, mortgage, repairs and depreciation apart?

Record every transaction against the one property it belongs to, so each Schedule E or Form 8825 column fills from its own totals (IRS: Schedule E instructions).

Line 12 is for interest paid to a bank or other financial institution; use line 13 when the recipient is not one or no Form 1098 came (IRS: Schedule E instructions). A lender need not file Form 1098 for interest received from a company (IRS: Form 1098 instructions), so an LLC's loan may come without one. Interest follows how the borrowed money was used, not which property secures the loan (26 CFR 1.163-8T).

A bill that covers several properties, such as one insurance policy, is usually split among them on a reasonable basis, and the split is kept with the bill.

If a loan is in your own name while an LLC holds the property, keep the loan papers and lender statements with that property and note who actually paid. A payment from your own funds is money you put into the LLC or lent to it; a payment from the LLC's account is not a contribution just because the loan carries your name. For an LLC with other owners, who can deduct the interest is a question for a preparer.

How do the books show an LLC paying another LLC's bill, or me paying one personally?

Book the bill to the LLC that owns the property, and book who paid it as money moving between two sets of books: a loan, or a contribution and a distribution.

• One LLC pays another LLC's bill. The LLC that owns the property records the expense and a payable to the payer. The payer records money owed to it. If the same owner holds both LLCs and no repayment is intended, the books show a distribution from the payer and a contribution to the other LLC.
• You pay an LLC's bill personally. The LLC's books show money you put in, or a loan from you. A one-owner LLC's cost is deducted once, in that property's column. For a partnership LLC, whether an owner can deduct a cost paid personally for the LLC depends on the partnership agreement and on whether the rental is a trade or business (IRS: Schedule E instructions); record it as money the owner put in or lent, and ask a preparer before deducting it on the owner's return.
• An LLC pays your personal bill. Record it as money taken out, not a rental expense (IRS: Publication 583).

When one owner holds both LLCs and neither elected corporate tax, both are reported on the owner's return, so a repair still falls in the Schedule E column of the property repaired. When the LLCs have different owners, the payment moves money between those owners. Document it as a written loan; if no repayment is intended, its tax treatment is a question for a preparer. Mechanics are in separate books for each company, LLC equity accounts and partner capital accounts.

Which state fees and reports repeat for every LLC?

A state that charges an LLC fee or requires an annual report does so for each LLC, not for its owner. California, for example, charges every LLC organized or doing business there an annual tax of $800, even when the LLC conducts no business, until it is canceled. Three LLCs mean three charges (California Franchise Tax Board).

A state may also ask for an annual report or a return of its own from an LLC the IRS ignores, depending on where the LLC is organized and where it does business. See LLC annual fees and reports by state and California minimum tax and LLC fee.

What does each LLC give my preparer at year end?

One folder per LLC, with these items:

• The operating agreement and every amendment, showing who owns what and when owners joined or left.
• The EIN letter, and any Form 8832 or Form 2553 with what the IRS returned.
• Year-end statements for every bank account and loan, with Form 1098 if the lender issued one.
• Rent records by property, and any property manager's statements.
• Property tax bills, insurance bills, and repair invoices marked repair or improvement.
• Closing statements for any purchase, sale or refinance in the year, and the depreciation schedule from the last return.
• A dated list of every transfer between LLCs or with an owner, with the amount and the reason.
• The last return: the owner's Schedule E, or the LLC's Form 1065 with K-1s and capital accounts.
• State annual report and fee notices.

What if the books are tangled or a Form 1065 was never filed?

Start by deciding which LLCs are separate taxpayers, then rebuild each LLC's books from its own statements. The rebuilt books show which returns are missing.

1. For each LLC, list its owners by date from the operating agreement, its amendments and any K-1s, and note any Form 8832 or Form 2553. Those set the classification for each year, and so which LLCs should have filed Form 1065.
2. Gather every bank and loan statement and assign each transaction to the LLC whose property or loan it belongs to.
3. Re-sort money that crossed between LLCs, or between an LLC and an owner, into loans, contributions and distributions.
4. Reconcile each account to its statements before any return is prepared.

A Form 1065 that was required and never filed may carry the per-owner monthly penalty above, at the amount set for the year that return was due. The IRS can waive it for reasonable cause, and a small partnership of at most 10 partners may qualify for a waiver under Revenue Procedure 84-35 (IRS: CP162C notice). Some administrative relief depends on timely filing of the same return for the three prior years (IRS: administrative penalty relief). If a second owner joined and the filing never changed, Schedule E reporting for the years since may be wrong. A second owner who joined or left in a year, a Form 8832 or Form 2553 you cannot find, or numbers that will not reconcile are the cases where a preparer's review can change which returns are due. See late partnership return penalty relief, late-filing penalties, fixing mixed business and personal funds and catching up on rental property books.

Example

Illustrative US dollars, round numbers.

Three one-owner LLCs, one rental each

An owner holds three LLCs, each with one long-term rental and $24,000 of rent a year. None has elected corporate tax, so no LLC files a federal income tax return. The owner's Schedule E has three columns, A, B and C, each showing $24,000 of rent. The owner keeps three sets of records so each property's mortgage interest and depreciation stay in its own column. A bank, a lender or a state may still ask for an EIN or an annual report for each of the three LLCs.

Two siblings, one rental, 60/40

Two siblings hold one long-term rental in an LLC with no corporate election and share profit 60/40. Rent is $30,000 and expenses are $12,000, so net rental income is $18,000. The LLC, on a calendar year, files Form 1065 with Form 8825 and two K-1s by March 15. Box 2 shows $10,800 for one sibling and $7,200 for the other, and each reports that amount on Schedule E, Part II, of a personal return.

One LLC pays another's roof repair

LLC A pays a $3,000 roof repair on LLC B's property from A's account. B books the $3,000 repair and owes A $3,000; A books $3,000 owed to it. If the same owner holds both LLCs and neither has elected corporate tax, the repair still falls in B's column on Schedule E. If A is never repaid, the books show $3,000 distributed from A to the owner and $3,000 contributed by the owner to B. Charging the repair to A would put it in the wrong column.

Different for you?

• Your LLCs' books or accounts already cross, or one account has paid several LLCs' bills: past transfers usually need to be sorted into loans, contributions and distributions before returns are prepared. Get bookkeeping help and see fixing mixed business and personal funds.
• An LLC has a second owner and never filed Form 1065: the capital accounts may need rebuilding. Get bookkeeping help and see rebuilding partnership capital accounts.
• A preparer quotes a return for every LLC and you cannot tell which are needed: ownership dates and elections decide, LLC by LLC. See which returns your business files, and get bookkeeping help to split the books before year end.
• You and your spouse own the LLC: see spouse and family LLCs.
• You share a rental with others and have no LLC yet: see co-owned rental: Schedule E or partnership return.
• Years of rental books are behind: see catching up on rental property books.
• An LLC elected S corporation status: see books after an S corporation election.
• An owner lives outside the US: see nonresident landlords.