Although filling out IRS tax forms each year isn’t fun, it is a necessary part of real estate investing. Fortunately, tax forms for rental properties are not complicated. If you invest as a member of a partnership or as an S corporation, you will need to report your earnings on Form 8825.
Making sure that Form 8825 is filled out correctly is crucial. Accurate financial reporting is required and can help you determine if you qualify for certain tax deductions.
What is the format of 8825?
IRS Form 8825 is a special tax form for reporting rental income and expenses for a partnership or S corporation. The form allows you to record financial information for eight different properties. If you have more than eight, the additional characteristics can be reported on the second Form 8825.
Form 8825 may not be used by sole proprietors or LLCs. If you file as a sole proprietor or a one-member LLC, you will record your rental real estate activities on Schedule E (Form 1040), which is used to report additional real estate rental income and expenses.
Who uses Form 8825?
Form 8825 shows rental income for partnerships or S corporations in the United States. Let’s say your S corporation owns two apartment buildings, a self-storage facility, and three single-family rental homes. In this case, you will need to include income and expenses for each property on the form.
If you are reporting partnership income, Form 8825 must be attached to Form 1065 (US Partnership Income Return). If you report S Corporation income, Form 8825 must be attached to Form 1120S (US Income Tax Return for an S Corporation).
It is important to note that Form 8825 can be used if your partnership is an LLC, but it does not need to be used for all LLCs. For example, a single-member LLC might use Schedule E (Form 1040).
What type of expense is included in Form 8825?
The IRS taxes real estate rental activity only on net income earned. Net income simply refers to total income minus expenses. To derive net taxable income, Form 8825 includes lines to enter certain expenses, which include:
- Cars and travel
- Cleaning and maintenance
- Other legal and professional fees
- Wages and salaries
If you’re not sure whether a particular operating expense qualifies, check the Internal Revenue Service website. You can also consult a tax professional such as a CPA to clarify the issue.
How do you fill out Form 8825?
Although IRS Form 8825 may look somewhat intimidating when you first look at it, it’s not complicated. The form is logical and easy to follow. The information required for each line is clearly marked, and instructions are included when you download the form.
- Enter your name and employer identification number (EIN). It is important to make sure that this information is included on all tax forms that you submit. This will help prevent errors or delays if the form is lost or misplaced.
- List the physical address of each property you own. You should also include the type of property (multi-family, single-family, short-term rental, etc.). You will also need to indicate how many days the property was rented and how many days it was used for personal use (if any).
- Enter the gross income for each property. Make sure you match the right income to the right property. For example, the income you list in column A must match the property you list in row A.
- Enter all of your expenses for each property. If you have any expenses that are not listed, you can include them in the section called “Other”. Add all of your expenses for each property to determine the total. Then you subtract the total expenses from the total income for each property to determine the income or loss.
- Add the total rental income (line 2, column AH) and the total rental expenses (line 16, columns AH).
- Enter the net profit or loss from the sale of the rental property. This information is on Form 4797, Part Two, Line 17.
- Enter your net income or loss from any real estate rental activity resulting from a partnership, property, or trust where the S corporation or partnership is a beneficiary or partner. This information is obtained from Table K-1.
- Enter the names and EIN for partnerships, estates, or trusts from the previous step.
- Determine the net income or loss of rental properties. This is done by adding everything up in steps 5 through 7. You will then enter the amount on either Form 1065 (for partnerships) or Form 1120S (for S corporations).
What does a practical example look like?
The best way to understand how to fill out Form 8825 is with a practical example. Let’s say you are in a real estate partnership that owns the following properties:
- One multi-family property
- Three single family homes
- Two self storage facilities
Because you are in a partnership and your rental property activities are not of a single owner or a one-member LLC, you must complete Form 8825 to report rental property income.
After filling in the name and EIN on Form 8825, you’ll enter the physical address for each property and the number of days it was used as a rental in the AH rows. Be sure to list both single-family homes and self-storage facilities separately.
You will then enter your total rental income and expenses for each property in columns AH to get your net profit or loss. Next, enter the income or loss from Schedule K-1 on line 20a. Enter each partner’s name and EIN, then combine lines 18a-20a. You will then enter the result into either Form 1065 (for partnerships) or Form 1120S (for S corporations).
Thats all about it. Although many tax forms have earned a reputation for being difficult and time consuming, Form 8825 is simple and easy.
How are LLCs Listed on Form 8825?
Many real estate investment partnerships form limited liability companies (LLCs) to protect their personal assets in the event of a lawsuit. If someone slips and falls in a rental unit, the owner’s bank accounts, homes, and other personal assets will be protected if the lawsuit is successful. LLCs can be either single member (single owner) or multimember.
Since Form 8825 is only for partnerships or S corporations, you will only include LLCs on the form that are either partnerships or S corporations for tax purposes. If you have a one-member LLC, your 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. However, they are two separate and distinct forms.
The primary difference between the two forms is that Form 8825 is used if you declare on behalf of a partnership or S corporation. Schedule E, on the other hand, is used to report the earnings of a sole proprietor. 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 physical address for each property, its type, and the number of days it was used as a rental. You will then enter your total rental income and breakdown of your expenses to determine your profit or loss for each property.
What is Schedule K-1?
Schedule K-1 is a form you’ll need to fill out for important information listed on Form 8825. The form identifies the net income or loss from real estate rental activities from partnerships, estates, and trusts. Instead of reporting the entire income or loss, Schedule K-1 outlines each partner’s share.
Let’s say the partnership has four members and earns $200,000 annually. Each partner will complete a Schedule K-1 reporting $50,000 in individual earnings (assuming the profit is split evenly). This amount is then transferred to line 20a of Form 8825.
If you’re a sole proprietor or a one-member LLC, you don’t have to worry about Form 8825. If your rental real estate activities are part of a partnership or your business is an S corporation for tax purposes, you must include the form when you file your income taxes.
Fortunately, Form 8825 is not complicated or difficult to understand. It can be filled out in just a few minutes, allowing you to finish 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 author and do not necessarily represent the opinions of BiggerPockets.