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I own a few residential rental properties in the United States. I actively manage all of them, although this is not my full-time job. The properties are owned by an LLC of which I am the sole member. I had a loss on the rentals for 2018, expect to break even in 2019 and hopefully have steady profit after that.

My accountant says I can choose to use either schedule C or schedule E to report the rental income/loss. I'm wondering about the tax advantages/disadvantages of each ones. (My accountant gave me his perspective but I'm asking here to get more ideas.)

Some specific questions include:

  1. If I report on schedule C, I can get the 20 percent passive income deduction that was included in the new tax law, whereas I can't get that under schedule E, correct?

  2. If I report on schedule C, can I put a portion of the rental income into a SEP IRA?

  3. If I report on schedule C, do I lose the ability to carryover losses from year to year?

  4. If I report on schedule C and pay self-employment tax on the rental income, will that entitle me to a higher social security benefit when I retire (assuming I don't already max out my social security benefit through other earned income)?

  5. How much leeway do I have to switch between which schedule I use in different tax years? In other words, if I use schedule C this year, do I have to keep using it in future years?

I'd appreciate any other advice on the tax impact of using schedule C vs. E, especially with the new tax law in mind.

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    I've had a Sch E for most of my life. I was never aware there was a choice to go Sch C for limited rental income. Looking forward to seeing what answers you get. – JTP - Apologise to Monica Mar 17 at 19:12
  • I believe you could still take the 20% qualified business income deduction if you report on Schedule E, but you need to have 250 hours of documented "rental services" activity in the year. kitces.com/blog/… – Craig W Mar 17 at 20:23
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    Are you renting them out AirBNB style or the more traditional lease method? – Hart CO Mar 17 at 21:35
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I don’t believe it’s as simple as “you have the option” which seems to be how you heard your accountant describe it.

This is from IRS pub 527 And offers the circumstance under which you do that.

Providing substantial services. If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Use Form 1065, U.S. Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Substantial services don’t include the furnishing of heat and light, cleaning of public areas, trash collection, etc. For more information, see Pub. 334, Tax Guide for Small Business. Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. For a discussion of "substantial services," see Real Estate Rents in Pub. 334, chapter 5.

I would go back and respectfully ask him to explain why he thinks you have the choice. I say ‘respectfully’ because pros often don’t take kindly to being second guessed by strangers on the internet. On the other hand, you are not taking my advice, as is often the case, I offer an IRS citation.

  • The accountant said that since the business was owned through an LLC I could file under schedule C, but that publication definitely suggests otherwise. Thanks. Tangentially, I wonder which rules would apply if I were renting some of the apartments as Airbnbs (which would seem to involve "substantial services") but the others as regular apartments. I'm currently not doing that but have thought about it for future. – historian18 Mar 17 at 22:48
  • Agreed that running an airbnb turns a unit into potential sch c filing. I own a multi-unit building via LLC as well. LLC is a legal pass-thru for tax purposes. Please keep us posted if you find out something different. – JTP - Apologise to Monica Mar 17 at 23:00
  • I don't think there's any question, if you aren't providing what you would argue to be substantial services it's Schedule E. Also, you can take the 20% pass-through deduction with rental income reported on Schedule E. The question for that deduction is if your rental activity generates what is considered business income. – Hart CO Mar 18 at 2:30
  • @HartCO - my larger concern is how often I find professionals getting things wrong. For you or me, no question, for OP’s accountant, big question. – JTP - Apologise to Monica Mar 18 at 2:33

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