Tax deductions for a rental property, personal vs LLC

Question

I have numerous questions on the tax deductions regarding a rental property owned by two people. Certain things can be deducted from your income tax each including property taxes, improvement costs and depreciation. When comes to these deductions as far as I know you can only deduct them if you go with the itemized deductions option, otherwise I don't think you can deduct these when using standard deductions (correct me if I am wrong.). Also when you are selling your house you need to pay capital gain tax for that you need to calculated the adjusted basis for your home. In the calculation of the adjusted basis you should subtract depreciation values.

• If you have used standard deductions so far do you still need to subtract the depreciation value when calculating the adjusted basis for capital gain tax?

• How does the situation change if the property is LLC with two members? (regarding the calculation of the capital gain adjusted basis)

• If the property is LLC (unlike other costs than can be paid by the bank account owned by the LLC) the depreciation deduction can only be done by members individually on their own income tax. Should each member deduction 50% percent of the depreciation value?

• What if one of the members uses standard deduction and the other one uses itemized (in an LLC), should the person deducting the depreciation in this situation still deduct only 50% of the depreciation?

Answer 1

When you have a rental property, income and expenses are calculated on the business side and flow to your Schedule E (it's possible to have rental activity on your Schedule C, but it's a very high bar to meet and it's hard to qualify). It doesn't matter if you (or your business partner) take the standard deduction or itemize, since the rental expenses are deducted before getting to AGI on your personal tax return.

That being said, if the rental is used for personal use during the year (e.g. you use it for summer vacation), you need to calculate the percentage of expenses that are personal (only deductible as an itemized deduction on Schedule A) and rental (deductible on Schedule E, or Form 1065 if a partnership). The exception is if the rental activity is less than 15 days in the year - rental income isn't reported and rental expenses aren't deductible. I'll assume it's 100% rental activity here.

When a multi-member LLC owns the property, the LLC needs to file a Form 1065 each year and provide a Schedule K-1 to each partner/owner. Each partner uses their K-1 to report their allocable share of income/losses. Whether any losses are deductible in that year or suspended due to passive activity rules depends on the individual partner's situation.

To answer your bullet points more succinctly:

• Depreciation is calculated either directly on Schedule E (if personally-owned or owned by a disregarded entity) or at the entity level (e.g. multi-member LLC). If the property is mixed-use personal and rental, personal expenses and rental expenses must be proportioned. Personal deductible expenses flow to Schedule A (itemized deductions) and rental expenses flow to Schedule E (or Form 1065 if a partnership). It doesn't matter if you take the standard deduction or itemize for business-related expenses/deductions.
• For multi-member LLCs, adjusted basis is tracked on the entity side and reported to individual partners on Schedule K-1.
• For multi-member LLCs, the entity calculates depreciation as part of the income/expense calculation.
• Same as #1 and #3.

There's a lot more to rental real estate taxes than this, especially if you're doing it with a partner within an MMLLC. A CPA, EA, or other tax professional can help ensure you're doing things in the right way.