Setting up general ledger/tax reporting for a Real Estate Rental LLC in GnuCash

Question

I have downloaded the GnuCash accounting software for use with our real-estate rental LLC, in hopes of following more universal accounting practices and determining our individual cash basis, but my accounting experience is rather low (I'm at least familiar with the concept of double entry). We need to be able to calculate our cash basis for use in Form 1065 Schedule K-1 and in determining PAL.

First of all, is there a built-in function or report to calculate each member's cash basis? This is the most important part of my needs. If this is not possible in GnuCash (including building custom logic somehow), what other open-source software packages support this calculation?

Secondly, where can I find some written advice on which accounts (and in which order) to set up the ledger? I have an accounts outline I'm drafting based on GnuCash's "Business Account" template, removing accounts I deem unnecessary and attempting to incorporate the categories from Form 8825 (e.g. "Cleaning and Maintenance").

Based on this article, I am adding special accounts for assets (building, accumulated depreciation on building), liabilities (mortgage payable accounts for each mortgage), and expenses (mortgage interest charges). Once I get the ledger set up comfortably, I plan to transfer the transactions (by hand if necessary) from the spreadsheet into the accounting software.

I'm hoping for something a bit more involved than "hire a professional." :)

Backstory:

A friend of mine and I have been renting out a property for the last several years. We decided last year to form an LLC in hopes of reducing our liability by transferring the ownership of the mortgage and title to the company. Unfortunately, both the property and title are still in our individual names.

We are looking to file our taxes this year by using Form 1065, U.S. Return of Partnership Income. In the past, we have always divided all the numbers in half (50.00% ownership), but since we formed the business last year, we were given some advice that it would be beneficial to start filing as a company moving forward. The rationale was that we formed an informal "partnership" the day we started renting together, and therefore could/should have used Form 1065 starting that year, regardless of the ownership of the property.

I've been doing quite a lot of research on how to fill out these forms, and have completed the 1065, the 8825 (Rental Real Estate Income and Expenses...), and 4562 (Depreciation and Amortization). I am relatively comfortable with the numbers we have in these forms based on all the research I've done on all the tax laws, etc.

However, where I'm having an issue is on the Schedule K-1 (Partner's Share...), Part II (Information About the Partner), Line Item L (Partner's Capital Account Analysis).

We use a spreadsheet to track all of our transactions, and break them down into categories for tax reporting (income, insurance, utilities, cleaning/maintenance, improvement, etc.). Unfortunately, we've never properly tracked our cash basis, which is a requirement for properly figuring out how much of the loss can be deducted from our personal income, and which Line Item L is designed to summarize.

Answer 1

You will need to set up accounts in your chart of accounts for each of the partners. These are equity accounts where you can track your contributions, share of the profits and losses, and distributions. You're going to have to go back into the beginning years to get this right.

I'm not sure what you mean by a "Built-in function". All the accounting software I'm familiar with requires data entry of some kind. You need to post your contributions and distributions to the correct accounts, and close properly at year end.

You were indeed legally considered a partnership as soon as you started a for-profit business venture together. It's a bug in the legal system that a written partnership agreement is not necessarily required - you can form a partnership unknowingly. (BTW, a partnership actually is pretty far off from a sole proprietorship, legally and taxwise - the change from one person to two is major. It's the change from two to three or four or more that's incremental ;)

I know you said you didn't want to consult a professional, but I have to say that I think it's worth the money to get your books set up by someone who has experience and can show you how to do it. And get a separate bank account for the partnership, if you haven't done so already. And check with your state to see if there are any requirements regarding partnerships.

Hope this helps,

Mariette

IRS Circular 230 Notice: Please note that any tax advice contained in this communication is not intended to be used, and cannot be used, by anyone to avoid penalties that may be imposed under federal tax law.

Answer 2

No, GnuCash doesn't specifically provide a partner cash basis report/function.

However, GnuCash reports are fairly easy to write. If the data was readily available in your accounts it shouldn't be too hard to create a cash basis report.

The account setup is so flexible, you might actually be able to create accounts for each partner, and, using standard dual-entry accounting, always debit and credit these accounts so the actual cash basis of each partner is shown and updated with every transaction.

I used GnuCash for many years to manage my personal finances and those of my business (sole proprietorship). It really shines for data integrity (I never lost data), customer management (decent UI for managing multiple clients and business partners) and customer invoice generation (they look pretty).

I found the user interface ugly and cumbersome.

GnuCash doesn't integrate cleanly with banks in the US. It's possible to import data, but the process is very clunky and error-prone. Apparently you can make bank transactions right from GnuCash if you live in Europe.

Another very important limitation of GnuCash to be aware of: only one user at a time. Period. If this is important to you, don't use GnuCash.

To really use GnuCash effectively, you probably have to be an actual accountant. I studied dual-entry accounting a bit while using GnuCash. Dual-entry accounting in GnuCash is a pain in the butt. Accurately recording certain types of transactions (like stock buys/sells) requires fiddling with complicated split transactions. I agree with Mariette: hire a pro.