Sch C owner pays rent to herself - active participation?

[schirallicpa]

This client is new.  Has "always" owned the building she operates in (as an attorney) and has "always" paid rent to herself on Sch E.  Then deducts utilities and property tax on Sch E. Has a carryover on 8582 in Sec 3 "all other passive activity"  - not in sec 1 "rental real estate with active participation".  Am I missing something?  This means that she has carry forwards that could have been taken over the years.  Why wouldn't this be active participation?

[Lee B]

Not sure we have the whole story here, but shouldn't the rent be considered an owner's

withdrawal of capital and the expenses be deducted on Schedule C.

[Lion EA]

Self-rental.  Can she lower her SE profits/taxes by treating her business as a separate entity instead of a disregarded entity?  Why aren't her expenses on Schedule C instead of E?

[schirallicpa]

I know - that's the other half of my brain thinking - this isn't right to begin with.  Leave these losses suspended.............

 

[schirallicpa]

And to boot - this is the 2013 return.  So whatever the previous tax preparer did in 2012, 2011, etc is not amendable...............

 

[Abby Normal]

1 hour ago, schirallicpa said:

And to boot - this is the 2013 return.  So whatever the previous tax preparer did in 2012, 2011, etc is not amendable...............

 

You can always amend. What you can't do is get a refund for those years.

[Terry D EA]

I could see Sch E if the building was owned under the structure of a LLC and not her personally. Had a client in the past that was setup this way. Taxed as a disregarded entity. The CPA prior to me set this up, filed form 1065 and the IRS sent letters correcting the filing requirements. Other than this structure, I agree with cbslee and don't think it is right either.

[Abby Normal]

SMLLC would be disregarded for building. Sch C can't rent building to self. Just take depreciation and expenses on Sch C. Should not make any difference anyway.

[michaelmars]

First thing to note is self rental, whether like this or through an entity is NOT considered a passive activity.  Assuming the rent paid covers the expenses then by not claiming the depreciation on C the taxpayer is paying higher se tax.

 

[Abby Normal]

1 hour ago, michaelmars said:

First thing to note is self rental, whether like this or through an entity is NOT considered a passive activity.  Assuming the rent paid covers the expenses then by not claiming the depreciation on C the taxpayer is paying higher se tax.

 

The rent should zero out (Sch C rent expense = Sch E rent income). So the total income on the 1040 is the same (assuming no loss suspension on E).

If Sch E has close to a zero profit/loss, then SE tax won't change by much moving the Sch E expenses to Sch C.

If Sch E shows a loss, moving expenses to C will reduce SE tax, and vice versa.

[RitaB]

22 hours ago, schirallicpa said:

This client is new.  Has "always" owned the building she operates in (as an attorney) and has "always" paid rent to herself on Sch E.  Then deducts utilities and property tax on Sch E. Has a carryover on 8582 in Sec 3 "all other passive activity"  - not in sec 1 "rental real estate with active participation".  Am I missing something?  This means that she has carry forwards that could have been taken over the years.  Why wouldn't this be active participation?

Yes, if it were an allowed rental (it's not), it is active participation.   Looks like another example of incorrect tax return preparation by one of your competitors.  Be sure and milk it.

On taking the losses, even if she had a legit rental (not self) all the losses would be suspended at $150,000 MAGI, right?  Is she there? 

 

[michaelmars]

22 hours ago, Abby Normal said:

The rent should zero out (Sch C rent expense = Sch E rent income). So the total income on the 1040 is the same (assuming no loss suspension on E).

If Sch E has close to a zero profit/loss, then SE tax won't change by much moving the Sch E expenses to Sch C.

If Sch E shows a loss, moving expenses to C will reduce SE tax, and vice versa.

You aren't considering Depreciation, on E this doesn't affect SE tax but on C it would.

 

22 hours ago, RitaB said:

Yes, if it were an allowed rental (it's not), it is active participation.   Looks like another example of incorrect tax return preparation by one of your competitors.  Be sure and milk it.

On taking the losses, even if she had a legit rental (not self) all the losses would be suspended at $150,000 MAGI, right?  Is she there? 

 

It isn't a passive activity so the losses would not be limited but you can't use the income to free up other passive losses.  We have had a few audits on this.  Self rental to your own business is NOT a passive activity.  Even if the property was in a partnership with spouse. It is a nonpassive activity.

[RitaB]

I found this, it might be helpful:  https://www.irs.gov/businesses/small-businesses-self-employed/passive-activity-loss-atg-exhibit-3-2-self-rented-property-income-recharacterization

[Abby Normal]

1 hour ago, michaelmars said:

You aren't considering Depreciation, on E this doesn't affect SE tax but on C it would

Yes I was. Depreciation was included with the expenses.

[Max W]

On 7/29/2016 at 7:25 AM, RitaB said:

I found this, it might be helpful:  https://www.irs.gov/businesses/small-businesses-self-employed/passive-activity-loss-atg-exhibit-3-2-self-rented-property-income-recharacterization

From my reading of this, income is non-passive, losses are passive.