Confused about Partnership Return and Form 8825 for Rental Income - Where Does Depreciation Go?

The confusion here is totally understandable! You're on the right track with your understanding of the forms, but let me clarify how depreciation should be handled. Form 8825 is specifically designed for reporting rental real estate income and expenses that flow through to a partnership. The depreciation expense for the rental property itself should absolutely be reported on Form 8825, not directly on Form 1065. Form 1065 would include depreciation for assets used in the management business (like computers, office furniture, etc.), but not for the actual rental property. Since Form 8825 is essentially a schedule that attaches to Form 1065, the property depreciation flows through 8825 to the partnership return and ultimately to the partners' K-1s. If your previous accountant reported the property depreciation directly on Form 1065 instead of Form 8825, it might be worth reviewing those returns. While the depreciation would still flow to the K-1s either way, proper form allocation helps with accurate record-keeping and potential IRS scrutiny.

I was in almost the exact same situation last year with my rental LLC! After spending hours researching and getting nowhere, I finally used this amazing AI tax service called taxr.ai that specializes in analyzing partnership returns and real estate issues. It actually explained the whole Form 8825 vs 1065 situation in a way that finally made sense to me. I uploaded our previous returns and it immediately flagged that our depreciation was on the wrong form. The site at https://taxr.ai walked me through exactly where each expense should go and even created a checklist I could give to my CPA. Seriously saved me from making the same mistake again.

Just wanted to follow up here. I decided to give taxr.ai a try despite my initial skepticism, and I have to say I'm impressed. I was having the exact same issue with depreciation placement, and after uploading our returns, it gave me a detailed breakdown of exactly where each type of expense should go. What I found most helpful was that it actually explained WHY certain items belong on specific forms rather than just telling me where to put them. It clearly showed that our property depreciation belonged on Form 8825, while the depreciation for our office equipment used in management activities belonged on Form 1065. The explanation about the relationship between these forms finally clicked for me. Even showed me where we could have been taking additional deductions we missed. Definitely worth checking out if you're struggling with partnership returns.

After dealing with similar partnership/rental property headaches, I ended up needing to speak directly with someone at the IRS to get definitive answers. Tried calling them for THREE WEEKS with no luck - always disconnected or ridiculous wait times. Finally found this service called Claimyr that got me through to a real IRS agent in under 20 minutes. Check them out at https://claimyr.com - they have a video showing how it works at https://youtu.be/_kiP6q8DX5c. It basically holds your place in the phone queue and calls you when an agent is about to answer. The IRS agent I spoke with confirmed that property depreciation should absolutely be on Form 8825, not the 1065. She even emailed me some partnership return guidance that specifically addressed rental properties. Such a relief to get an official answer!

I need to eat my words here. After posting my skeptical comment, I decided to try Claimyr anyway since I was desperate to talk to the IRS about my partnership return issues. The service actually worked exactly as described. I submitted my request around 9am, went to work meetings, and got a call around 10:30am saying they had an IRS agent on the line. I was connected immediately and got my partnership/rental property questions answered in about 15 minutes. The agent confirmed that property depreciation goes on Form 8825, while any assets used by the management business go on Form 1065. After months of frustration trying to get through to the IRS myself, this was honestly life-changing. Got clear answers that I can confidently use for filing. Worth every penny just for the time saved and stress reduction.

Something that hasn't been mentioned yet - if your LLC owns multiple rental properties, you need a separate Form 8825 for EACH property. That tripped me up big time last year. Each property's income, expenses, and depreciation should be tracked separately.

Another thing to consider: if any partners live in or personally use one of the rental properties for part of the year, that changes how you report everything. We had to split a property between Schedule E (personal portion) and 8825 (business portion) which was a nightmare.

Thanks everyone for this incredibly helpful discussion! As someone who's been struggling with the same partnership/rental property filing issues, this thread has been a goldmine of information. Just to summarize what I've learned here for anyone else in a similar situation: - Property depreciation goes on Form 8825, not directly on Form 1065 - Management business assets (computers, office equipment) depreciation goes on Form 1065 - Multiple properties can be reported on one Form 8825 with detailed breakdowns - Personal use by partners complicates things significantly One question I still have: if we're doing major capital improvements to the rental property (new roof, HVAC system), does the depreciation for those improvements also go on Form 8825? Or is there a different treatment for capital improvements versus the original property basis? I'm definitely going to look into both the AI tax service and the IRS calling service mentioned here. After reading through all these responses, it's clear that getting expert guidance is worth the investment to avoid costly mistakes.

This has been such a valuable thread! I'm dealing with a similar partnership/rental property situation and want to add one more consideration that might help others. If your partnership has rental properties in multiple states, you'll need to be extra careful about state filing requirements. Some states require separate partnership returns even if you're only filing one federal Form 1065. The Form 8825 information flows through to state returns differently depending on the state, and some states have their own equivalent forms for rental property reporting. We learned this the hard way when we got a notice from a state where we own one rental property. Even though we filed the federal partnership return correctly with the property depreciation on Form 8825, that state required additional forms we didn't know about. Also, regarding the capital improvements question from @Omar Farouk - make sure you're distinguishing between repairs (deductible in the current year) versus improvements (must be depreciated). The IRS has specific guidelines about what constitutes a repair versus an improvement, and getting this wrong can trigger issues during an audit. For anyone considering the AI tax service or IRS calling service mentioned above, I'd recommend trying them sooner rather than later in tax season. These partnership/rental issues can take time to resolve, and you don't want to be rushing to file at the deadline with unresolved questions.

As someone who's been through this exact same confusion with partnership rental properties, I completely feel your pain! The good news is that you're asking the right questions and your understanding is actually pretty solid. To directly answer your depreciation question: Yes, the depreciation for the rental property itself should absolutely go on Form 8825, not directly on Form 1065. Your previous accountant may have made an error there, but as others have mentioned, if the depreciation still flowed through to the K-1s correctly, it's probably not worth amending unless there were other issues. One thing I learned the hard way is to keep meticulous records separating your "property management business" expenses (which go on 1065) from your "rental property" expenses (which go on 8825). Things like: - 1065: Office supplies, computers, software for managing properties, vehicle expenses for property management activities - 8825: Property taxes, insurance, repairs/maintenance, utilities, and yes - property depreciation The key insight that helped me was thinking of Form 8825 as essentially a "rental property Schedule E" that attaches to your partnership return. All the same types of expenses you'd put on Schedule E for personal rental property go on 8825 for partnership-owned rental property. Also, make sure you're calculating your depreciation correctly - if you converted a personal residence to rental property, you need to use the lesser of your original cost basis or fair market value at the time of conversion. That's another common mistake I see with partnership rental properties. Good luck with your filing!

This thread has been incredibly helpful! I'm dealing with a very similar situation with my multi-member LLC that owns rental properties. One additional consideration I'd like to add: if your partnership is making the Section 754 election, it can significantly impact how depreciation is calculated and reported on Form 8825, especially when partners change their ownership percentages or when new partners are admitted. The Section 754 election allows the partnership to adjust the basis of partnership property when there are transfers of partnership interests or distributions. This can affect the depreciation amounts that flow through to individual partners on their K-1s. If you're not familiar with this election, it's worth discussing with your tax professional, especially if you anticipate any changes in partnership structure. Also, regarding the multi-state issues mentioned earlier - I found that the Federation of Tax Administrators website has a good state-by-state breakdown of partnership filing requirements. Each state's Department of Revenue website also typically has specific guidance for multi-state partnerships. For those considering the AI tax services or IRS callback services mentioned above, I'd also recommend checking if your state has similar callback services. Some states have implemented their own versions for state tax questions, which can be just as valuable as getting federal guidance. Thanks everyone for sharing your experiences - this is exactly the kind of practical guidance that's hard to find elsewhere!