Form 1065 vs 8825 for active rental cabins LLC - partnership tax filing question
Hey everyone, my husband and I run a vacation cabin rental business through our LLC that's taxed as a domestic partnership. I'm confused about where to report our income on our tax forms. We're definitely active in the business - we personally handle everything from cleaning between guests, doing repairs, managing all the bookings online, and keeping our own books. We each easily log more than 750 hours per season working on this business. Since we're so actively involved, should we be reporting this income on Form 1065 Line 1a (like it would go on Schedule C if we weren't a partnership), or does it still have to go on Form 8825 because technically it's rental real estate income? I've read conflicting advice online and our tax situation from last year has changed. Really appreciate any guidance!
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Chris Elmeda
What you're describing is definitely an actively managed rental business, but the forms have specific purposes regardless of how hands-on you are. Form 8825 is specifically designed for reporting rental real estate income and expenses for partnerships and S corporations. Even though you're actively managing the properties and putting in significant hours, the income is still fundamentally from rental real estate. The IRS wants this reported on Form 8825, which then feeds into your Form 1065. The question isn't really about whether it's active or passive (which affects how losses are treated), but about the source of income. Since your income comes from renting real property, it should be reported on Form 8825, which then flows to your 1065.
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Jean Claude
•Thanks for the explanation. I think I get it now, but just to be clear - even though we're super active in the business, we still use 8825 because it's real estate? Does that mean we're still subject to passive activity loss limitations if we have a loss year?
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Chris Elmeda
•You're partially correct. You would use Form 8825 because it's rental real estate income, but that doesn't automatically mean you're subject to passive activity loss limitations. If you and your spouse materially participate in the rental business (which it sounds like you do with 750+ hours each), you may qualify as "real estate professionals" for tax purposes. This means your rental activities wouldn't be automatically considered passive. You'd need to meet specific requirements: 1) more than half of your personal services during the year are in real property trades/businesses, and 2) you perform more than 750 hours of services in real property trades/businesses. If you qualify, then losses wouldn't be subject to passive activity loss limitations.
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Charity Cohan
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Josef Tearle
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Shelby Bauman
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Charity Cohan
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Hazel Garcia
Just to add another perspective - I have a similar situation with my partner and our mountain rental cabins. Our accountant had us report on Form 8825 because it's specifically for real estate rentals in partnerships, but we file an additional statement with our return documenting our material participation hours to establish that we meet the real estate professional requirements. The key distinction is that the choice of form (8825) is about the TYPE of income (rental real estate), while the active vs passive classification is a separate determination that affects how losses can be used. Don't confuse the two concepts!
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Annabel Kimball
•Thank you for this explanation! That makes more sense now. If I understand correctly, we'll use Form 8825 because our cabins are rental real estate, regardless of how active we are in the business. But our active participation (750+ hours each) means we can potentially qualify as real estate professionals, which is a separate determination that affects loss limitations. Is there a specific form for documenting our hours, or do we just need to keep good records?
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Hazel Garcia
•That's exactly right! The 8825 is for the type of income, not the level of activity. There's no specific IRS form for documenting your hours for the real estate professional status. You'll want to keep detailed records of your time spent - a log or calendar showing dates, hours, and specific activities performed would be ideal. Many tax professionals recommend keeping this documentation contemporaneously (as you go) rather than trying to recreate it later.
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Laila Fury
Just to throw something else in the mix - make sure you're calculating the Qualified Business Income deduction correctly too! For rental real estate on Form 8825, there are specific rules for taking the QBI deduction that differ from other types of business income. This can be a huge tax savings if done right.
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Geoff Richards
•I second this! The QBI deduction (Section 199A) can be really valuable for rental properties. Just make sure your properties qualify as a "trade or business" under Section 162, which it sounds like they would with your level of activity. Our cabin rentals saved us about $9,400 last year with the QBI deduction.
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