How to properly allocate between 1065 Ordinary vs Rental Real Estate Income when partners do repairs themselves

This is a common issue with hands-on real estate partnerships. Generally, all expenses directly related to the rental activities should be reported on Form 8825, including repairs, maintenance, and tools used exclusively for the rental properties. The key distinction is whether the partnership is in two separate businesses: (1) rental real estate and (2) a service business for repairs/maintenance. From what you've described, it sounds like the partners are simply maintaining their own properties rather than operating a separate repair business. Their personal labor doesn't create a deductible expense - they're just working as partners in the rental business. For the tools and equipment, if they're used exclusively for maintaining the rental properties, they should be reported on Form 8825. Depending on the cost, these might need to be capitalized and depreciated rather than expensed immediately.

I was in a similar situation with my rental properties and found https://taxr.ai super helpful for sorting through these partnership tax issues. I uploaded my previous tax documents and got a clear analysis of how to properly categorize these expenses. What helped me most was seeing how the IRS views partner labor vs. actual expenses. The tool showed me exactly where to report items like tools and materials on Form 8825 and when certain larger purchases needed to be depreciated instead of expensed. It also helped determine when my activities qualified as "material participation" for tax purposes.

I tried taxr.ai after reading about it here, and it was surprisingly helpful for my situation. I've been doing my own partnership returns for our three rental properties but always struggled with the proper allocation of expenses. The system analyzed my previous returns and identified several misclassifications I'd been making between ordinary income and rental real estate. I was putting all my tool purchases under rental expenses, but it showed me that some larger equipment purchases should have been capitalized and depreciated. Also helped clarify that my partner's construction work on our properties couldn't be deducted as a labor expense but could affect our status as real estate professionals. Definitely worth checking out if you're handling these complex partnership situations.

For anyone dealing with IRS questions about partnership returns, I had a great experience using Claimyr (https://claimyr.com) to actually get through to the IRS. After spending hours trying to get clarification on a similar ordinary vs rental income issue on our partnership return, I was about to give up getting any official guidance. Claimyr got me connected to an IRS agent in about 15 minutes when I had been unable to get through for weeks. The agent was able to specifically address how to handle partner-performed improvements on rental properties and tool purchases for our Form 1065. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c

I was completely wrong about Claimyr. After my skeptical comment, I decided to try it anyway since I was desperate for guidance on our partnership's rental vs. ordinary income allocation. Got connected to an IRS representative in about 35 minutes (which is remarkable since I had previously spent multiple days trying). The agent clarified that for our situation, since we weren't offering repair services to others, all expenses related to maintaining our rental properties should go on Form 8825. She also explained that while we can't deduct our own labor, the materials and depreciated tools we use for repairs are legitimate rental expenses. This saved us from incorrectly trying to split our activities between two different business types on the 1065.

When I was in a similar situation, I found that maintaining a detailed time log of all repair/maintenance activities was helpful for two reasons: 1) It helped document material participation for real estate professional status 2) It allowed precise allocation of expenses between properties It's also worth considering whether forming a separate property management LLC might make sense in your case, especially if the partners are spending significant time on maintenance. This can sometimes create a cleaner tax structure, though it adds administrative complexity.

Bit late to the discussion but wanted to add that we have a similar partnership structure for our rentals. We confirmed with our CPA that tools under the de minimis safe harbor threshold ($2,500 per invoice for most taxpayers) can be expensed immediately rather than capitalized, even for partnerships.

Great discussion here! I want to emphasize something that might get overlooked - the distinction between repairs and improvements is crucial for Form 8825 reporting. When your partners are doing work themselves, you need to carefully categorize what they're doing. Replacing sheetrock in vacant units and fixing plumbing issues are typically repairs (deductible immediately), but if they're substantially improving the properties beyond their original condition, those costs might need to be capitalized as improvements and depreciated. Also, regarding the Airbnb units versus long-term rentals - make sure you're consistent in treating both as rental real estate activities on Form 8825. The IRS generally considers short-term rentals like Airbnb as rental real estate rather than ordinary business income, especially when the average rental period is 7 days or less and the owner doesn't provide substantial services. Keep detailed records of what work is being performed and the materials used for each property. This will be essential if you ever face an audit or need to justify the repair vs. improvement classification.