Married couple with rental property LLC - Is filing Form 1065 required?

Thanks for the quick response! What are those alternatives you mentioned? This all sounds more complicated than we expected when setting up the LLC. We were just trying to protect ourselves from tenant lawsuits.

You have a couple of options that might simplify things: One alternative is to elect to treat the LLC as a "qualified joint venture" if you meet certain conditions. As a married couple who are the only members of the LLC, you may be able to make this election, which allows you to skip filing Form 1065 and instead report the rental income and expenses directly on your joint tax return (Schedule E), with each spouse reporting their respective share. Another option is to consider a single-member LLC instead. If you're in a community property state, one spouse could be the sole member of the LLC, which is treated as a "disregarded entity" for tax purposes. This means no separate partnership return is needed - everything just goes on your personal return.

How does the system work? Do they have actual tax pros reviewing the documents or is it all automated? I'm dealing with a similar situation but with two properties in an LLC with my brother.

I'm skeptical about these online tax tools. Did they actually give you specific advice for your situation? I've tried some free ones that just gave generic answers that I could've found on Google.

The system uses AI to analyze your documents and tax situation, but they also have tax professionals who review complex cases. It's way more detailed than generic advice - they identified specific sections of the tax code that applied to our situation and explained how they applied to us. For your situation with your brother, they would probably analyze the ownership structure differently since you're not a married couple - that changes the qualified joint venture eligibility. You'd get specific advice for your circumstances rather than generic info.

How does that service work? I thought you couldn't pay to get through to the IRS faster. Is this some kind of premium service the IRS offers?

This sounds too good to be true. The IRS phone system is deliberately designed to be impossible to navigate. How could some third party service possibly get around that? I'm calling BS.

The service doesn't pay the IRS or use any special access - it just automates the frustrating phone tree process for you. It uses technology to navigate the IRS phone system and wait on hold so you don't have to. When it reaches an actual agent, it calls you and connects you directly to them. It's not an IRS service - it's a third-party service that deals with the nightmare of waiting on hold. Think of it like hiring someone to stand in line for you at the DMV, but for phone calls instead.

Did transferring the property to the LLC cause any problems with your mortgage? I've heard some banks consider that a change in ownership that could trigger the due-on-sale clause.

That's a really good question and something you definitely need to check. In our case, we had to get permission from our lender first. Some lenders are fine with it as long as the same people own the LLC who were on the mortgage, but others might not allow it or might require refinancing. We also had to check with our insurance company to make sure our policy would still cover the property after the transfer. And in some states, transferring property can trigger transfer taxes or reassessment for property taxes.

You're partly correct, but there's an important distinction. While married couples can elect qualified joint venture status for a partnership, when an LLC is involved, it gets more complicated. In some states, forming an LLC creates a separate legal entity that requires partnership treatment regardless of marital status. That said, the IRS did issue guidance in 2007 that allows married couples in certain situations to treat their LLC as a qualified joint venture. The key is whether state law recognizes the LLC as a separate entity from its owners.

This is a really important point that often gets overlooked! The self-rental rule can definitely come into play here. It would mean any rental income would be treated as non-passive, but losses could still be passive. It creates a mismatch that can be frustrating from a tax perspective.

I hadn't even thought about that aspect! In our case, we're not using the property for any business we work in - it's just a residential rental to unrelated tenants. Would the self-rental rule still apply?

Good news - the self-rental rule typically doesn't apply in your situation since you're renting to unrelated third-party tenants, not to a business entity you're involved with. The self-rental rule usually comes into play when you rent property to a business you materially participate in (like renting office space to your own S-corp). However, there's still the question of whether your rental activity through the LLC would be considered passive or non-passive based on your level of material participation in managing the rental. Since you and your spouse are actively managing the rental property, you might qualify as real estate professionals depending on your time spent and other factors, which could affect the passive activity loss rules.

This is exactly the kind of comprehensive advice that's been missing from this discussion! The record-keeping point is so important - I learned this the hard way when the IRS questioned some of our LLC deductions last year. Even though we qualified for the qualified joint venture election, they still wanted to see that we were operating the LLC as a legitimate business entity. One thing I'd add is to make sure you're also documenting the business purpose for the LLC beyond just liability protection. The IRS likes to see that there's a legitimate business reason for the structure, especially when it comes to rental activities. Things like marketing efforts to find tenants, property management activities, maintenance scheduling, etc. all help establish that business purpose. @da3c09432493 you're spot on about state requirements too. In my state, we still had to file an annual LLC report and pay franchise tax even though we elected qualified joint venture status for federal purposes. It's definitely not a set-it-and-forget-it situation.

@92434574153c Great point about the March 15th deadline! I wish someone had mentioned that earlier - we almost missed it last year because I was focused on the April individual deadline. The penalty structure for partnerships is no joke. Your suggestion about revisiting the LLC structure entirely is really insightful. We set up our LLC thinking it was the obvious choice for liability protection, but after going through a year of partnership tax filings and all the associated complexity, I'm starting to wonder if we overcomplicated things. The guaranteed payment approach you mentioned is interesting - we ended up doing something similar after our CPA recommended it. The LLC pays us rent for using the property, which creates a clean deduction for the partnership and lets us handle depreciation on our personal return. It felt weird at first "paying ourselves rent" but it actually simplified the tax reporting quite a bit. Has anyone here actually compared the liability protection of an LLC versus just having really good umbrella insurance coverage? I'm curious if the tax headaches are really worth it for a single rental property.