Struggling with 1065 Form - Ordinary vs Rental Real Estate Income Classification

This is a common point of confusion! In most cases, all income and expenses related to rental real estate activities should be reported on Form 8825 (Rental Real Estate Income and Expenses of a Partnership), which feeds into line 2 of Form 1065. The fact that the partners are personally performing maintenance and repairs doesn't change the fundamental nature of the income as rental income. The tools and equipment they purchased for property maintenance are considered expenses against the rental income, not separate business activities generating ordinary income. These expenses would generally go on Form 8825, Part I, line 14 (Repairs and maintenance) or possibly line 18 (Other expenses) depending on the exact nature. For larger purchases that might need to be capitalized, you'd handle those through depreciation.

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I was struggling with almost this identical issue last month - partnership with mixed rental types and owners doing their own repairs. I was skeptical about using online tools after being burned before, but I decided to try https://taxr.ai after seeing it recommended. It completely clarified my confusion about Form 1065 reporting for active rental owners. The system analyzed my scenario and clearly explained how the self-performed maintenance should be handled on Form 8825 rather than as ordinary income. Even better, it provided specific line references and IRS guidance I could cite in my workpapers. The partners were impressed with how thoroughly I addressed their situation. I'm actually going to use it again for another complex partnership return I'm working on this week.

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I handle several real estate partnerships, and the distinction really depends on the operating agreement and how the partnership is structured. If the partners receive guaranteed payments for services performed, that's treated differently than if they're just active in managing their investment. From what you described, it sounds like they're just active owners taking care of their own properties. In that case, all expenses and income related to the properties would go on Form 8825 as rental activities. The tools they purchased would be deductible expenses against the rental income (either as repairs/maintenance or capitalized if they meet the capitalization thresholds).

Did anyone mention material participation rules yet? I think OP needs to consider whether partners are materially participating or not which can affect how passive vs non-passive income/loss is allocated on K-1s. If they're spending significant time on repairs and management, they might hit the material participation threshold.

Great question! I've dealt with similar partnership situations involving active real estate management. The key is understanding that the nature of the income doesn't change based on who performs the work - it's still rental real estate activity. For your 1065 with mixed rental properties, everything should be reported on Form 8825 (Rental Real Estate Income and Expenses). The tools and equipment they purchased for property maintenance are legitimate business expenses that reduce the rental income, typically reported on line 14 (Repairs and maintenance) or line 18 (Other expenses). The fact that they're doing the work themselves actually strengthens the case that this is rental activity rather than a separate service business. If they were providing substantial services beyond normal property management (like daily housekeeping for short-term rentals), you might need to consider whether some activities rise to the level of ordinary business income. One thing to watch for: if any of the tool purchases are substantial enough to require capitalization rather than immediate expensing, you'll need to depreciate those over their useful life. But for typical maintenance tools, they're usually fully deductible as current expenses. The partnership structure keeps everything together on one return, but make sure you're properly tracking each partner's level of participation for the K-1 passive/non-passive determinations.

I've handled several similar partnership returns with active real estate owners, and you're right to be thoughtful about the classification. The good news is that in most cases, all of this activity stays on Form 8825 as rental real estate income and expenses. The key principle is that when partners perform maintenance and repairs on their own rental properties, it's still considered part of the rental real estate activity - not a separate business generating ordinary income. This is true even when they're very hands-on with the work. For the tools and equipment they purchased, these are legitimate rental expenses that should be reported on Form 8825. Smaller tools (hand tools, basic equipment) typically go on line 14 as repairs and maintenance expenses. Larger equipment purchases might need to be capitalized and depreciated depending on cost and useful life. One area to pay attention to with mixed rental types: if the Airbnb properties involve substantial services beyond typical property management (like daily housekeeping, concierge services, meal preparation), those activities could potentially be treated as ordinary business income rather than rental income. But basic services like cleaning between guests and general property maintenance still qualify as rental activity. The material participation rules others mentioned will affect the passive/non-passive classification on the K-1s, but won't change how the income is reported on the 1065 itself.