1065 - how to report expenses and depreciation related to holding property for investment

Question 1:

I bought properties that I need to fix up and dress up so I can sell them for a reasonable profit in the future. I have other rental properties but I have no intention to rent out these holding properties due to repair and dismal rental market in their locations. Are the expenses related to repair and renovation as well as depreciation can be treated as trade or business activities. These expenses and depreciation should just go to the first page of the 1065.

Answer :

Partnerships use Form 8825 to report income and deductible expenses from rental real estate activities, including net income (loss) from rental real estate activities that flow through from partnerships; 

Do not report on Form 8825 any income or deductions from a trade or business activity or a rental activity other than rental real estate and on Form 1065 SCh K line 2, Net rental real estate income (loss).

---------------------------------------------------------------------

Question 2:

Thanks for the prompt response. I like to confirm that depreciation and expenses related to repair and renovation for a property holding for future resale are a Trade or Business activities. Hence, I should report them on the Deduction Section of the first page of 1065. I would have no income or capital gain until I sell the property which may still be a year or two away.

Answer :

The partnership needs to start with Form 4562, one per property, where depreciation is calculated and reported. From line 22 of 4562, the depreciation numbers flow to line 14 of Form 8825. On 8825, depreciation gets mixed with other expenses and offset against rental income. The bottom line of Form 8825 (line 21) gets distributed between partners and ends up on Lines 2 of their respective K-1s. Enter the net income (loss) from rental real estate activities of the partnership from Form 8825. Generally, the income (loss) reported in box 2 is a passive activity amount for all partners. However, the income (loss) in box 2 is not from a passive activity if you were a real estate professional and you materially participated in the activity.As the partnership had more than one rental real estate activity, it will attach a statement identifying the income or loss from each activity. Depreciation is "built into" these numbers and is not separately reported. On personal returns of the partners, depreciation will not be separately visible. It will end up on the 2nd page of Sch E, buried inside total gain/loss transferred from the partnership via K-1.

NOTE : On line 16a of form 1065, you need to, enter only the depreciation claimed on assets used in a trade or business activity. Enter on line 16b the depreciation included elsewhere on the return (for example, on page 1, line 2) that is attributable to assets used in trade or business activities. You need to complete and attach Form 4562 only if the partnership placed the property in service during the tax year or claims depreciation on any car or other listed property.

Visit Asktaxguru for Online tax help