Although filling out IRS tax forms each year isn’t any fun, it is a necessary part of real estate investing. Thankfully, the tax forms for rental properties aren’t complicated. If you are investing as a member of a partnership or as an S corporation, you will need to report your earnings on Form 8825.
Making sure you fill out Form 8825 correctly is vitally important. Accurate financial reporting is required and could help you determine if you qualify for certain tax deductions.
What Is Form 8825?
IRS Form 8825 is a special tax form specifically for reporting the rental income and expenses of a partnership or S corporation. The form allows you to record the financial information for eight different properties. If you have more than eight, the additional properties can be reported on a second Form 8825.
Form 8825 is not to be used by sole proprietors or single-member LLCs. If you are filing as a sole proprietor or single-member LLC, you will record your rental real estate activities on Schedule E (Form 1040), which is used to report supplemental rental real estate income and expenses.
Who Uses Form 8825?
Form 8825 reports the rental income of partnerships or S corporations in the United States. Suppose your S corporation owns two apartment buildings, a self-storage facility, and three single-family rental homes. In that case, you will need to include the income and expenses of each property on the form.
If you are reporting partnership income, Form 8825 should be attached to Form 1065 (U.S. Return of Partnership Income). If you report S corporation income, Form 8825 should be attached to Form 1120S (U.S. Income Tax Return for an S Corporation).
It’s important to point out that Form 8825 can be used if your partnership is an LLC, but it doesn’t have to be used for all LLCs. A single-member LLC, for example, would use Schedule E (Form 1040).
What Type of Expenses Go On Form 8825?
The IRS only taxes rental real estate activity on the net income earned. Net income simply refers to gross income less expenses. To derive the taxable net income, Form 8825 includes lines to enter certain expenses, which include:
- Advertising
- Auto and travel
- Cleaning and maintenance
- Commissions
- Insurance
- Legal and other professional fees
- Interest
- Repairs
- Taxes
- Utilities
- Wages and salaries
- Depreciation
- Other
If you aren’t sure whether a particular operating expense qualifies, check the Internal Revenue Service website. You can also consult a tax professional like a CPA to clarify the issue.
How Do You Fill Out Form 8825?
Although IRS form 8825 may appear somewhat intimidating when you first look at it, it’s not complicated. The form is logical and easy to follow. The required information for each line is clearly labeled, and the instructions are included when you download the form.
- Enter your name and employer identification number (EIN). It’s important to ensure you include this information on all the tax forms you submit. This will help to prevent errors or delays if a form is lost or misplaced.
- List the physical address of each property you own. You must also include the property type (multi-family, single-family, short-term rental, etc.). You will also need to indicate the number of days the property was rented and the number of days it was used for personal use (if any).
- Enter the gross income for each property. Be sure to match the right income to the right property. For example, the income you list in column A must match the property you listed in row A.
- Enter all of your expenses for each property. If you have any expenses not listed, you can include them in the section labeled “Other.” Add all of your expenses for each property to determine the total. You then subtract the total expenses from the gross income for each property to determine the income or loss.
- Add your gross rental income (line 2, columns A-H) and gross rental expenses (line 16, columns A-H).
- Enter the net gain or loss from the sale of rental real estate property. This information is found on Form 4797, Part II, line 17.
- Enter your net income or loss from any rental real estate activity that is from a partnership, estate, or trust where the S corporation or partnership is a beneficiary or partner. This information is obtained from Schedule K-1.
- Enter the names and EIN of the partnerships, estates, or trusts from the previous step.
- Determine your net rental real estate income or loss. This is done by adding everything in steps 5-7. You will then enter the amount either on Form 1065 (for partnerships) or Form 1120S (for S corporations).
What Does a Practical Example Look Like?
The best way to understand how to fill out Form 8825 is with a practical example. Let’s say you are in a real estate partnership that owns the following properties:
- One multi-family property
- Three single-family homes
- Two self-storage facilities
Because you are in a partnership and your rental real estate activities are not from a sole proprietor or single-member LLC, you must complete Form 8825 to report your rental real estate income.
After filling out the name and EIN number on Form 8825, you will enter each property’s physical address and the number of days it was used as a rental in rows A-H. Be sure to list each of the single-family homes and self-storage facilities separately.
You will then enter your gross rental income and expenses for each property in columns A-H to obtain your net gain or loss. Next, enter the income or loss from Schedule K-1 on line 20a. Enter the name of each partner and the EIN, and then combine lines 18a-20a. You will then enter the result on either Form 1065 (for partnerships) or Form 1120S (for S corporations).
That’s all there is to it. Although many tax forms have earned reputations for being difficult and time-consuming, Form 8825 is simple and easy.
How Do You List LLCs on Form 8825?
Many real estate investment partnerships form limited liability companies (LLCs) to protect their personal assets in case they are sued. If someone slips and falls in a rental unit, the owner’s bank accounts, homes, and other personal assets are protected if the suit is successful. LLCs can be either single-member (one owner) or multi-member.
Because Form 8825 is only for partnerships or S corporations, you will only list LLCs on the form that are either partnerships or S corporations for tax purposes. If you have a single-member LLC, rental income will be reported on Schedule E (Form 1040).
Is Form 8825 the Same as Schedule E?
Form 8825 and Schedule E (Form 1040) are similar insofar as they are used to report rental real estate income. They are, however, two separate and distinct forms.
The primary difference between the two forms is that Form 8825 is used if you declare on behalf of a partnership or S-corporation. On the other hand, Schedule E is used to report an individual owner’s earnings. Schedule E is also used to report other forms of supplemental income.
The process for reporting rental real estate income and expenses on Schedule E is similar to Form 8825. You must include the physical address of each property and its type and the number of days it was used as a rental. You will then enter your gross rental income and itemize your expenses to determine your profit or loss for each property.
What Is Schedule K-1?
Schedule K-1 is a form you will need to fill out to obtain important information included on Form 8825. The form determines the net income or loss from rental real estate activities from partnerships, estates, and trusts. Instead of reporting the full income or loss, Schedule K-1 determines each partner’s share.
Let’s assume a partnership has four members and earns $200,000 annually. Each partner will complete a Schedule K-1 to report $50,000 in individual earnings (assuming the profit is split evenly). This amount is then transferred to line 20a of Form 8825.
The Bottom Line
If you are a sole proprietor or a single-member LLC, you don’t have to worry about Form 8825. If your rental real estate activities are part of a partnership or your business is an S corporation for tax purposes, however, you must include the form when submitting your income taxes.
Thankfully, Form 8825 isn’t complicated or difficult to understand. It can be filled out in just a few minutes, which allows you to finish your taxes and get back to doing what you do best—closing more deals and growing your portfolio.
Dreading tax season?
Not sure how to maximize deductions for your real estate business? In The Book on Tax Strategies for the Savvy Real Estate Investor, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year—but to also prepare an ongoing strategy that will make your next tax season that much easier.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
