We recently received a great question to the Bukers Hotline from an analyst who was spreading her borrower’s tax returns in the Bukers Taxanalysis and BTA Pro software. The borrower operated multiple rental properties through an LLC; for this article let’s call this ABC Rentals, LLC. The borrower provided the analyst with K-1s from ABC Rentals, LLC for the 2017 and 2018 tax years, but did not have any K-1s for 2019 or 2020. The analyst’s question to the Bukers Hotline was “Why would my borrower not receive K-1s for 2019 and 2020? I know they still own these rental properties…”

If the borrower stopped providing copies of his K-1s after 2018, our first step would be to confirm that the borrower did not sell the rental properties or sell his ownership interest in the holding company of the properties. After the analyst confirmed that the borrower still owned and operated the rental properties under ABC Rentals, LLC, we now need to analyze the transactions of ABC Rentals, LLC. This entity was filing Form 1065 partnership tax returns for the 2017 and 2018 tax years. The K-1s from those tax years showed that the borrower had a 50% ownership interest in the LLC. This fact is very important for the analyst’s question because it shows that the borrower owned these properties with at least one other partner. Our team directed the analyst to look at her borrower’s 2019 Form 1040 Schedule E.  Here the analyst found the income and expenses reported from the same rental properties that were formerly included on the partnership tax returns for ABC Rentals, LLC.

This was the “Aha” moment. In this case, the borrower bought out his other partner’s ownership interest in ABC Rentals, LLC at the end of 2018 and now wholly owned the LLC. An LLC with at least two members is classified as a partnership for federal income tax purposes (unless it elects to be treated as a corporation). For income tax purposes, an LLC with only one member (a single-member LLC) is treated as a disregarded entity. The income from a disregarded entity would not be reported on a Form 1065 Partnership Tax Return because there is only one owner of the business; in other the words the business is no longer a partnership. Instead, the income and expenses from the single-member LLC will be reported directly on the owner’s individual Form 1040. This particular borrower wholly owned ABC Rentals, LLC starting in 2019, so the entity is treated as a disregarded entity for income tax purposes and rental income will now be reported on the borrower’s Schedule E as part of his Form 1040. While the analyst did not receive K-1s for 2019 and 2020, the income was still included within her borrower’s provided tax returns.