- The podcast discusses the importance of understanding taxes and filing tax returns.
- It mentions various forms, such as Form 1040 for individual tax returns, Form 1065 for partnership tax returns, and Form 1120S and 1120 for S-Corporation and C-Corporation tax returns, respectively.
- The podcast explains the purpose and content of Form 1040, including reporting income, deductions, and calculating tax owed or refund.
- It highlights the significance of supplemental forms, such as Schedule C for reporting trade or business activities, Schedule E for reporting rental activities, and Form 8582 for tracking passive income and losses.
- The podcast emphasizes the need to monitor and carry forward suspended passive losses and capital losses when switching CPA firms.
- It clarifies that rental properties are typically reported on Schedule E, except in cases where substantial services are provided or when one is considered a dealer of real estate.
- The podcast suggests joining the TaxSmart Insiders group for more detailed information on tax topics.

- LLCs with multiple members are considered multi-member LLCs and are typically taxed as partnerships.
- Rental real estate activities can be reported on Form 8825 for partnerships.
- S Corporations are not recommended for rental real estate, but can be used for fixing and flipping properties or property management.
- S Corporations can help mitigate self-employment taxes by paying a reasonable salary and only paying self-employment tax on that salary.
- Schedule E page 2 of the tax return is where K-1 statements from partnerships and S Corporations are reported.
- Schedule E page 1 is used to report rental properties and can have multiple pages if there are more than 3 rentals.
- Entering K-1s has become more complex and can increase tax return prices, especially with a large number of K-1s.
- Compliance costs for K-1s in multiple states can be significant and should be considered when investing in syndications or funds.

- The speaker advises investors to choose a few states they like and find sponsors in those states to invest in, in order to keep compliance costs low.
- The speaker shares their personal experience of having to file tax returns in multiple states, which increased their tax return price and created compliance headaches.
- They caution against creating partnerships for small investments, as the compliance costs can outweigh the returns.
- The speaker emphasizes the importance of being aware of state compliance issues and the associated costs when investing as a limited partner.
- They highlight the time and monetary costs of reviewing state tax returns, especially for investors in multiple states.
- The speaker mentions the need to understand how states treat bonus depreciation, as it can impact tax liabilities.
- They stress the complexity of the tax code and the costs associated with entity structuring.
- The episode concludes with a preview of the next episode on tax services.

The podcast discusses the importance of understanding taxes and filing tax returns. It mentions various tax forms and explains the purpose and content of Form 1040. The podcast highlights the significance of supplemental forms for reporting specific activities. It emphasizes the need to monitor and carry forward losses when switching CPA firms. The podcast clarifies the reporting of rental properties and suggests joining a tax information group for more detailed information. It explains the taxation of LLCs with multiple members and the use of S Corporations for certain real estate activities. The podcast discusses the reporting of K-1 statements and the compliance costs associated with multiple states. It advises investors to choose a few states to invest in to keep compliance costs low. The speaker shares their personal experience with state compliance issues and cautions against creating partnerships for small investments. The importance of understanding state tax treatment and the complexity of the tax code is emphasized. The episode concludes with a preview of the next episode on tax services.

In part two of our latest series, Brandon Hall and Thomas Castelli break down the key tax forms real estate investors need to understand including Form 1040, Schedule E, Form 8582, 1065, and a lot more!

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You're now listening to the TaxSmart REI podcast.

Need to be aware of if you're going to be paying taxes or have a tax liability to the IRS or other authorities.

put it this way, you're probably going to be paying taxes.

So go back, put an asterisk on what I just said there.

But we're going to be going through Form 1040 and related schedules.

We're going through partnership tax returns a bit, and as corporations, we'll probably touch on some more.

So having said that, we're going to dive into all of that in 1 minute after a quick word from Landlord studio.

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All right, so let's start with the first form, the form everybody should be familiar with unless you've been avoiding taxes your entire life and that's form 1040, the individual tax return.

Maybe we just go off of the ones that are most relevant to real estate investors.

Maybe we just start with Form 1040 is the individual tax return, right?

Your partnership tax return is Form 1065.

Your S-Corporation tax return is 1120S, 1120-S.

And then if you have a C corporation, it's just 1120, form 1120.

So your form 1040, everybody should be familiar with it.

If you don't have real estate, if you don't have a business, if you're not investing in stocks, it should be a pretty simple, straightforward form.

You're going to report your income, any itemized deductions, standard deductions that you have, then it's going to calculate your total tax.

And then you're going to report how much tax you paid in via W2 withholdings or estimated taxes.

And then it's going to basically say your total tax minus your payments equals either the amount that you owe or the refund that you should be getting.

Now, to support the numbers on Form 1040, we have a whole bunch of supplemental forms.

So that's if you're running a trade or business.

If we weren't running it through a partnership, we would report it on Schedule C, even if it was a single member LLC.

So single member LLCs are still reported on Schedule C of your Form 1040.

So you're going to report all sole proprietorship activities that are self-employment activities.

Then you have Schedule E, which is for passive activities or I should say rental activities.

So you're going to report rental real estate, royalty income on Schedule E.

And on Schedule E, that's where you're also going to make that real estate professional status, election.

It's more of like a check mark in the software and it makes it flow to a specific box on Schedule E.

So Schedule E, you're going to report all your rentals that are not held in partnership LLCs or in S-Corps or C-Corps.

So even if you have a single member LLC that's owning the rental real estate, you're still going to report it on Schedule E.

And just to clarify, single member LLC is the default tax status is partnership tax status, but don't get that confused with an actual partnership.

So single member LLC, if you 100% own it, you're still going to report it on Schedule E.

You're not going to go and report it on a Form 1065 where you would an actual partnership.

But yeah, you report all your rents, all your expenses, depreciation on Schedule E.

Now, Form 8582, in my opinion, is 1 of the most important forms that real estate investors need to know.

That form is going to report the aggregate of all of your passive income and passive losses from all of your passive activities.

So it's important to look at that form annually.

It's really important to look at that form annually and just understand how much suspended passive loss you are carrying forward.

Suspended passive losses that you're carrying forward can be beneficial in years that I'm going to liquidate real estate, right?

So maybe instead of doing a 1031 exchange, I have enough suspended passive losses to just sell the property outright and I release the suspended passive losses in the year of sale.

So form 8582 will help give you that information that you can use every single year that you were investing in rental real estate.

Additionally, form 8582 is really important to track on an annual basis.

So I even recommend just creating a little spreadsheet and just label it Form 8582 and put that suspended passive loss that you're carrying forward every single year, label the year, put the loss number.

Because sometimes what we've seen when people switch CPA firms is the new CPA firm forgets to look at form 8582 and carry forward the suspended loss.

So all of a sudden, like 2021, they had a loss of $100,000.

And then on the 2022 tax return, the loss is 0.

The suspended loss that was carried forward is 0.

Well, it turns out the taxpayers switched CPA firms and the new CPA firm just forgot to carry that forward.

And it happens to the best firms because you get into peak tax season and everybody's just trying to grind and get the returns out the door.

And so it's really important for you to know what to look for so that you can make sure that you catch these potential mistakes and get them corrected.

Because we have seen it where people are, you know, multi years into their tax filings and they, you know, you do like a retroactive look back and you see those suspended losses that never got carried forward simply because we switched CPA firms and the new firm forgot to look at that carry forward loss.

The same statement on Schedule D, by the way, if you're carrying forward a large capital loss from stock sales or anything like that, make sure that gets carried forward as well.

Anytime that you switch firms, you got to double-check this stuff.

Form 8582, Schedule D, Because the firm has to go in manually, typically manually, unless your prior firm's nice enough to release the file, like the actual software file.

But your new firm has to manually go key in all those losses that are carrying forward.

So you have to be very aware of that in years that you switch firms.

Typically, once you're with that same firm, it's fine because they just do a big rollover every single year.

They roll the past file into the new file and all the suspended losses move into the new file.

It's less of a lift on you from a quality check perspective when you are with the same firm.

And that's 1 benefit of being with the same firm for a long time is that you just get to benefit from that rollover and it makes things on you easier.

You have a little less worry on those mistakes, but if you're switching firms, you got to check those 2 forms.

And you know, something that I just wanted to make sure we touch on here is there's some confusion on when rental properties are reported on Schedule C and not Schedule E.

I figure we might want to just address that here to clear up any of that confusion.

So typically rental properties are not going to be reported on Schedule C even when they're short-term rentals unless, okay, unless you are providing substantial services to your guests and again for anybody who does not know what substantial services are substantial services are services that you'd find in a hotel things like daily cleaning while the guest is in the unit, daily meals while the guest is there, ride vouchers providing cars for them to drive around and while they're there, concierge services, anything you would find in a hotel that goes above and beyond simply renting out the space for them to use, may be considered substantial.

So that's the time when we report on Schedule C.

And there's a whole bunch of things that go into determining whether or not you're a dealer or not.

But typically if you're fixing and flipping properties or you're developing properties, you will be considered a dealer of real estate in many cases, and you're going to have to report that on schedule C.

So those are the times you're reporting on schedule C.

If you're merely renting out the property for 7 days or less and not providing substantial services, it's still going to go on schedule E.

We have all this stuff detailed out in the TaxSmart Insiders group.

If you want to check that out, head on over to TaxSmart Investors and sign up for a subscription, go ahead and a free trial and go ahead and check out those articles where we have all that detailed out citations and all the beautiful stuff that you and all the tax professionals out there like to see.

I want to move right along to the partnership tax return and the partnership tax return.

That's form 1065 and usually going to file a partnership tax return when you have a business that you're operating with multiple people.

So if you have an LLC with multiple members that's gonna be considered a multi-member LLC and that's gonna be traditionally taxed a partnership unless you elect to have it taxes in S corporation or C corporation, which typically you do not want to do with rental real estate.

All right, you do not want to use S corporations or C corporations for rental real estate in many cases.

So partnerships, multi-member LLCs, multiple members.

That's when you have a partnership typically, and rentals, okay, your rental activities can be reported on form 8825.

It's kind of like the Schedule E of the partnership tax return.

And when you're doing a partnership tax return, there's some additional things you'll need to be aware of like you need to have a balance sheet in some cases so you want to make sure that your your bookkeeping and your financial reporting is up to date and accurate and is complete so when you hand that off to your CPA or to your tax preparer they can file that for you and meet all those requirements and all that good stuff.

Now, so the partnership, all right, does not pay taxes.

What the partnership does is it passes through income, deductions, credits, and all that good stuff to each individual partner via Form K-1, all right?

So you receive this nice, beautiful K-1 statement from the partnership and you reported that on schedule E page 2 of your form 1040 and that's where all of that all of your income expenses etc.

Deductions all that good stuff is reported on your 1040.

Alright, moving right along to S Corporation.

So S Corporation is another commonly used business entity for people within the real estate industry.

And again, just want to repeat that typically you do not want to use an S-Corporation for rental property.

You either want to have it as a sole proprietorship or an LLC that's disregarded for tax purposes, so it flows directly to your 1040.

Or if you have multiple members, you're going to want to use that partnership for rental real estate.

Now, for the S corporation, so when does it make sense to use an S corporation?

Well, it could make sense to use an S-Corporation when you are fixing and flipping properties or your property manager or consultant.

Basically, when you have an active business and it's not rental, properties in S-Corporation may make sense.

And the reason why S-corporations tend to be used are to help you mitigate the exposure to the self-employment tax, right?

So the way that works is basically in a partnership, what ends up happening is you pay taxes on the profits of the partnership that are allocated to you.

In addition to paying taxes on those profits, you're going to pay self-employment taxes up to a certain threshold.

The self-employment tax is 15.3% and is typically taxed on up to $142,000 of income.

And again, it increases for inflation, but with an S corporation you can pay yourself a salary.

It can't just be something you pull out of a hat.

All right, so you want to work with a tax professional to determine what that means for you and you only pay the self-employment tax on that salary.

Right, You don't pay the self-employment tax on the whole entire profits, which is why corporations tend to be used in the first place.

Give you a quick example of what that may look like.

Let's just say you generate $100,000 in net income.

You get, if you don't use an S corporation, you get the benefit or you get, you get the plate, you get the honor of paying the IRS 15.3% or $15,200 in self-employment taxes on top of your federal tax rate, state taxes and all that good stuff.

But let's just say you're able to justify a reasonable salary of $40,000.

The sake of this example, I'm using nice and round numbers.

Well, now you're only paid 15.3% tax on that $40,000.

And we're looking at here, that's going to be roughly $6,000, give or take, which means you're saving.

I'm just bull parking these numbers here for the sake of an example.

Well, that's why people use S corporations now with an S corporation, much like a partnership, you ended up receiving a form K 1, right?

Because the S corporation does not pay taxes.

It just like a partnership passes through the income deductions, credits, and all that good stuff down to each individual partner on that form K-1, which is again reported on your schedule E page 2 of your tax return where each individual stakeholder shareholder rather pays taxes.

If you are receiving a bunch of K ones and you're looking for a you're looking for the place to go to in your tax returns to understand what all like if all the K1s were entered appropriately, the first place that you look is Schedule E page 2.

So Schedule E page 1 is going to show all of your rentals.

And there might be several Schedule E page 1s, by the way.

So if you have like 10 rentals, there's going to be multiple copies of Schedule E page 1.

I know that sounds weird, but page 1 is always used to report your rentals and it holds how many rentals?

I'm actually going to pull this up real quick.

So if you have, let's say that you have 9 rental properties, you will see 3 Schedule E page ones.

Okay, so you're gonna have Schedule E, and then you're gonna scroll down, you're gonna see it again, and you're gonna scroll down, you're gonna see it again.

All right, and it's got the 3 columns, ABC with all your rentals.

So you're gonna have 3 of those pages if you have 9 rentals, right?

Then below that, you'll see Schedule E page 2.

So Schedule E page 2 comes after all of your Schedule E page ones that include all your rentals.

Schedule E page 2 is going to show you all of your passive activities from partnerships and corporations.

That's in part 2, and it's going to consolidate it on, I believe it's line 32.

So part 2, schedule E page 2 shows you all of your K1s essentially.

Now if you have many K1s, then what it's going to say is it's just going to say C statement X, you know, C statement 1, C statement 25, whatever statement it is in your returns.

And then what you have to do is you have to scroll down your tax returns until you find the section where they list all the statements.

And most softwares are different, but most of the time the statements are going to be at the end of the federal return package.

So all the way to the end before the state return, you'll find the statements section and it'll be all the supporting statements, all the supporting calculations, everything.

That's what schedule E page 2 says to look for.

And on statement 25, you will see every single 1 of your passive activities listed and you can spot check it from there.

So you want to pull the K1s up and make sure they are all entered correctly.

Any other forms you want to touch on here before we wrap this 1 up?

No, but I do just want to say that I think that the general understanding is that entering K1s is really easy.

So if I have 10 K-1s, my return should not be that expensive if all I have aside from that is a Form W-2.

I'm just going to put this out there just from what we are seeing so that everybody can understand going into next year.

Taxes have gotten increasingly complex since the 2017 Tax Cuts and Jobs Act.

Those K-1s, while they were probably easy to enter years ago, They're no longer easy to enter.

And we're seeing return prices go sky high when you have a lot of K-1s.

Because there's a lot of supplemental information that we have to key in.

Think about the 199A deduction, business interest limitations.

And there's a lot of states that conform and don't conform and conform in different ways to various provisions of the federal tax code, such as bonus depreciation and things like that.

So all of a sudden, these K-1s, well, not all of a sudden, but over the years, the entering K-1s and understanding the law around K-1s, not only from a federal perspective, but also from a state perspective has gotten more and more complex.

So if you have, you know, 50 K ones, expect a very pricey tax return.

And you need to factor that into your investment decisions as well.

When you're placing capital into syndications and into funds and private investments and things, you need to understand what that K1 is going to look like.

Because 1K1, 1K1 in a fund that invests in 50 different states, that 1K1 could cost you thousands of dollars in compliance fees with your firm.

That's what we're seeing on our end and also with the other firms that we have relationships with that service real estate investors across the United States.

So be very cognizant of that because it's an underlying factor that could blow up your return on investment.

And I invested in a fund recently, I think last year, and I got the first fund I invested in versus more like single asset syndications.

And I think I had 32 state K1s supporting because it invested across multiple states.

Right now, it just becomes increasingly complex.

And I know limited partnerships, you know, it sounds all sexy.

It is passive, because you don't have to make any management decisions.

However, like Brennan said, you do have to factor in all the compliance costs that will rack up if you're just willy nilly.

My personal 2 cents on this, if you could try to pick a few states you really like, find some sponsors that operate in those states and go and invest in those states.

So then you're keeping your compliance costs low because otherwise you might blow up with 32 K ones.

And- Can I ask you, what did that do to your, so you had that 1K1, but like 30 different States, what did that do to your tax return price?

And I, it's the first year, and I've mentioned this on other podcasts that I did not actually file my tax return.

past- It's also be clear that our firm did not file it for you.

We like to get the, I know that probably sounds weird for people, but we actually like to get other opinions on our own returns too, so.

So what ended up happening was we didn't file in all 32 states because I ended up having losses in many of those states and not all of them needed to file the K ones to maintain those losses.

But I still had a file in I forgot how many states had a file and I had a file in like 10 states or something like that.

And it's just like all this stuff and then you're a tax attorney to review this bigger tax return.

It just becomes a compliance, becomes a compliance nightmare and what becomes a passive investment, you know, easily becomes, you know, you make up for all that passivity by having to review and having to deal with all these compliance headaches.

Now, 1 more thing I want to throw in there while we're on this topic.

So what I did was a few years ago, now this is I think, before I may have even worked at this firm, I invested with a partner.

So we partnered up, we created an LLC, and we put money into the partnership and invested in a syndicate, right?

And then every single year had to file a partnership tax return on top of that.

Now, I Being the CPA, I said, hey, look, I'll file that tax return every year.

And what was supposed to be a simple past investment turned into, you know, a few hours of work every single year around the deadline to do that.

Or if I would have, you know, outsourced that someone else file it, would it turn into like, you know, 1000 plus dollar tax return on a year over year basis, just for a nice, simple passive investment.

So my 2 cents is if you're going to be making investments, limited partnerships, a like we discussed before, just be aware of the state compliance issues that you're going to have to face, or your CPA that you're going to have to pay is going to face.

And B, don't, I mean, unless you're talking about substantial dollars, and I'm talking about hundreds of thousands of dollars, don't create a partnership just to go and invest in the syndicate, because you're creating another layer of compliance, another layer of cost is going to factor into your returns.

Now like I said, if you have, if you're investing several hundreds of thousands of dollars as a partnership, it may be all right because your compliance cost is going to be a fraction of your returns.

The smaller the amount you invest, the smaller your returns, generally speaking.

And the higher percentage that compliance cost is going to have of your overall returns, it's going to nerf your benefits.

The bottom line is just be aware there are state compliance issues when you're investing as a limited partner, just be aware of them and be aware there's usually going to be a cost associated with it if you're going to have a third party do it, which you should when you're operating that level, for sure.

You know, going back to your K1 story, it probably raised your cost by a few hundred bucks, probably if not by 500, 750 or 1000 bucks.

I mean, so that's 1K1A lot of different states, but you also mentioned something else that I want to touch on.

Reviewing all of those state returns cost you time, Like it's going to cost you a weekend.

If you don't know, I mean, look, like we specialize in tax, right?

But even me reviewing all these state returns, it's insane.

And you have to sit there and refresh on all the state rules and you have to pull up the regulations per state and really understand if everything's flowing correctly.

I mean, it's not you can't just passively sign off on these returns and think that they're good to go.

You have to actually view them and every single state return that gets added to your plates at least 1 and a half to 2 hours to review effectively for somebody that doesn't know that state's tax law very well.

You know, I can review North Carolina's state return in 30 minutes, but Arizona's takes me a while.

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Real Estate Investors Need to Understand These Tax Forms (Form 1040, 1065, K-1, Schedule E, 8582)