If you and one or more other persons jointly own a property that you rent out, and you have not formed a partnership, limited liability company (LLC), or corporation, generally each of you would report your proportional share of the rent income and rent expenses on your individual income tax returns.
As indicated by the IRS in its Publication 541 on Partnerships, an unincorporated organization with two or more members that carries on a business and divides the profits would normally be classified as a partnership for federal income tax purposes. But the IRS goes on to say that co-ownership of property that is rented or leased is not a partnership unless the co-owners provide services to the tenants.
According to the IRS, if you provide substantial services for your tenant’s convenience, such as regular cleaning, changing linen, or maid service, you would have to file as a partnership on Form 1065. In that case you would report all your rental income and expenses on the partnership return. All the income and expenses are passed through to the “partners” and each of your distributive shares of the rental income and expenses would be reported on Schedule K-1. You would then take your share of the net income from the partnership and report it on Schedule E of your individual tax return.
There is an exception when a married couple jointly owns and operates a real estate business. In this case, the couple does not have to file a partnership tax return, even if they provide substantial services for the tenants’ convenience. Instead, they can choose to be treated as a joint venture for tax purposes and report their rental income and expenses on Schedule E of their individual tax return.
The IRS points out that there are certain situations in which you would be subject to self-employment tax on your rental income. For example, if you and your co-owners are real estate dealers; that is, you sell real estate for profit, and you rent real estate that you are holding for sale, you would be subject to self-employment tax on the rental income.
Also, if you own and operate a hotel, boarding house, or apartments and provide substantial services for your tenants’ convenience, your rental income would be subject to self-employment tax. The IRS points out that maid service would be considered a substantial service provided for the convenience of your tenants. But heating and lighting, cleaning stairways and the lobby, or collecting the trash would be services normally provided to tenants and would not make the activity a business subject to self-employment tax.
