"I set up an LLC for my rental — does that change my taxes?"
The answer is: it depends almost entirely on how many members your LLC has. Get this wrong and you could be filing the wrong forms entirely — or handing your accountant books that don't match what the IRS needs.
The short version
Single-member LLC
Disregarded entity by default. Your rental income and expenses flow to your personal return on Schedule E — exactly as if you owned the property in your own name. The LLC protects your liability. It doesn't change your tax filing.
Multi-member LLC
Taxed as a partnership by default. The LLC files its own return (Form 1065) by March 15, then issues each partner a K-1 showing their share of income, expenses, and deductions. Partners report that on Schedule E Part II of their personal returns.
Most rental LLCs are one of these two. The rest of this post goes deeper on each.
Single-member LLC: the IRS doesn't care it exists
From a federal tax perspective, a single-member LLC is invisible. The IRS calls it a "disregarded entity" — it passes income and expenses through to your personal return as if the LLC wasn't there.
You report rental income and expenses on Schedule E, same as you would without the LLC. All the same rules apply: depreciation over 27.5 years, deductible expenses, passive activity loss limits. The LLC protects your personal assets from liability — that's the value. Tax-wise, nothing changes.
Some states require single-member LLCs to file a state-level return even when the IRS doesn't require a federal one. Check your state — California, for example, has a mandatory $800/year franchise tax regardless.
Multi-member LLC: now you need partnership accounting
Add a second member to your LLC and the whole picture changes. The IRS treats it as a partnership, which means:
A separate tax return: Form 1065
Form 1065 is the partnership information return. It's due March 15— two months before personal returns. The LLC itself doesn't pay tax. It passes income, deductions, and credits through to partners via K-1s.
K-1s for each partner
Each partner gets a Schedule K-1 showing their allocated share of the LLC's rental income, deductions, and depreciation for the year. Partners need this to file their personal returns — which is why the 1065 is due two months early.
Capital accounts
Partnerships must track each partner's capital account — a running record of their equity stake. It starts with their initial contribution, goes up with income allocations and additional contributions, and comes down with distributions and losses. The IRS reviews this on audit. If the accounts don't reconcile, that's a problem.
Profit and loss allocations
Income, deductions, and depreciation all get allocated between partners according to the operating agreement — typically by ownership percentage. A 70/30 split means 70% of everything flows to the majority partner's K-1. Your accounting needs to track this throughout the year.
The most common partnership accounting mistake
Treating a multi-member LLC like a sole-owner situation — tracking income and expenses in a spreadsheet without maintaining capital accounts or allocation records. The result is a very unpleasant March 15 where your accountant has to reconstruct everything from scratch. That bill is not small.
What about S-Corp status?
LLCs can elect to be taxed as an S-Corp, but it's almost never the right move for a rental LLC. S-Corp benefits come from splitting income between salary and distributions to reduce self-employment tax — but rental income isn't subject to self-employment tax in the first place. The added complexity (payroll, separate S-Corp return, reasonable salary requirements) buys you nothing. Skip it.
Deductions are the same regardless of structure
Whether single-member or multi-member, the deductible expenses are identical: depreciation, mortgage interest, property taxes, insurance, repairs, management fees, utilities you pay, legal and accounting fees. The difference is just where they end up — directly on your Schedule E, or allocated via K-1 from the partnership return.
Why the accounting structure matters from day one
Solo landlords have it simple — most tools handle their situation fine. Multi-member LLC owners need software that actually supports partnership accounting: double-entry books, capital account tracking, proper depreciation. An income/expense tracker isn't enough.
Kulta handles both paths. Start free at kulta.app.