Single-member LLC: disregarded entity
A single-member LLC is a disregarded entity for federal income tax purposes — the IRS treats it as if it does not exist. The owner reports all rental income and deductions, including depreciation, directly on Schedule E of their personal return, exactly as if they held the property in their own name. The LLC wrapper provides liability protection without affecting the tax calculation.
Multi-member LLC: partnership taxation
A multi-member LLC is taxed as a partnership (unless it elects corporate treatment). The LLC files Form 1065 and issues a Schedule K-1 to each member showing their share of income, losses, and depreciation. Each member reports their K-1 share on their personal return. Depreciation is calculated at the LLC level on the property's full basis; each member's share is proportional to their ownership interest.
S-Corp or C-Corp elections
An LLC can elect to be taxed as an S-Corporation or C-Corporation. S-Corp status preserves pass-through taxation but has restrictions on shareholders and creates complications (salaries required, no allocation flexibility). C-Corp status introduces double taxation on distributions. Most real estate investors avoid corporate taxation for rental properties because the tax efficiency of pass-through treatment — including direct depreciation deductions — is lost.
Frequently asked questions
Does putting a rental in an LLC change how depreciation works?
No — the same MACRS rules apply. How it is reported depends on whether the LLC is disregarded (single-member) or taxed as a partnership (multi-member).
Can members of a multi-member LLC each claim their share of depreciation?
Yes. Depreciation flows through the LLC partnership return to each member's K-1, and each member deducts their share on their personal return, subject to passive activity loss rules.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.