Real Estate Tax Calc
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.
Basis stays with the property, not the wrapper
A key point investors miss: forming an LLC and contributing an existing property to it does not reset the depreciable basis or restart the 27.5-year clock. Under IRC §721, contributing property to a partnership (a multi-member LLC) is generally a tax-free event, and the LLC takes a carryover basis — it continues depreciating the property on the same schedule, using the same remaining recovery period, as the contributing owner did. The same is true when moving a property into a single-member LLC, which the IRS ignores entirely. If you have owned a rental for 8 years and put it in an LLC, the LLC keeps depreciating the remaining 19.5 years of basis; it does not get a fresh 27.5-year deduction. Only a genuine purchase at a stepped-up cost (or an inheritance with a stepped-up basis) resets the schedule.
How depreciation flows on Form 1065 and the K-1
In a multi-member LLC taxed as a partnership, depreciation is computed once at the entity level on Form 1065 and reduces the ordinary business income (or increases the loss) reported on the partnership return. Each member receives a Schedule K-1 showing their distributive share of that net figure, which they carry to Schedule E, Part II of their personal 1040. Special allocations are possible — a partnership can, within the substantial-economic-effect rules of §704(b), allocate depreciation differently than a straight ownership percentage — but the allocation must have economic substance and be reflected in the members' capital accounts. This flexibility is one real tax advantage of the LLC/partnership form over holding property as tenants in common.
Passive losses, basis, and at-risk limits still apply
Wrapping a rental in an LLC does not free its losses from the usual limitations — if anything, a partnership adds layers. A member's ability to deduct their share of a rental loss is limited by three separate hurdles, applied in order: (1) outside basis (a member cannot deduct losses beyond their basis in the LLC interest, which includes their share of qualifying LLC debt under §752); (2) the at-risk rules of §465; and (3) the passive activity loss rules of §469, which suspend rental losses unless the member materially participates as a real estate professional or qualifies for the $25,000 active-participation allowance. Depreciation often drives the loss, so understanding which of these limits bites first is essential to knowing whether the deduction is usable this year or carried forward.
How LLC debt affects a member's basis
Because depreciation frequently creates a loss that outruns a member's cash investment, the treatment of LLC liabilities matters. In a partnership, a member's outside basis includes their allocable share of the LLC's debt under §752 — and how a liability is shared depends on whether it is recourse (allocated to the member who bears the economic risk of loss) or nonrecourse (typically shared among members under a three-tier regulatory scheme). Most rental mortgages are nonrecourse 'qualified nonrecourse financing,' which — usefully — also counts toward a member's at-risk amount under §465. This is a genuine difference from an S-Corporation, where entity-level debt does not add to a shareholder's stock basis. For a leveraged rental throwing off depreciation losses, the partnership form generally lets members deduct more of those losses than an S-Corp would.
Depreciation recapture flows through at sale
When the LLC sells the property, the depreciation taken over the years is recaptured and passes through to the members. The gain attributable to real-property depreciation is unrecaptured Section 1250 gain, taxed at a maximum federal rate of 25%, while any gain on cost-segregated personal property (5-, 7-, 15-year assets) is Section 1245 recapture taxed at ordinary rates. Each member reports their share via the K-1. A partnership can also pursue a 1031 exchange at the entity level to defer the gain, but individual members who want to cash out while others exchange face the well-known 'drop and swap' complications — a situation to plan with a CPA well before closing.
A worked example: single-member LLC
Say you buy a rental for $330,000 through a single-member LLC you formed for liability protection. Because the LLC is disregarded, you report exactly as if you owned the property personally. Allocate, say, 25% to land ($82,500), leaving a depreciable building basis of $247,500. Straight-line over 27.5 years (MACRS residential) gives roughly $9,000 of annual depreciation, which you claim on Schedule E of your 1040 alongside the rent, mortgage interest, insurance, and repairs — the LLC files no separate federal income tax return. The liability shield is real, but the IRS ignores the entity for income tax. Note one wrinkle: even a disregarded single-member LLC generally needs its own EIN for banking and, if it has employees, payroll and excise filings — 'disregarded' applies to income tax, not to every federal purpose.
Where the K-1 depreciation actually lands on your return
Members of a multi-member LLC should understand how the K-1 flows through the personal return, because depreciation is buried inside a single net number. The LLC's ordinary rental real estate income or loss — after depreciation is subtracted at the entity level — appears on Schedule K-1 (Form 1065), box 2 (net rental real estate income/loss). You carry that figure to Schedule E, Part II, and then run it through Form 8582 (passive activity loss limitations) to determine how much, if any, is deductible this year. You will not see a separate 'depreciation' line on your 1040 — it is already embedded in the box 2 amount. The K-1 also reports your share of §179 expense, any separately stated items, and — crucially for tracking your limits — your capital account and share of liabilities, which feed the basis and at-risk calculations. Keep every year's K-1; you need the running basis history when the property is eventually sold or your interest is redeemed.
Series LLCs, multiple properties, and separate schedules
Investors holding several rentals often ask whether to use one LLC for all of them or a separate LLC per property. From a depreciation standpoint the answer is neutral — each property is depreciated on its own basis and schedule regardless of how the entities are arranged — but the structure affects liability isolation and administrative burden. A single multi-property LLC files one Form 1065 and one set of K-1s but commingles the properties' liability exposure; separate LLCs (or a series LLC in states that recognize them) wall off each property but multiply filings and costs. For federal income tax, a series LLC's treatment can be complex and the IRS guidance has evolved, so confirm current rules for your state. Whatever the structure, depreciation on each building is computed the same way; the entity choice is driven by liability and cost, not by the depreciation math.
Don't expect the LLC to change your tax bill
The most important takeaway is what an LLC does not do: it does not increase your depreciation, does not shelter rental income the way a different structure might, and does not by itself unlock losses the passive rules would otherwise suspend. An LLC is a liability tool, not a tax-reduction tool, for rental real estate. Its tax neutrality is actually a feature — you get asset protection without disturbing the favorable pass-through treatment (direct depreciation deductions, capital-gain rates on appreciation, 1031 eligibility, potential §199A QBI deduction) that makes rentals tax-efficient. Investors sometimes form an LLC expecting a lower tax bill and are surprised to see the same numbers; the correct expectation is unchanged taxes plus a legal barrier between the property's liabilities and your personal assets. Weigh the state filing fees, franchise taxes, and extra return (Form 1065 for multi-member) against that protection when deciding.
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.
Does moving my rental into an LLC restart depreciation?
No. Contributing an existing property to an LLC is generally tax-free and uses carryover basis — the LLC keeps the same remaining recovery period and depreciable basis you already had. There is no fresh 27.5-year schedule; only a purchase at a new cost or an inherited step-up resets the clock.
Can an LLC allocate more depreciation to one member?
Potentially. A partnership can make special allocations under the §704(b) substantial-economic-effect rules, so depreciation can be split differently than straight ownership percentages — but the allocation must have real economic effect and be tracked in members' capital accounts. This flexibility does not exist for co-owners holding title directly.
Does LLC debt help me deduct depreciation losses?
In a partnership-taxed LLC, yes. A member's share of LLC liabilities adds to outside basis under §752, and qualified nonrecourse financing also counts toward the at-risk amount — both of which can free up depreciation losses. An S-Corporation does not give shareholders basis for entity-level debt, which is one reason the partnership form is common for leveraged rentals.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.