[ashok jain]

Dear Atlanta Tax Expert,

I must congratulate you for providing a clear and prompt advice and therefore decided to ask my longish question. Sorry for that. Here it goes:

Myself (employed with a foreign corporation in UAE) and my wife ( not employed but having self employed income in UAE). Both are Indian citizens with Bonafide residence in UAE for last 15 years living togather in a rented apartment ( dependents are USC / Residents and working is USA for few years). We donot have any US soure income.

My wife is a beneficiary of I130 petition by our daughter who is a USC. My wife expets tol receive her GC and LPR status in May 2009. So for the first time she will be filing her 1040/2555 tax return for the year 2009 from May onwards, as a RESIDENT ALIEN living abroad in UAE.

She qualifies as bonafide resident of UAE because she is a citizen of India and continues to live in UAE for last 15 years with her husband who continues to be a Non resident Alien and works in UAE for a foreign company.

She has no US source income. She is not an employee in UAE but has self employed income (SEI) in UAE. So, after getting the Green Card, she plans to join her husband in UAE and will continue to satisfy the Bonafide residency test in UAE and will also take enough precaution visits to USA / steps to maintain her GC for next 1-2 years, after which her husband would also be retiring from his job in UAE and get his GC and then both will move to live in USA.
That sure was a long background!

So She fills 1040 Shedule E and schedule C as under:

She jointly owns with her husband a rental apartment property in UAE. It has a loss of 15,000 (after deducting Investment interest, depreciation, management fee and maintenance charges). So on Schedule E, out of this loss of 15,000 should she she show 50% i.e. loss of 7,500 on her return ?

She also does Schedule C for providing her services ( which includes finding a renter and getting the apartment cleaned / minor repairs before renting, colleting the rent and liasoning between the owner and the rentor during the year). She gets a management fee of 4500 per year from the above mentioned jointly owned rental property and 2000 from another client - thus a total of 6500, out of which the only expense she shows is telephone/ travel of 1500 for the year. Thus she shows a net self employment income of $ 5000 on schedule C and She pays SST on this 5000. Is this correct? Or this 5000 will be offset by the Schedule E loss of 10,000 and she cannot pay SST?

Is the above acceptable to IRS? Or, she needs to form a sole proprietor LLC for providing the management services? Also, should we also look at the possibility of changing the Ownership of the said apartment from joint to single in the name of husband only in order not to raise question on earning 4500 from jointly owned property?

Also, if above is correct then, can you please advise what precaution can we take in terms of keeping the paperwork for her to show her S E Income on Schedule C and to pay her SETax.

[AtlantaTaxExpert]

Regarding the rental property, yes, she should reflect 50% of all income, losses, depreciation, etc. on Schedule E.

The Schedule C is considered to be separate income, with expenses separate from the Schedule E, DEFINITELY for the work done and income received from the "other" client. She can CHOOSE to treat the $4,500 in income from the jointly-owned property as separate income as well. If that choice is made, the jointly-owned property must issue her a Form 1099-MISC, showing the $4,500 as non-employee compensation. All income must be reported on the Schedule C and, after deductions for valid expenses, the net income transferred to Schedule SE, on which the self-employment tax will be calculated at 15.3%.

Forming the LLC is an option, but not necessary In my opinion.

Changing the ownership from joint to single is also an option, but it is too late for 2008.

Now, since she is half-owner of the rental property, she CAN provide all the services cited above as part of the owner's normal duties, thus eliminating the $4,500 in charged expenses and the $4,500 in income on her Schedule C. This will reduce the rental loss from $15,000 to $10,500, but it will also save her $689 in self-employment taxes. If I were preparing your return, that would be my recommended course of action, as it is simpler to document AND it removes any hint of related-party transactions, something in which the IRS takes a special interest.

It also eliminates any need to form an LLC or to transfer the rental to sole ownership.

[ashok jain]

Your reply is very much appreciated but needs more information / input from my side , which is provided below against each part of reply in italics and RED colour:

Regarding the rental property, yes, she should reflect 50% of all income, losses, depreciation, etc. on Schedule E.
Is my understanding correct that 50% is applied only if she is filing separately ( in the first year of residency when she can choose to file separately as DUAl Status).

The Schedule C is considered to be separate income, with expenses separate from the Schedule E, DEFINITELY for the work done and income received from the "other" client. She can CHOOSE to treat the $4,500 in income from the jointly-owned property as separate income as well. If that choice is made, the jointly-owned property must issue her a Form 1099-MISC, showing the $4,500 as non-employee compensation. All income must be reported on the Schedule C and, after deductions for valid expenses, the net income transferred to Schedule SE, on which the self-employment tax will be calculated at 15.3%.
We want to pay SSTax on schedule SE so that she earns 4 credits which will eventually get her Medicare benefit when she turns 65. So we want to show SE Income on schedule C for her. In this case is it necessary to change the property ownership to single husband owned? or it is ok to keep it as joint from SEIncome schedule c point of view? Also is it necessary to have any other client (other than this property) from IRS angle? Is a compensation of 4,500 or say 5,500 considered reasonable? ( the property rental income is 45,000). How does the property supply her 1099-MISC?

Forming the LLC is an option, but not necessary IMHO.

Changing the ownership from joint to single is also an option, but it is too late for 2008.

We can do it for 2009 or later years , if it is advisable?
Now, since she is half-owner of the rental property, she CAN provide all the services cited above as part of the owner's normal duties, thus eliminating the $4,500 in charged expenses and the $4,500 in income on her Schedule C. This will reduce the rental loss from $15,000 to $10,500, but it will also save her $689 in self-employment taxes. If I were preparing your return, that would be my recommended course of action, as it is simpler to document AND it removes any hint of related-party transactions, something in which the IRS takes a special interest.

as mentioned earlier , we want her to pay SStax to earn 4 credits. Yes indeed we would be very much interested in engaging someone like you who provides us general guidance at this stage, and like to know your charges for preparing our returns, when we are RESIDENTS. At the moment we are looking for general direction and pre planning of things for Tax purpose.
It also eliminates any need to form an LLC or to transfer the rental to sole ownership.

I await your advice.

[AtlantaTaxExpert]

If she is filing separately, then everything MUST be split 50-50.

It is NOT necessary to change the property to just husband-owned, and it is TOO late for 2008 in any event. The amount claimed ($4,500) is reasonable given the amount of rental income.

Given that you WANT to pay the SE tax for 2008 and beyond, I recommend that, for 2009 and beyond, that you establish the LLC under the partnership mode, then employ your wife as the property manager using the independent contractor methodology (issuing Form 1099-MISC for services rendered). The LLC would then be considered a separate tax and business entity by the IRS and remove any potential problems of related-party activity.

Email me at [email protected] if you want to use our tax services.

[ashok jain]

If she is filing separately, then everything MUST be split 50-50.

It is NOT necessary to change the property to just husband-owned, and it is TOO late for 2008 in any event. The amount claimed ($4,500) is reasonable given the amount of rental income.

Given that you WANT to pay the SE tax for 2008 and beyond, I recommend that, for 2009 and beyond, that you go ahead and establish the LLC under the partnership mode, then employ your wife as the property manager using the independent contractor methodology (issuing Form 1099-MISC for services rendered). The LLC would then be considered a separate tax and business entity by the IRS and remove any potential problems of related-party activity.

Email me at [email protected] if you want to use our tax services.

dear Atlanta expertthanks for your reply. Just one more clarification on this.
I understand for the property, one is allowed to treat a partnership of husband -wife only, with or without making it LLC. but then one has to file 1064 and not schedule E. Even it can be treated as a joint venture and reported on schedule C. Is this correct?

If a partnership or LLC is formed, then, does the property ownership will have to be transferred to the Partnership or LLC 's new name? Or it can be kept in our existing joint name? that will create transfer charges. What is the usual preferred course.

In the same partnership or LLC activities, Can I also include our some other foerign share/funds/ bonds investment income ( (about $15,000 per year)and also make my wife a manager for that by paying her additional say $1500 on 1099 MISC. This will ensure that her SEI is above the 4 credit requirements. Or should we think about 2 separate partnership / LLC for each activity. Which Form/ schedule will be used to report the income? Mind you that transferring of shares etc to a new name will again cost me, unless it can be avoided.

Sorry because these clarifications may sound very basic but these are confusing for a non resident person working abroad.

[AtlantaTaxExpert]

That is true. If you make it a LLC partnership, then it is reported on Form 1065 and the profits (and losses) pass through the partnership and is distributed to the partners via Schedule K-1. If it is a partnership, there is NO schedule C.

If the partnership is formed, then the property may be transferred to the LLC's name, but probably does not HAVE to be. This is REALLY a legal question that should be presented to an attorney.

You should not, in my opinion, try to include your investment transactions on this real estate partnership LLC; the nature of the business is too different. Establish a second LLC if that is your desire.