Form 8825 and how rental income is reported through an entity

Form 8825 is titled Rental Real Estate Income and Expenses of a Partnership or an S Corporation. It is attached to the entity return, Form 1065 or Form 1120-S, is due with that return, and each rental property the entity holds is reported on it with its income and expenses.

It is the entity level equivalent of Schedule E: a rental owned in your own name goes on Schedule E, and the same rental owned through an LLC taxed as a partnership goes on Form 8825.

What changed on Form 8825 for tax year 2025

For tax years beginning in 2025 the December 2025 revision of Form 8825 applies; the November 2018 revision applies to earlier years. Four changes:

• Gross rents on line 2a and other rental income on line 2b, reported separately.
• Up to eight properties across the two pages, with more on attached pages.
• Days rented at fair rental value and days of personal use for each property, counted under the section 280A personal use rules.
• Other deductions on line 17. Partnerships and S corporations required to file Schedule M-3 attach Schedule(s) A (Form 8825) and carry the total to line 17; other filers report other deductions directly on line 17, as on line 15 before 2025.

Old line 15 became line 17 when lines were added, so a workpaper carried forward from 2024 maps other deductions to the wrong line.

Where Form 8825 income is reported: Schedule K-1 and Form 1040

Net rental real estate income or loss on line 23 is carried to Schedule K, line 2, of Form 1065 or Form 1120-S, separately from ordinary business income on line 1. Each owner’s share appears in box 2 of their Schedule K-1, and the owner reports it on Schedule E, Part II.

Lines 20a to 23 are completed once, on page 1, however many pages of properties there are.

The passive activity rules are applied at the owner level. The entity has no record of the hours each owner spent on the property, which is why participation is tested against the individual under Publication 925.

Why two partners get two different answers

The same building, the same loss, the same K-1 line, and two different outcomes.

One partner manages the property, meets a participation test and takes the loss against other income. The other is a passive investor whose share is suspended until there is passive income to absorb it or until the interest is sold. The same figure is on the entity return for both.

The participation records are each owner’s, kept outside the entity’s files.

Basis, at-risk and passive limits on K-1 rental losses

An owner’s share of a loss is tested in this order, and a loss stopped at one stage does not reach the next:

• Basis: section 704(d) for a partner, section 1366(d) for a shareholder. A loss above basis is suspended until basis is restored.
• At-risk: section 465. A loss above the amount at risk is suspended until the owner is at risk for more.
• Passive: section 469. A passive loss is suspended until there is passive income or the entire interest in the activity is disposed of.

A fourth limit applies after all three: the excess business loss limit of section 461(l), which for 2026 is $256,000 for a single filer and $512,000 on a joint return.

Grouping properties and the self-rental rule

Several rental properties can be grouped as one activity for the passive rules under Treas. Reg. 1.469-4, while each property is still reported separately on Form 8825. A partnership or S corporation groups at the entity level and each owner is bound by that grouping.

Once properties are grouped, suspended passive losses are released only on disposal of the entire activity, so selling one property in a group releases nothing.

Under Treas. Reg. 1.469-2(f)(6), net rental income from a property rented to a business in which the owner materially participates is treated as nonpassive; a net loss from the same property stays passive. The rule is applied at the owner’s level even where the entity holds the property, and the entity marks the property with the self-rental code on line 1.

Where these returns go wrong

• Properties lumped together. Disposals and suspended losses are tracked per property, so a consolidated entry has to be unpicked later.
• Rental income put on the wrong line. Net rental real estate belongs in box 2 of the K-1. Rolled into ordinary business income in box 1, it is reported by each owner with the wrong character.
• Short term rentals treated as ordinary rentals. Where the average guest stay is short, the activity may not be a rental activity for passive loss purposes at all, and the analysis is different from the start.
• Basis and at-risk limits ignored. Deductibility is capped by each owner’s basis before participation is tested, and basis is tracked at the owner level.
• The entity return and the personal returns prepared by different firms. The K-1 is keyed in without a check that box 2 stayed rental income on the owner’s return.

On that third point, the short term rental tax loophole covers the test in full.

What entity rental returns cost

Quoted on the entity and the properties in it. What we price against:

• Number of properties on the form and how clean the books are
• Number of owners receiving a K-1
• Whether basis and at-risk schedules exist or have to be rebuilt
• Whether we prepare the owners’ personal returns as well
• Whether any property is short term let, which changes the analysis

These are the factors, not a quote.

Who prepared this

Entity returns and owner returns handled under one roof.

• Licensed CPAs and Enrolled Agents on every return
• Fixed quote agreed before work starts
• Support available year round

“We had over a hundred clients this last tax season that were in the wrong business structure. And on average, they overpaid anywhere between a few thousand to even tens of thousands of dollars in tax just because they did not have the right business structure for themselves.”

— George Dimov, CPA · Founder, Dimov Tax

General information rather than advice for your circumstances. Outcomes depend on facts specific to you, so speak to a CPA before acting on it.