Taxation: Rental V Investment ?
This situation concerns property held by a LLC which is taxed as a partnership (1065) in which the taxes flow to the partners (K-1).
We have recently acquired two adjacent multi-family apartment buildings. Both were obtained from the same seller as seller financed mortgages. The first property required relatively minor cosmetic work and is now fully rented. 
The second will require considerably more effort and cost to make rentable. These properties are in a highly sought after commercial area and we expect that both will eventually be sold for commercial development or claimed by eminent domain (thank you SCOTUS). We are considering NOT improving the second property and just holding it for future sale. Thus my question .... IF the property is not actively rented can we still file a Schedule E and deduct the mortgage interest and depreciation (on the existing dwelling - not land of course) on the second property?? OR will the interest flow through to each partners Sch A as investment interest?? OR is there some other scenario that applies?? Any help and references will be appreciated. I am fairly well versed on the Capital Gains issues ... but unsure how the taxation should be handled before we sell (or improve the second should we ever).[ Edited by fbprop on Date 08/24/2005 ]
Can anyone provide any additional info or references to support the above answer (IRS pub #, etc) ... All info appreciated. Thanks!!
NewKid3 ... would you please weigh in on this one??? I would really apprecate your thoughts! Thanks!!!
In general, I agree with Darryl -- no Schedule E, no depreciation expense allowed for property held as investment.
My thoughts are to consult a licensed tax professional for specific details on your tax reporting questions.
On the eminent domain issue, US Senator John Cornyn (TX), has introduced S.1313, The Protection of Homes, Small Businesses, and Private Property Act of 2005. This legislation would ensure that the power of eminent domain could only be invoked for public use, thus eliminating future seizure of private property to transfer to another private owner though the power of eminent domain.
This proposed legislation has many co-sponsors and needs to be passed to stop future occurrences of an inappropriate application of the power of eminent domain which the Supreme Court affirmed in the case of Relo v. City of New London.
Please contact your US Senators and ask them to support S.1313.