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How to deduct personal labor as an expense for a rental?

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Nick M.

Real Estate Investor from Sterling Heights, Michigan

Jan 07 '10, 01:38 AM


I purchased a rental property in 2009 and had to do major remodeling before it was ready to rent. I do not have an accountatnt yet but planning on looking for one to have my taxes done this year. This is my first rental property.

I did most of the work myself with my wife and was wondering if there is a way to deduct all those labor hours as an expense and at what rate would it be reasonable. Or what is the proper way to go about getting paid (or deducting) for rendering services for your own property.

Any ideas are appreicated.
Thanks in advance.


Edited Jun 26 2010, 11:08


Dustin Lyle

Real Estate Investor from Kentucky

Jan 07 '10, 02:17 AM


Well, what this comes down to is... Who owns the properties' liabilities? Are you protecting yourself and holding the property in an LLC which you are the sole owner? OR do you own the property without that "corporate veil"?

~If you own the property personally, you have already been paid for your labor in the form of equity. Due to you working on the property, you have made the property increase in value, and the market as a whole will dictate the value of your labor. You will realize the payment for your labor when you rent/sell the property. In this light, the taxes you pay on the gain will also be deferred til sale.

~If your property is owned by an LLC, Then you would simply cut yourself a check from the LLC for skilled labor rates. Also, you would keep records of all other expenses related to the property.


The big thing about this is, no matter what way you decide to go about handling this accounting measure, the money is still the same. Wether you pay yourself now or later, your ledger balance will remain neutral. Most people can't wrap their brains arround the fact that perceived income isnt neccesarily actual income. Due to the time value of money, your best option is to go with the LLC, pay yourself now, and defer the capital gains tax to as late as possible. ie Years.

:superman:
Dustin


Generally, Skilled labor rates run between $17.50/hr well through $90.00.


Edited Jun 26 2010, 11:08 by Dustin Lyle


Nick M.

Real Estate Investor from Sterling Heights, Michigan

Jan 07 '10, 02:24 AM


Dustin, thsnk you for your feedback. I am planning on setting up an LLC this year and have this rental under the LLC (and since it is paid off I understand that it is much easier to transfer to the LLC from my personal property).

Nick


Edited Jun 26 2010, 11:08


Bill Walston

Real Estate Investor from Northeast TN, Tennessee

Jan 07 '10, 03:34 AM


Dustin is quite right. If you own the property personally there is no write off for your own labor.

I would point out, as well, that an LLC is a disregarded entity as far as IRS is concerned. It may be taxed as a sole-proprietorship, a partnership, or a corporation, depending on its structure. This means that even if your property is in a LLC your personal labor might not be deductible. I'd encourage you to consult with your tax pro before setting up your LLC.


Edited Jun 26 2010, 11:08


Steve Babiak

Real Estate Investor from Audubon, Pennsylvania

Jan 07 '10, 03:35 AM


OK, for sake of explanation. Let's say you paid yourself some hourly rate times number of hours worked = total wages. Your rental property pays you those wages, and you then get a 1099 telling you that you will have to pay the IRS income taxes for wages earned.

The fact that you owned your rental property in 2009 means that you pay yourself those wages. So you get an expense on Schedule C or E, but then you get wages to declare for the same amount! So tax liability does not really change, since you have income paid to yourself equal to the expense that you wanted to take.


Edited Jun 26 2010, 11:08


Steve Babiak, Redeeming Properties, LLC
Telephone: 6109082183
...


J Scott Moderator Donor

Real Estate Investor from Ellicott City, Maryland

Jan 07 '10, 06:29 AM
2 votes


There may actually be benefits to not paying yourself this money, and keeping it in the company, assuming you own the property in an LLC taxed as an S-Corp.

Basically, if you pay yourself without "yourself" being another entity, you're on the hook for self-employment taxes for 100% of the income.

But, the company -- if taxed as an S-Corp -- can avoid paying FICA taxes on some of the income that will ultimately be passed through to you (and any other shareholders/members) at the end of the year.

Just something to think about...


Edited Jun 26 2010, 11:08


Medium_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


Bill G.

Real Estate Investor from Springfield, Missouri

Jan 07 '10, 06:37 AM


Good point Scott, Who wants to pay FICA on their own labor? Otherwise it's a wash. Bill


Edited Jun 26 2010, 11:08


Nick M.

Real Estate Investor from Sterling Heights, Michigan

Jan 07 '10, 06:53 PM


Thanks for your recommendation to form an LLC and have it taxed as an S-Corp. This is all great infor (ammo) for me to have when talking to an accountant to help me set up the right entity.


Edited Jun 26 2010, 11:09


Brian Haskins

Real Estate Investor from St. Louis, Missouri

Jan 10 '10, 10:26 AM


You need to ask an attorney.

Brian Haskins


Edited Jun 26 2010, 11:10


Nick M.

Real Estate Investor from Sterling Heights, Michigan

Jan 10 '10, 07:53 PM


Brian, please excuse my lack of knowkedge but can you please explain why an attorney and not an accountant is the person to help determine what entity to set up.

thank you.


Edited Jun 26 2010, 11:11


J Scott Moderator Donor

Real Estate Investor from Ellicott City, Maryland

Jan 11 '10, 02:51 AM


You should consult both an attorney and a CPA/tax-professional.

The attorney will help ensure that your assets are protected, and your tax professional will help ensure that you receive optimal tax benefits for your specific business plans.


Edited Jun 26 2010, 11:11


Medium_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


Nick M.

Real Estate Investor from Sterling Heights, Michigan

Jan 11 '10, 02:54 AM


J. Scott : thanks.
by the way I wisited your site a while back and am very impressed with what you are doing and how the "after" pics look. Nice work.


Edited Jun 26 2010, 11:11


J Scott Moderator Donor

Real Estate Investor from Ellicott City, Maryland

Jan 12 '10, 09:51 AM


Originally posted by Nick M.:
J. Scott : thanks.
by the way I wisited your site a while back and am very impressed with what you are doing and how the "after" pics look. Nice work.


Thanks Nick! I really appreciate that...


Edited Jun 26 2010, 11:12


Medium_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


Dave T

Real Estate Investor from South Carolina

Feb 06 '10, 04:04 PM


Nick,

Suggest you save the money that you would spend on forming the LLC. Make sure you have adequate liability insurance instead.

Most new real estate investors don't really have a high enougn net worth for the cost of the "asset protection" they think the LLC provides. Most don't really benefit from an entity structure until their net worth is in the high seven figures.


Edited Jun 26 2010, 11:32


J Scott Moderator Donor

Real Estate Investor from Ellicott City, Maryland

Feb 07 '10, 09:21 PM


Originally posted by Dave T:

Most new real estate investors don't really have a high enougn net worth for the cost of the "asset protection" they think the LLC provides. Most don't really benefit from an entity structure until their net worth is in the high seven figures.


This is a great point, though my personal research (so take it for what it's worth) has indicated that the break-even point in net-worth is actually in the low-seven-figures when both the cost and effort of maintaining asset protection through corporate entities is more efficient than general liability policies.

When you take into account the tax benefits, you really only need to be earning (not net worth) in the low six-figures in most real estate activities before the headache of managing corporate entities is optimal over not having those entities in place.

Again, just my personal experience...others may have a different take...


Edited Jun 26 2010, 11:33 by J Scott


Medium_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


Dave T

Real Estate Investor from South Carolina

Feb 12 '10, 02:55 PM


In my opinion, it is a mistake to substitute an LLC for an insurance policy. If you need the LLC, let the LLC supplement your insurance, not replace it.


Edited Jun 26 2010, 11:38


J Scott Moderator Donor

Real Estate Investor from Ellicott City, Maryland

Feb 12 '10, 09:14 PM


Originally posted by Dave T:
In my opinion, it is a mistake to substitute an LLC for an insurance policy. If you need the LLC, let the LLC supplement your insurance, not replace it.


Absolutely...a general liability insurance policy should be in place regardless of whether you have a corporate entity in place or not...


Edited Jun 26 2010, 11:38


Medium_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


Bill G.

Real Estate Investor from Springfield, Missouri

Feb 12 '10, 11:29 PM


Hi, the primary purpose of setting up and maintaing an LLC should not be for liability protection but for the flexibility of conducting business. Liabilty protection in my opinion is secondary and it seems some look to the LLC as a substitute for liabilty inusrance, I don't agree with that either. Recently, there was a gas explosion in a rental property, that house was gone and it caused significant damage to surrounding homes as well. Lucky no one was killed! The tenant was changing out a hot water heater and left to go get parts. The tenant was not a plumber as required in the city. Clearly it is negligence. The tenant will be facing criminal charges and the landlord civil. An LLC is a first line of defense, and likely the insurance company will simply write a check and walk away, leaving the landlord to defend himslef beyound the limits insured. 10 people could have easily died in that explosion, there goes your five million dollar laiabilty policy withot considering property damage. In reality, I have not heard of a landlord who owns three 45K rentals having more than 5M in coverage, most don't have that. So, the LLC gives the landlord a fighting chance if it was properly maintained, without it, he might as well pack his bags and leave the country! Maybe in some areas, judges zap right through an LLC, but not in my area!
Bill


Edited Jun 26 2010, 11:38


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