From the BiggerPockets Blog

 BiggerPockets Blog »

Jump to Forum View All

Click a category below to view different forum categories.

BiggerPockets

General Info

BiggerPockets Q&A, Site Questions, & Announcements

1518 topics, 14426 posts — Last Post 04/20/14, 09:14PM

BiggerPockets Exclusive PRO Area

118 topics, 842 posts — Last Post 04/20/14, 04:40PM

New Member Introductions

10909 topics, 85850 posts — Last Post 04/21/14, 03:08AM

Real Estate Success Stories

396 topics, 6166 posts — Last Post 04/20/14, 09:40PM

General Real Estate

General Real Estate

Buying & Selling Real Estate

5954 topics, 46924 posts — Last Post 04/21/14, 12:32AM

Renters

645 topics, 5825 posts — Last Post 04/20/14, 07:48PM

Get Foreclosure Help - Help Stop Foreclosure Forum

316 topics, 2557 posts — Last Post 04/16/14, 03:58AM

Home Owner Association (HOA) Issues & Problems Forum

237 topics, 1609 posts — Last Post 04/17/14, 08:53AM

Do it Yourself

657 topics, 6296 posts — Last Post 04/20/14, 07:04PM

Reviews & Feedback

Real Estate Deal Analysis and Advice

3688 topics, 29558 posts — Last Post 04/21/14, 03:06AM

Real Estate Guru, Book & Course Reviews and Discussions

1135 topics, 11565 posts — Last Post 04/20/14, 08:31PM

Ask About A Real Estate Company

741 topics, 7327 posts — Last Post 04/20/14, 05:47PM

Real Estate Investing

Real Estate Strategies

Wholesaling

5612 topics, 43779 posts — Last Post 04/21/14, 01:18AM

Rehabbing and House Flipping

3336 topics, 31023 posts — Last Post 04/20/14, 10:33PM

Real Estate Development & New Home Construction

554 topics, 4687 posts — Last Post 04/20/14, 10:21PM

Innovative Strategies

704 topics, 6030 posts — Last Post 04/20/14, 10:54AM

Tax Liens, Notes, Paper, & Cash Flows Discussion

866 topics, 6678 posts — Last Post 04/19/14, 06:06AM

Rent to Own a.k.a. Lease Purchase, Lease Options

695 topics, 4909 posts — Last Post 04/20/14, 05:32PM

1031 Exchanges

143 topics, 1054 posts — Last Post 04/18/14, 08:41AM

Foreclosure Investing

General Foreclosure & Pre-Foreclosure Forums

1689 topics, 11299 posts — Last Post 04/20/14, 10:36PM

HUD, VA, and Tax Sales

415 topics, 3097 posts — Last Post 04/19/14, 10:19PM

REOs

1214 topics, 10578 posts — Last Post 04/20/14, 12:34AM

Short Sales

1535 topics, 13121 posts — Last Post 04/20/14, 02:17PM

Landlord & Tenant Forums

Landlord & Rental Property Questions

7217 topics, 70848 posts — Last Post 04/20/14, 11:43PM

Mobile Homes & Mobile Home Park Investing

638 topics, 5142 posts — Last Post 04/20/14, 08:42PM

Investor Basics

Starting Out

7712 topics, 60534 posts — Last Post 04/20/14, 10:47PM

Investor Psychology

431 topics, 6107 posts — Last Post 04/20/14, 06:04AM

General Real Estate Investing

4720 topics, 37233 posts — Last Post 04/20/14, 11:53PM

Real Estate Investor Marketing

1732 topics, 14098 posts — Last Post 04/20/14, 05:20PM

Commercial Real Estate

Commercial Real Estate Investing Forum

1410 topics, 8994 posts — Last Post 04/19/14, 04:34PM

Multi-Family and Apartment Investing

1111 topics, 9255 posts — Last Post 04/20/14, 09:00PM

The Business of Real Estate

Real Estate Technology and the Internet

Real Estate Technology, Social Media & Blogging

641 topics, 4897 posts — Last Post 04/20/14, 08:43AM

Business Basics

Goals, Business Plans & Entities

831 topics, 7563 posts — Last Post 04/21/14, 12:26AM

Real Estate Finance & Legal

Financial, Tax, and Legal

Tax, Legal Issues, Contracts, Self-Directed IRA

2790 topics, 20034 posts — Last Post 04/20/14, 10:23PM

Property Insurance

309 topics, 2045 posts — Last Post 04/17/14, 07:41PM

Personal Finance Discussion

328 topics, 2732 posts — Last Post 04/19/14, 06:57PM

Loans, Mortgages, Credit Lines

Private & Conventional Lending Discussion

2839 topics, 19730 posts — Last Post 04/21/14, 02:45AM

Creative Real Estate Financing

1210 topics, 8772 posts — Last Post 04/20/14, 06:59AM

Crowdfunding Real Estate

35 topics, 463 posts — Last Post 04/19/14, 06:24PM

Real Estate Professionals

Real Estate Professionals

Real Estate Agents

1211 topics, 7999 posts — Last Post 04/20/14, 03:12PM

Bankers, Lenders, and Mortgage Brokers

441 topics, 1922 posts — Last Post 04/20/14, 07:09AM

Contractors

270 topics, 1685 posts — Last Post 04/20/14, 02:48PM

Local Real Estate

Local Real Estate

Local Real Estate Networking & Recommendations

1994 topics, 11628 posts — Last Post 04/20/14, 07:37PM

Americans & International Real Estate

161 topics, 566 posts — Last Post 04/14/14, 11:19AM

Foreigners Buying in the USA

62 topics, 409 posts — Last Post 04/10/14, 06:27AM

Canadian Real Estate

65 topics, 430 posts — Last Post 04/20/14, 04:56PM

Marketplace

Real Estate Marketplace

Real Estate Marketplace

15028 topics, 53974 posts — Last Post 04/21/14, 03:06AM

Real Estate Events and Happenings

165 topics, 2544 posts — Last Post 04/20/14, 11:36PM

Off-Topic

Off Topic

Off-Topic

2905 topics, 32411 posts — Last Post 04/19/14, 08:03AM

Housing News & Real Estate Market

914 topics, 8351 posts — Last Post 04/17/14, 08:41AM

BiggerPockets Real Estate Investing Summit

97 topics, 1751 posts — Last Post 04/10/14, 02:27PM

BiggerPockets Resources

Forums » Tax, Legal Issues, Contracts, Self-Directed IRA » How to deduct personal labor as an expense for a rental?

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

18 posts by 8 users

Signup

Real Estate Investor · Sterling Heights, Michigan


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.



Real Estate Investor · Kentucky


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.



Real Estate Investor · Sterling Heights, Michigan


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



Real Estate Investor · Northeast TN, Tennessee


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.



Real Estate Investor · Audubon, Pennsylvania


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.


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


Real Estate Investor · Ellicott City, Maryland


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...


Small_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Telephone: 770-906-6358
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


Real Estate Investor · Springfield, Missouri


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


Financexaminer@real estate investor dot com


Real Estate Investor · Sterling Heights, Michigan


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.



Real Estate Coach · St. Louis, Missouri


You need to ask an attorney.

Brian Haskins



Real Estate Investor · Sterling Heights, Michigan


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.



Real Estate Investor · Ellicott City, Maryland


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.


Small_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Telephone: 770-906-6358
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


Real Estate Investor · Sterling Heights, Michigan


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.



Real Estate Investor · Ellicott City, Maryland


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...


Small_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Telephone: 770-906-6358
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


Real Estate Investor · South Carolina


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.



Real Estate Investor · Ellicott City, Maryland


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...


Small_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Telephone: 770-906-6358
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


Real Estate Investor · South Carolina


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.



Real Estate Investor · Ellicott City, Maryland


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...


Small_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Telephone: 770-906-6358
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


Real Estate Investor · Springfield, Missouri


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


Financexaminer@real estate investor dot com




Sign up