I know that I want to move forward and become a real estate investor. I am buying some books, accounting software and incurring some legitimate business expenses like mileage as I look at potential properties.
What is a good way to have these expenses fall under a business entity? Do I start with just a sole proprietorship so the expenses are tied to a company, or can I just record them as business expenses on my personal taxes and form some kind of business entity later?
Thank you in advance for your advice.
If you have accounting software write checks for all business related items. Keep a mileage journal. Document when and where you made business trips. Run all your ideas by your tax advisor for his review.
Thanks John, check, check, check on those things, will do. Still wondering when to switch from just claiming expenses on my personal 1040 and move it to a business.
The IRS has some specific rules on start up expenses...
Also, tax, records, etc may depends on your goals.
Really, if you are just buying a few residential rentals, check out how easy Schedule E is. Do-able, and goes right on your 1040. Simple...
Schedule E even guides you through the process some by listing categories. My banks won't let me put residential properties into entities's name until they are paid off anyway. (And If the liability scares you, go with a good landlord policy and add an umbrella policy (mine allows I think 4 or 6 residential properties)). On record keeping.... I am ten years into it and still find the super simple manila folder listed "business expenses" for all ordinary and necessary expenses work. Never lost a receipt or statement or missed a major deduction. One could type or scan them, but never been an issue to just to have paper (or print something to add to the file).....Just keep it separate from personal. Open and add the categories at tax time....
Always account for business expenses separately you can do this by using separate credit card and bank account. When and if you file taxes separately is a more a complicated decision to discuss with your tax advisor. Reading the IRS publication on business expenses can help you understand what to do too.
Hey Dan, If you're just starting and haven't done a deal yet, starting as a sole proprietor is fine. That's how I got started back in 1997. However, after you do your first deal you should consider forming an LLC. This will help with taxes and shield your personal assets.
Good luck Dan!
Thanks everybody for the great advice. I do not have any rental properties yet but am looking at several, trying to find a great deal. I have several bank accounts currently for different purposes but they are all tied together so I can transfer from one to another.
I was thinking just to keep things simple that I might open an account at a completely separate back for all Real Estate related income and expenses. That way it would be easy to keep things straight. Plus I have heard that smaller banks might be more open to investors.
Also are Credit Unions more open to investors?
I suggest you google 1040 schedule E PDF and print out the irs form you will use to report your rentals and set up your expenses in the categories IRS lays out. This will save you time come tax time.