Tax professional help needed!!

27 Replies

So this is the first year that I have not had a traditional job and w2 income to show at tax time as well we own 4 rental properties (one in which we live in one side of a duplex). We also did a short term rental on Airbnb on the other side of the place we lived in and the other properties are all rented on yearly contracts. As such I operated the entire year under the assumption that I have had in the past with properties that I just add up my expenses and income at the end of the year and my adjusted gross (usually very little if I use all my qualifying write offs) and pay the tax on the adjusted gross income.  

However, in preparation for tax time I was reading up and found that Airbnb rental income is not considered passive income and is actually considered self employment income and subject to self employment tax and that I might need to pay quarterly estimated taxes on both Airbnb income and my traditional rental properties? 

The Rental properties will make approximately 20k after write offs and Airbnb will most likely be about 15k after tax write offs. I am married with a child dependent and my wife is an employee of our business  as she does the cleaning at the Airbnb rental and we file jointly. Have I missed the boat on the quarterly payments? I had no idea if I needed to do that. Any help would be greatly appreciated. Thanks! 

DISCLAIMER:  I am not an accountant or Attorney :)

That being said, I think I can steer you in the right direction.  You PROBABLY should be making QE payments (depending on the state you might have to do state QEs as well.  BUT, you might not have to depend on some rules.  This is from a similar question on an Intuit post.  

"To determine whether you need to make quarterly estimates, answer these questions:

  1. Do you expect to owe less than $1,000 in taxes for the tax year after subtracting your federal income tax withholding from the total amount of tax you expect to owe this year? If so, you're safe—you don't need to make estimated tax payments.
  2. Do you expect your federal income tax withholding (plus any estimated taxes paid on time) to amount to at least 90 percent of the tax that you will owe for this tax year? If so, then you're in the clear, and you don't need to make estimated tax payments.
  3. Do you expect that your income tax withholding will be at least 100 percent of the tax on your previous year's return? Or, if your adjusted gross income (Form 1040, line 37) on your tax return was over $150,000 ($75,000 if you're married and file separately), do you expect that your income tax withholding will be at least 110 percent of the tax you owed in tax for the previous year? If so, then you're not required to make estimated tax payments.

If you answered "no" to all of these questions, you must make estimated tax payments using Form 1040-ES. To avoid a penalty, your total tax payments (estimated taxes plus withholding) during the year must satisfy one of the requirements we just covered."

https://turbotax.intuit.com/tax-tips/small-business-taxes/estimated-taxes-how-to-determine-what-to-pay-and-when/L3OPIbJNw

thanks for the reply! I also read that and questions 2 and 3 confuse me a bit and maybe I just need them rephrased a little or possibly explained in a little better detail in layman’s terms. The answer to question 1 is I’m not actually sure. I might owe less than 1k as I have a ton of expenses I can write off and with credits that I’ll qualify for I don’t really know? So I’m not sure how to answer that one! 

I honk federal tax withholding is throwing me off since I don’t get a w2 this just means I don’t have any tax withholding and I haven’t paid any estimated taxes yet so the answer to 2 and 3 would be no? Last year I had some federal tax withholdings with a few months of w2 income. So this year will not be at least 100% of last years withholding? Am I understanding this right? 

Yeah  it can be tough to figure that out, BUT, it is good you are thinking on this as going forward in RI, you will almost certainly need to do your quarterly estimates.  Worst case, if you miss them then you would have a penalty on the amounts owed.  I usually have a penalty even though I do QE because of how erratic my income is, hard to estimate where I end up.

You should be able to take what you think your income will be and use an online calculator to ball-park your tax liability.  My guess, if you have not been doing withholding then you will for sure have some tax owed and probably more than 1k.  If that is the case, it could be worth making a payment at least for Q4 (due mid January but there can be tax benefits for paying in 2017 depending on your state etc on the local side.)

You mention your wife is an employee of your business, do you mean she gets a paycheck or a 1099?  

Summary- Sounds like you might have needed to do QEs, BUT you are learning, and worst case is a penalty for not paying which isn't too bad.  This was a honest mistake, no one is going to kick down your door, your just gonna pay Uncle Sam a little bonus.  BUT, make sure you have it on point for next year!  :)

Originally posted by @James Defazio :

I honk federal tax withholding is throwing me off since I don’t get a w2 this just means I don’t have any tax withholding and I haven’t paid any estimated taxes yet so the answer to 2 and 3 would be no? Last year I had some federal tax withholdings with a few months of w2 income. So this year will not be at least 100% of last years withholding? Am I understanding this right? 

 Yep, that's exactly right.  In W2 income they withhold for you, so you always have some already paid to the Feds/State.  The reason they make you do QE when not on W2 is essentially the same thing...they want your money early and want to spread it out as it is easier to collect than a big bill 9 months later.

thanks so much for the info. I don’t 1099 my wife although I probably should. She also does not receive a paycheck per se we just use it as additional business income.  I will most likley not use her as an employee. I’ll probably just count the cleaning income as Airbnb income. But I have heard that that is something I can do to alleviate some of the income since she really does do all the cleaning just as I would pay someone to do. I just invested in quickbooks to help me prepare well for tax time and track everything and be organized and have clean books and I think The next step is probably a cpa? 

I thought I read somewhere that If it is your first year as being self employed only that you might get a pass from the IRS and not pay penalties? I hope so! 

I did a major remodel on the Airbnb Property and some of it will definitely qualify as legit expenses but most of it will need to be depreciated probably so it probably won’t help offset my income much eh? 

Thanks for the help! 

I am not sure if it would matter if you used her as a 1099 as on the one hand, the business gets a write-off, but on the other hand, you have to jointly pick up that income...so probably a wash or real close to it.  BUT you can 100% write off all the materials, cleaners, tools etc.

I would absolutely consider a CPA, even if just for one year if it ends up being too much compared to your income as you would probably learn a lot..or just do what your doing now, track everything in quickbooks (you can get the desktop version and just pay the one time fee as opposed to the monthly which is probably overkill if its just you working on the books) you can export the quickbooks backup for your CPA or anyone else that needs it.

I am not sure on if you are not going to have a penalty, I hope not but you might, but it wont be huge, and learning about the taxes is a WISE thing to do!

Congrats on your properties and AirBNB business!  Make sure you sign up for VRBO/Homeaway as well.  We have a Airbnb and we get at least 1/3 of our bookings from VRBO/Homeaway!

Thanks for the advice Richard! We love doing Airbnb but unfortunately have been shut down by our city because of zoning violations. Apparently I am unable to list my property for short term rent unless I want criminal charges filed against me. So until we buy another property in an area that allows short term rentals we will have to only rent out on yearly contracts and wait for homeaway and Vrbo but thank you for the suggestion and we’ll definitely look into listing on there when we able. 

CPA here. 

First, you have nothing to worry about with the quarterly estimates.  Assuming you only take the standard deduction, you are going to wipe out about $25k of your $35k income with the standard deduction and personal exemptions. If you are itemizing that amount will be even higher. 

If your kid is under 17 you will get the child tax credit and if your kid is under 22 and a student you will almost definitely get the earned income credit. 

Even if you have to treat the Airbnb income as SE income you will likely owe very little in taxes which means any possible penalties for failing to pay estimates is going to be tiny, if any. 

For the Airbnb income, it mostly depends on your average rental period. If it’s less than seven days then it’s probably SE income. If it’s more than 7 and less than 30, but you are also offering hotel type services like a bed and breakfast than it’s probably SE income. In all other scenarios it’s passive income. 

Finally, absolutely do not pay your wife a salary or 1099 her.  There would be zero benefit and since the rental income is passive income you are turning income that’s not subject to social security and Medicare taxes into income that is subject to those taxes. This would be a big mistake. 

Overall nothing really to worry about here other than figuring out how the Airbnb needs to file, which is an easy determination. 

Originally posted by @Josh Bauerle :

CPA here. 

First, you have nothing to worry about with the quarterly estimates.  Assuming you only take the standard deduction, you are going to wipe out about $25k of your $35k income with the standard deduction and personal exemptions. If you are itemizing that amount will be even higher. 

If your kid is under 17 you will get the child tax credit and if your kid is under 22 and a student you will almost definitely get the earned income credit. 

Even if you have to treat the Airbnb income as SE income you will likely owe very little in taxes which means any possible penalties for failing to pay estimates is going to be tiny, if any. 

For the Airbnb income, it mostly depends on your average rental period. If it’s less than seven days then it’s probably SE income. If it’s more than 7 and less than 30, but you are also offering hotel type services like a bed and breakfast than it’s probably SE income. In all other scenarios it’s passive income. 

Finally, absolutely do not pay your wife a salary or 1099 her.  There would be zero benefit and since the rental income is passive income you are turning income that’s not subject to social security and Medicare taxes into income that is subject to those taxes. This would be a big mistake. 

Overall nothing really to worry about here other than figuring out how the Airbnb needs to file, which is an easy determination. 

Awesome!  Glad someone who knows what they are talking about jumped in!  :)  Thumbs up!

Originally posted by @Josh Bauerle :

CPA here. 

First, you have nothing to worry about with the quarterly estimates.  Assuming you only take the standard deduction, you are going to wipe out about $25k of your $35k income with the standard deduction and personal exemptions. If you are itemizing that amount will be even higher. 

If your kid is under 17 you will get the child tax credit and if your kid is under 22 and a student you will almost definitely get the earned income credit. 

Even if you have to treat the Airbnb income as SE income you will likely owe very little in taxes which means any possible penalties for failing to pay estimates is going to be tiny, if any. 

For the Airbnb income, it mostly depends on your average rental period. If it’s less than seven days then it’s probably SE income. If it’s more than 7 and less than 30, but you are also offering hotel type services like a bed and breakfast than it’s probably SE income. In all other scenarios it’s passive income. 

Finally, absolutely do not pay your wife a salary or 1099 her.  There would be zero benefit and since the rental income is passive income you are turning income that’s not subject to social security and Medicare taxes into income that is subject to those taxes. This would be a big mistake. 

Overall nothing really to worry about here other than figuring out how the Airbnb needs to file, which is an easy determination. 

 Josh thank you so much for your help and advice. We are planning to buy another rental this coming year and are getting to the point that we are likely to hire a cpa for our business. I see you are from Willard which is not far away, we will keep in touch as I may be coming in to see you soon! Merry Christmas to everyone! 

Originally posted by @James Defazio :
Originally posted by @Josh Bauerle:

CPA here. 

First, you have nothing to worry about with the quarterly estimates.  Assuming you only take the standard deduction, you are going to wipe out about $25k of your $35k income with the standard deduction and personal exemptions. If you are itemizing that amount will be even higher. 

If your kid is under 17 you will get the child tax credit and if your kid is under 22 and a student you will almost definitely get the earned income credit. 

Even if you have to treat the Airbnb income as SE income you will likely owe very little in taxes which means any possible penalties for failing to pay estimates is going to be tiny, if any. 

For the Airbnb income, it mostly depends on your average rental period. If it’s less than seven days then it’s probably SE income. If it’s more than 7 and less than 30, but you are also offering hotel type services like a bed and breakfast than it’s probably SE income. In all other scenarios it’s passive income. 

Finally, absolutely do not pay your wife a salary or 1099 her.  There would be zero benefit and since the rental income is passive income you are turning income that’s not subject to social security and Medicare taxes into income that is subject to those taxes. This would be a big mistake. 

Overall nothing really to worry about here other than figuring out how the Airbnb needs to file, which is an easy determination. 

 Josh thank you so much for your help and advice. We are planning to buy another rental this coming year and are getting to the point that we are likely to hire a cpa for our business. I see you are from Willard which is not far away, we will keep in touch as I may be coming in to see you soon! Merry Christmas to everyone! 

 Oh wow I didn’t even notice you were Sandusky, crazy!

I actually live in Monroeville, so I’m a little closer still.  Any other tax questions just let me know happy to help. 

Since you are now self-employed, ask your accountant about the advantages of claiming you are a real estate professional. This is not a license requirement.  It has to do with working 750 hours in your business, having your money at risk and being an active participant in the decisions.

Changing to professional status with the IRS will change the way capital gains are calculated and lift the restrictions on how much you can deduct.  Once you do this you may find that depreciation, taxes, insurance, mortgage interest, maintenance, and management costs reduce your income substantially, perhaps even to the point of negative income you can use to get refunds from prior years taxes!

Find an accountant who works extensively with real estate investors if you want the best results.  I know some who have pulled 5 and 6 figure refunds on behalf of people previously represented by accountants who just didn't know the truth but forged ahead anyway with professional arrogance as if they did know.

Originally posted by @Mark Elkins :

Since you are now self-employed, ask your accountant about the advantages of claiming you are a real estate professional. This is not a license requirement.  It has to do with working 750 hours in your business, having your money at risk and being an active participant in the decisions.

Changing to professional status with the IRS will change the way capital gains are calculated and lift the restrictions on how much you can deduct.  Once you do this you may find that depreciation, taxes, insurance, mortgage interest, maintenance, and management costs reduce your income substantially, perhaps even to the point of negative income you can use to get refunds from prior years taxes!

Find an accountant who works extensively with real estate investors if you want the best results.  I know some who have pulled 5 and 6 figure refunds on behalf of people previously represented by accountants who just didn't know the truth but forged ahead anyway with professional arrogance as if they did know.

 That’s actually not what the real estate professional designation does.  It doesn’t change anything with capital gains and doesn’t make anything more deductible than it is for anyone else. 

The advantage of being a real estate professional is that if your deductions exceed your rent you aren’t subject to the limitation of only taking the net loss against ordinary income. 

This wouldn’t apply here because 1. The OP said he will show a gain not a loss. 2. Even if he showed a loss, he isn’t going to run into the income limitations that start to phase out his losses, which start at $100k modified AGI and 3. All of his income is real estate related income so even if he showed a loss and ran into the income limits he would still have little or no other income to apply the losses to. 

Real estate pro is a great designation for those who make over $100k in income outside of real estate and show a net loss on their rentals. But wouldn’t appply here. 

Originally posted by @Josh Bauerle :
Originally posted by @Mark Elkins:

Since you are now self-employed, ask your accountant about the advantages of claiming you are a real estate professional. This is not a license requirement.  It has to do with working 750 hours in your business, having your money at risk and being an active participant in the decisions.

Changing to professional status with the IRS will change the way capital gains are calculated and lift the restrictions on how much you can deduct.  Once you do this you may find that depreciation, taxes, insurance, mortgage interest, maintenance, and management costs reduce your income substantially, perhaps even to the point of negative income you can use to get refunds from prior years taxes!

Find an accountant who works extensively with real estate investors if you want the best results.  I know some who have pulled 5 and 6 figure refunds on behalf of people previously represented by accountants who just didn't know the truth but forged ahead anyway with professional arrogance as if they did know.

 That’s actually not what the real estate professional designation does.  It doesn’t change anything with capital gains and doesn’t make anything more deductible than it is for anyone else. 

The advantage of being a real estate professional is that if your deductions exceed your rent you aren’t subject to the limitation of only taking the net loss against ordinary income. 

This wouldn’t apply here because 1. The OP said he will show a gain not a loss. 2. Even if he showed a loss, he isn’t going to run into the income limitations that start to phase out his losses, which start at $100k modified AGI and 3. All of his income is real estate related income so even if he showed a loss and ran into the income limits he would still have little or no other income to apply the losses to. 

Real estate pro is a great designation for those who make over $100k in income outside of real estate and show a net loss on their rentals. But wouldn’t appply here. 

AWESOME clarification Josh!  Thanks for taking the time to send that, I sort of half knew that and no I really know...and you know they say that's half the battle..haha  Seriously though, thanks!

Josh will standard deduction this year be 25k? Or will that take effect new year when trumps new tax plan goes into effect? It looks like it might be more like 12 in which case it wouldn’t wipe out most of my income? 

@James Defazio The standard deduction is $12,700 and your personal exemptions will be a total of $12,150. So your total deduction from income with just those two auto deductions would be almost $25k. Then you would get the child tax credit and quite possibly the earned income credit depending how the Airbnb ends up classified. 

If you get the earned income credit you will get a refund. Even without it you would owe little to nothing if the numbers you gave end up accurate. 

Also $20k taxable profits on rentals seems very high.  Are you including depreciation in that?  Do you not have mortgages on the properties?

no I was not including any depreciation forgot about that write off. That’s great thanks Josh! 

Sweet then the only possible tax you will have is self employment tax on the Airbnb. 

And actually you should want it to be self employed income because if it is you will get the earned income credit which will more than make up for the SE tax. 

I would be surprised if there’s a scenario you don’t walk away with a refund, assuming your numbers are accurate. 

By the way, we should get together some time. Not many other young people I know of in our area doing the real estate game!

@Richard Sherman ,@Josh Bauerle , @James Defazio .

Gentlemen:

Becoming a real estate professional will change calculations on capital gains because short-term capital gains will now be treated as ordinary income which is taxed differently.  Additionally, limits on passive losses, expenses, and depreciation to $25,000 are removed.  In other words, you won't need to make over $100,000 to take full advantage of this distinction and it doesn't phase out. What this means is, YES, it does make things more deductible for real estate professionals than for anyone else. You may deduct everything including ALL your depreciation the year it occurs.  If your passive losses exceed your income you have a loss that may be carried back 3 years or carried forward and you would owe ZERO tax in the year of the loss.  These deductions from income will also offset your spouse's income reducing your overall MAGI.

If you are uncertain this is correct, look it up and then check with an accountant who specializes in this area.  There is an excellent article posted on this blog that offers the insight you seek, BiggerPockets Article.  That article also contains a link to the IRS for this information but it doesn't work and I can't offer a good substitute.  A more technical guide from IRS may be found here Sec 469 PDF.

I don't know everything Gentlemen, I just know what I know, and I hope it helps.

Merry Christmas!

Mark Elkins

Updated 4 months ago

Just to be clear, you do not need to lose money for this strategy to work. It will reduce your income by the maximum amount in the event you are indeed a real estate professional.

thanks for all the info guys. Josh- you mentioned I should be able to qualify for the earned income credit as my Airbnb income will qualify as self employment income but to qualify for this I can’t show more than 3400 in investment income. 2 of my properties are paid for with no mortgage and I should have a decent amount of depreciation, taxes, expenses etc to offset a lot of the income but from what I read if it does not surpass what we’d receive from the standard deduction then we just take the standard deduction. My 2 properties with no mortgage make 24,000 a year before any deductions, expenses, depreciation etc...so I’m not sure I will be able to have enough deductions to offset the rental income if I itemized to surpass the standard deduction...but I would think I will need to show more than the allowed investment income to qualify for this tax credit? Thanks you guys. Just trying to get my mind prepared for taxes for next month. 

@Mark Elkins

I'm a CPA so this is kind of my expertise, and what you are saying is not accurate.

Short term capital gains are ALWAYS treated as ordinary income.  The real estate professional changes nothing there.

Depreciation and ALL other deductible real estate expenses are ALWAYS fully deductible in the year they occur.  The real estate professional changes nothing there.  

The $25,000 limitation is not a limitation on deductions.  It's a limitation on how much of your NET LOSSES can go against your ordinary income.  

What the real estate professional designation does is allows you to deduct your passive real estate losses against your ordinary income.  This is a huge benefit for those who qualify.  For the OP, as outlined above, it would do absolutely nothing for him.

There are two types of people a real estate professional designation could help.  Those with over $25k NET LOSSES and those who are making over $100k and beginning to phase out their $25k NET LOSS allowance.  You seem to be mistaking NET LOSSES for deductible expenses.  The info you are giving is inaccurate and misleading for people reading.  Gaining a real estate professional designation would not help the OP in any way whatsoever.

@James Defazio The standard deduction is entirely separate from your rental property deductions.  You will take 100 percent of your rental deductions against your rental income.

The standard vs. itemized factor only comes into play on your personal residence, not your investment properties.

josh, gotcha thanks for that clarification. Also, I sent you a private message on here just in case you haven’t checked it. Would love to get together with you anytime. 

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