Investor · Los Angeles, CA · Member since 2008 · 20 posts · 1 vote
I have been investing for several years. Initially, I met with a Tax Consultant to ask how to categorize Misc Expenses. Expenses that cannot be tied to a particular property. He advised that I either not report the expenses or randomly relate them to a property. So they would then be reported on the Schedule E. I am not content with this answer. I have legitimate expenses that do not relate to a particular property (examples: education and researching geographical areas and opportunities). I am considering the use of a Business (Schedule C) in addition to the Real Estate Profit and Loss (Schedule E). However, the Business will never have income. All of the income will be generated from the Real Estate (Schedule E).
I am very interested to get some opinions on how to structure these Misc Expenses. Please let me know what approach you have taken, and how well that approach has worked for you. And please enlighten me on any Tax Guidelines that I might be overlooking.
Wholesaler · Dallas, TX · Member since 2009 · 48 posts · 21 votes
16y
This may be the wrong place but it needs to be on the forum someplace.
If you are trying to claim deductions for education expenses prior to actually placing offers on properties. The IRS may want to argue that your education expenses were pre-career change and thus not allowable. Make sure you keep a journal of everything you do in business. A journal showing you were looking for property, made offers, even if none were accepted would be more evidence in court (hopefully never needed) than hearsay or testimony.
Ask a real estate accountant for advise before you spend your money. Just good business.
http://www.groco.com/readingroom/tax_woody_realestate_business.aspx This is not an endorsement, but the orginal article that prompted my post reply.
Real Estate Lender · Wheat Ridge, CO · Member since 2009 · 113 posts · 59 votes
16y
If you dont get an answer you like from your CPA get a new one. Almost everything with-in the tax code is grey so you can really push it if you keep great records. I have reported it both ways. When I was just starting and had just a few rentals we separated business expenses equally across the rentals and it worked fine. As I started making more money with other real estate activities like referral fees, wholesaling and flips I started reporting on a Sch C. I am not a CPA so please check with your accountant but I would not worry so much about how it gets reported as long as it is reported and is legal.
Certified Public Accountant · Chattanooga, TN · Member since 2008 · 279 posts · 151 votes
16y
I'd put it on Schedule E.
I tend to allocate my overhead expenses to my properties evenly. Example: My cell phone bill is $1,000 per year. I estimate I used it 25% of the time for rentals. $250 is then allocated equally between my two properties.
The IRS doesn't require you to use any particular allocation method, but you do need to use whichever method you pick consistently. ie. % of Revenue or evenly between properties.
A good book that you might want to pick up concerning common landlord tax questions is "Every Landlord's Tax Deduction Guide" by Nolo. It's very handy!
Certified Public Accountant · Chattanooga, TN · Member since 2008 · 279 posts · 151 votes
16y
No problem. Let me go back and make sure I clarify my position.
I went back and reread your original post. You mentioned "researching geographical areas" as a cost that you would like to expense for tax purposes. I'm not sure if you can take this one or not. I've always tended to allocate overhead that directly related to taking care of my current properties; cell phone, mileage, education, lawn mower, etc. These are absolutely allowable as deductions on Schedule E. I'm not saying you can't take this research as an expense, I'm just not sure where it would go either.
Sorry for the confusion. I just didn't want to lead anyone down the wrong path.
Wholesaler · Dallas, TX · Member since 2009 · 48 posts · 21 votes
16y
This may be the wrong place but it needs to be on the forum someplace.
If you are trying to claim deductions for education expenses prior to actually placing offers on properties. The IRS may want to argue that your education expenses were pre-career change and thus not allowable. Make sure you keep a journal of everything you do in business. A journal showing you were looking for property, made offers, even if none were accepted would be more evidence in court (hopefully never needed) than hearsay or testimony.
Ask a real estate accountant for advise before you spend your money. Just good business.
http://www.groco.com/readingroom/tax_woody_realestate_business.aspx This is not an endorsement, but the orginal article that prompted my post reply.
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
16y
James,
Nice link. The Wealth Intelligence Academy (WIA) and Rich Dad (affiliated with WIA for training) students should all pay attention to that BEFORE they pay a penny to get their "education". The "it's deductible" argument that the training providers use is a bit misleading once you understand the ruling from that link.