Ne RE investor
Mimi TakelePro Member
Investor · Minneapolis/ St Paul, MN · Member since 2016 · 7 posts · 3 votesNe RE investor
Most Popular Reply
Sean O'KeefePro Member
CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votes@Mimi Takele The answer is - maybe
The main question is when did you complete the start-up phase and became actively engaged in business?
This is the case that is related to your questions. The court decided that the $21k education expense was not deductible as business expenses but would be considered, at best, the start-up cost. Start-up costs are also deductible but are amortized over 15 years with a limit of 5k.
Start-up costs have strict rules and your case might not be the same as this one.
Case Summary:
Timeline line of events
- Started investigating property: Feb
- Put first contract (canceled): May
- Bought first property: December 30th
Whether a taxpayer is engaged in a trade or business is determined using a facts and circumstances test under which courts have focused on the following three factors that indicate the existence of a trade or business:
- Whether the taxpayer undertook the activity intending to earn a profit;
- Whether the taxpayer is regularly and actively involved in the activity; and
- Whether the taxpayer's activity has actually commenced.
On the basis investor testimony, we may assume that he undertook this activity to make a profit and that he regularly and actively engaged in it. However, it is the third factor—whether investor business had actually commenced—that is determinative here.
In investor’s business outline, dated May 10, 2004, he indicated that he was starting Value Property Investments “for the purpose of buying, remodeling and renting property.” Therefore, until investor began to buy, remodel, or rent—i.e., to perform the activities for which Value Property Investments was organized—he was not carrying on a trade or business as contemplated by section 162 (Business deduction).
Nonetheless, in order to resolve the matter before us, we do not need to decide whether Mr. Woody's business started at the time he purchased the 1st property or at the time he held it out for rent, because, in any event, the expenses in question here all occurred before the purchase date, i.e., before December 30
If the earliest possible date investor was actively carrying on a trade or business was December 30, 2004, then any expenses incurred in that year but incurred “before the day on which the active trade or business” began, all the expenses incurred from January 1 through December 29, 2004--would be, by definition, start-up expenses whose deductibility, and possible amortization, is expressly dealt with by section 195 (Start up amortization).
Court case for reference:
- Code Sec(s): 162; 195
- Docket: Dkt No. 30077-07.
- Date Issued: 04/30/2009
- Judge: Opinion by Gustafson, J.
- Tax Year(s): Year 2004.
- Disposition: Decision for Commissioner.
5 Replies
- 2ySean O'KeefePro MemberCPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votes
@Mimi Takele The answer is - maybe
The main question is when did you complete the start-up phase and became actively engaged in business?
This is the case that is related to your questions. The court decided that the $21k education expense was not deductible as business expenses but would be considered, at best, the start-up cost. Start-up costs are also deductible but are amortized over 15 years with a limit of 5k.
Start-up costs have strict rules and your case might not be the same as this one.
Case Summary:
Timeline line of events
- Started investigating property: Feb
- Put first contract (canceled): May
- Bought first property: December 30th
Whether a taxpayer is engaged in a trade or business is determined using a facts and circumstances test under which courts have focused on the following three factors that indicate the existence of a trade or business:
- Whether the taxpayer undertook the activity intending to earn a profit;
- Whether the taxpayer is regularly and actively involved in the activity; and
- Whether the taxpayer's activity has actually commenced.
On the basis investor testimony, we may assume that he undertook this activity to make a profit and that he regularly and actively engaged in it. However, it is the third factor—whether investor business had actually commenced—that is determinative here.
In investor’s business outline, dated May 10, 2004, he indicated that he was starting Value Property Investments “for the purpose of buying, remodeling and renting property.” Therefore, until investor began to buy, remodel, or rent—i.e., to perform the activities for which Value Property Investments was organized—he was not carrying on a trade or business as contemplated by section 162 (Business deduction).
Nonetheless, in order to resolve the matter before us, we do not need to decide whether Mr. Woody's business started at the time he purchased the 1st property or at the time he held it out for rent, because, in any event, the expenses in question here all occurred before the purchase date, i.e., before December 30
If the earliest possible date investor was actively carrying on a trade or business was December 30, 2004, then any expenses incurred in that year but incurred “before the day on which the active trade or business” began, all the expenses incurred from January 1 through December 29, 2004--would be, by definition, start-up expenses whose deductibility, and possible amortization, is expressly dealt with by section 195 (Start up amortization).
Court case for reference:
- Code Sec(s): 162; 195
- Docket: Dkt No. 30077-07.
- Date Issued: 04/30/2009
- Judge: Opinion by Gustafson, J.
- Tax Year(s): Year 2004.
- Disposition: Decision for Commissioner.
- Investor · Minneapolis/ St Paul, MN · Member since 2016 · 7 posts · 3 votes2y
Thank you, Sean I started this past August 2023. I haven't purchased any properties yet, but working on a wholesale deal. I appreciate your time.
Thx again
- 2yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votesYou may want to read this new post:
Quote from @Mimi Takele:
I started this past August 2023. I haven't purchased any properties yet, but working on a wholesale deal.
https://www.biggerpockets.com/forums/51/topics/1202208-gray-... - 2yJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 903 votes
it’s important to note that the IRS generally does not allow you to deduct expenses for a new career or business that you are trying to enter. Deductions are typically only allowed for expenses that are related to your current trade or business. If you are in the process of entering a new business, such as real estate investing, those start-up expenses are generally capitalized and can be amortized over time, but they cannot be immediately deducted.
Malabute & Company CPAs525 Reviews - 2yNathaniel QuesenberryBusiness MemberAccountant · Member since 2024 · 15 posts · 9 votes
Mimi,
I'll echo everyone here and especially Sean's answer to your question. Nothing else really to add.
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