Section 179 Question for rental business
Member since 2024 · 9 posts · 5 votes
Section 179 Question for rental business
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Accountant · NH · Member since 2019 · 269 posts · 288 votes
2yGenerally if you only have a handful of rentals and you are fulltime doing something else (a W-2 job), it'll just make sense to claim the standard mileage deduction - @David Orr did a good job outlining all the related nuance to that.
With 179 you are going to be limited based on your percentage of business use with the vehicle (so still need to track mileage), and if you go under 50% business use you can end up with a recapture of your prior 179 deduction - income with no related cash flow is always a bit uncomfortable!
12 Replies
Expenses for your rental activities still have to all be on Schedule E, not C. An LLC doesn't make a difference in your federal taxes or what you can deduct.
What you want to do is technically possible, but there are several hurdles. To deduct the vehicle using section 179, it would need to be a qualified SUV/pickup/van over 6000 pounds. The more challenging stipulation is you would need to use it more than 50% of the time for business use (and you need to log the miles to document that).Ok, if it's still sounding do-able, the next issue is that section 179 can't be used to create a business loss, so it would only reduce your taxes for the year if your rentals are operating as a taxable gain (but rentals are often at a tax loss thanks to depreciation).
And then the last hurdle is that driving miles between your home and your rental properties by default is considered to be like your "commute" to work, and your commute doesn't count as business miles. You can get around that issue if you have a dedicated home office space that is used for the operation of your rental business. This applies regardless of the type of deduction you choose to take for the vehicle.
If section 179 doesn't work in your situation, there is bonus depreciation, which allows for a deduction of up to about $20k of the value of the vehicle for 2024. That still has the 50% use requirement, but can be used to create a tax loss. But then we have to get into talking about the passive loss rules, which may prevent you from actually being able to claim a tax loss if the deduction is more than your rental or other passive income.
Or you can claim the actual expenses (gas, insurance, etc) for the vehicle and regular depreciation, proportioned by the percent of business use of the vehicle. And then finally, there is always the option to just claim the regular standard mileage deduction rate of $0.67/mile. That's the easiest option.
But keep in mind all these options still require logging your driving trips, and having a home office if you're claiming trips from home to the rentals. And the passive loss rules may prevent you from getting a tax benefit if your rental deductions are more than your rental income for all of these options.
David Orr
Tax Modern- Member since 2024 · 9 posts · 5 votes2y
Wow thanks for this awesome response.
I will be able to log the 50% time of business use. But I think the your point on this causing a business loss is what's going to be my biggest huddle. Because like you said, my rentals are very close to a net loss on a yearly basis. I think maybe the regular standard mileage deduction might be my route then. I've searched around and think I do understand how it works, but do you know any good resource that I can get more if not at least the accurate information on it?
- Accountant · NH · Member since 2019 · 269 posts · 288 votes2y
Generally if you only have a handful of rentals and you are fulltime doing something else (a W-2 job), it'll just make sense to claim the standard mileage deduction - @David Orr did a good job outlining all the related nuance to that.
With 179 you are going to be limited based on your percentage of business use with the vehicle (so still need to track mileage), and if you go under 50% business use you can end up with a recapture of your prior 179 deduction - income with no related cash flow is always a bit uncomfortable! Quote from @Daniel Chen:
Wow thanks for this awesome response.
I will be able to log the 50% time of business use. But I think the your point on this causing a business loss is what's going to be my biggest huddle. Because like you said, my rentals are very close to a net loss on a yearly basis. I think maybe the regular standard mileage deduction might be my route then. I've searched around and think I do understand how it works, but do you know any good resource that I can get more if not at least the accurate information on it?
I'm not sure if we can like to articles on our own websites here, so to be safe I'll just suggest the IRS web page, which does do a pretty good job of explaining the basics: https://www.irs.gov/taxtopics/tc510
The main thing to know if you're going to claim business miles is that you do need to keep a log of every business trip. There are phone apps that help with that. MileIQ is a popular one, and that one runs in the background on your phone and logs every trip you make, and then you categorize each trip as personal or business. Everlance is one that I prefer, but that one you have to remember to open up the app and turn it on before each business trip. If you haven't been logging your past trips, you can piece together the info from your calendar, etc.And @Kory Reynolds brought up a good point about recapture of the section 179 deduction if your business use drops under 50% in a future year.
David Orr
Tax Modern- Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes2y
Quote from @David Orr:
Expenses for your rental activities still have to all be on Schedule E, not C. An LLC doesn't make a difference in your federal taxes or what you can deduct.
What you want to do is technically possible, but there are several hurdles. To deduct the vehicle using section 179, it would need to be a qualified SUV/pickup/van over 6000 pounds. The more challenging stipulation is you would need to use it more than 50% of the time for business use (and you need to log the miles to document that).Ok, if it's still sounding do-able, the next issue is that section 179 can't be used to create a business loss, so it would only reduce your taxes for the year if your rentals are operating as a taxable gain (but rentals are often at a tax loss thanks to depreciation).
And then the last hurdle is that driving miles between your home and your rental properties by default is considered to be like your "commute" to work, and your commute doesn't count as business miles. You can get around that issue if you have a dedicated home office space that is used for the operation of your rental business. This applies regardless of the type of deduction you choose to take for the vehicle.
If section 179 doesn't work in your situation, there is bonus depreciation, which allows for a deduction of up to about $20k of the value of the vehicle for 2024. That still has the 50% use requirement, but can be used to create a tax loss. But then we have to get into talking about the passive loss rules, which may prevent you from actually being able to claim a tax loss if the deduction is more than your rental or other passive income.
Or you can claim the actual expenses (gas, insurance, etc) for the vehicle and regular depreciation, proportioned by the percent of business use of the vehicle. And then finally, there is always the option to just claim the regular standard mileage deduction rate of $0.67/mile. That's the easiest option.
But keep in mind all these options still require logging your driving trips, and having a home office if you're claiming trips from home to the rentals. And the passive loss rules may prevent you from getting a tax benefit if your rental deductions are more than your rental income for all of these options.
David Orr
Tax Modern
Firstly, utilizing Section 179 deductions for a vehicle purchase can indeed be advantageous, particularly if the vehicle is primarily used for business purposes. However, it's important to note that Section 179 deductions typically apply to tangible personal property used for trade or business, which may not directly align with rental property activities reported on Schedule E. Since you currently operate without an LLC and report rental income on Schedule E, the vehicle purchase might not seamlessly integrate into your existing tax structure.To leverage Section 179 deductions effectively, you may need to consider restructuring your rental property management operations. Establishing a separate entity, such as an LLC, for your rental property business could provide more flexibility in claiming deductions associated with business-related assets like vehicles. Additionally, transitioning certain activities, such as maintenance and repairs, to be conducted directly through the business entity could strengthen your position for claiming deductions. Ultimately, consulting with a real estate focused accountant is the move here, but this should be a helpful primer. Best of luck!
- 2yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
The issue with section 179 expense is that you normally have to operate at positive income.
Under most circumstances, bonus depreciation is better since you can take bonus depreciation even if you operate at negative income.
Basit Siddiqi CPA4.979 Reviews - 2yJulio GonzalezPro MemberSpecialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
@Daniel Chen Here's an article with some FAQs on Section 179D that you may find helpful. Feel free to reach out if you have any questions.
https://www.biggerpockets.com/forums/432/topics/1013061-sect...
- Member since 2022 · 1 post · 0 votes1y
I appreciate this post as this scenario is very similar to mine. I'm looking to buy a vehicle this weekend, specifically to transport supplies to and from my rental property, and to work on the property in between tenants; the property is 700 miles away. I use a schedule E and do not have an LLC or business name, so can I purchase the vehicle under my personal name and take section 179? The vehicle is over 6000 pounds GVWR and will be used nearly entirely for business (going to current rental and searching for new properties to acquire).
A second question is if I finance the car purchase can I also deduct the business use portion of the interest charged on the loan? This is an old thread that was revived with the recent reply, and re-reading it now, I want to correct a couple things. What I said in an earlier comment about "section 179 can't be used to create a business loss", that wasn't entirely accurate/complete. The loss created by section 179 is limited to your total net taxable income amount from all "active" business income you have, plus any W-2 income. So you can have section 179 losses for your rental even if the rental isn't generating positive taxable income, as long as you have other active income. Note that active income isn't the same thing as non-passive income, it's lower bar that just requires that it's a business activity that isn't just entirely passive. But the rental too does have to meet the "active conduct of a trade or business" threshold, which does mean you wouldn't qualify to use section 179 if you have a rental that is managed entirely by someone else and you aren't at least overseeing it and making decisions about the management of it.
I mostly disagree with the reply suggesting that you need to have an LLC to take the section 179 deduction. An LLC is potentially one minor factor that might contribute to the evidence that you are running your rental activity as a trade or business, but it's definitely not required that you have an LLC to qualify. That comment also seemed to imply that you don't report the rental on Schedule E if you have an LLC, but that's not correct, with a single member LLC it still goes on Schedule E.
"I use a schedule E and do not have an LLC or business name, so can I purchase the vehicle under my personal name and take section 179? The vehicle is over 6000 pounds GVWR and will be used nearly entirely for business (going to current rental and searching for new properties to acquire)."It's fine that it's on schedule E and not in an LLC. The are some specific limitations on SUVs and crossovers even if they're over 6000 pounds, so you should make sure the particular vehicle qualifies.
"A second question is if I finance the car purchase can I also deduct the business use portion of the interest charged on the loan?"
Yes, you can deduct related expenses including gas, loan interest, insurance, etc. using the actual vehicle expenses method to deduct auto expenses for your rental or other businesses.
- Member since 2024 · 9 posts · 5 votes1y
Quote from @David Orr:
This is an old thread that was revived with the recent reply, and re-reading it now, I want to correct a couple things. What I said in an earlier comment about "section 179 can't be used to create a business loss", that wasn't entirely accurate/complete. The loss created by section 179 is limited to your total net taxable income amount from all "active" business income you have, plus any W-2 income. So you can have section 179 losses for your rental even if the rental isn't generating positive taxable income, as long as you have other active income. Note that active income isn't the same thing as non-passive income, it's lower bar that just requires that it's a business activity that isn't just entirely passive. But the rental too does have to meet the "active conduct of a trade or business" threshold, which does mean you wouldn't qualify to use section 179 if you have a rental that is managed entirely by someone else and you aren't at least overseeing it and making decisions about the management of it.
I mostly disagree with the reply suggesting that you need to have an LLC to take the section 179 deduction. An LLC is potentially one minor factor that might contribute to the evidence that you are running your rental activity as a trade or business, but it's definitely not required that you have an LLC to qualify. That comment also seemed to imply that you don't report the rental on Schedule E if you have an LLC, but that's not correct, with a single member LLC it still goes on Schedule E.
"I use a schedule E and do not have an LLC or business name, so can I purchase the vehicle under my personal name and take section 179? The vehicle is over 6000 pounds GVWR and will be used nearly entirely for business (going to current rental and searching for new properties to acquire)."It's fine that it's on schedule E and not in an LLC. The are some specific limitations on SUVs and crossovers even if they're over 6000 pounds, so you should make sure the particular vehicle qualifies.
"A second question is if I finance the car purchase can I also deduct the business use portion of the interest charged on the loan?"
Yes, you can deduct related expenses including gas, loan interest, insurance, etc. using the actual vehicle expenses method to deduct auto expenses for your rental or other businesses.
Thank you for coming back and clarifying it, the minor difference does make a difference to me in practice.
- Investor · Denver, CO · Member since 2015 · 3 posts · 0 votes7mo
The commenter is right that standard mileage usually makes more sense for your situation. The math tends to work out better when you're not racking up massive miles, plus it's simpler at tax time.
The tracking part is the annoying bit though. I actually built a free add-on for this called Mileage Log because I got tired of forgetting to log trips. It pulls from your Google Calendar and calculates the driving distances automatically in Google Sheets. So if you're already putting property visits on your calendar (inspections, showings, meeting contractors, etc.), it just generates the log for you. Everything stays in your own Google account.
There are other options too like MileIQ or Everlance if you prefer a phone app, but I found those required me to actually remember to open them, which was my whole problem. The calendar approach worked better for my brain since I was already using it to stay organized.
Either way, getting some system in place now will save you a headache come tax season. Your CPA will thank you, and you won't be scrambling to reconstruct trips from memory.
mileagelog.app if you want to check it out.
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