Health Insurance on Schedule E

6 Replies

My accountant has taken the position that health insurance premiums for full-time, self-employed real estate investors are not deductible on Schedule E since real estate is not technically considered a business by the IRS. This seems contrary to what I have heard other investors discuss. Does anyone have any insight on this?

Is there an advantage to putting them on Schedule E?  My premium costs are fully accounted for on 1040 Line 29, which is "Self-employed health insurance deduction".  

Do you have any Schedule C income as well, or only Schedule E?

Thank you Marie. 1040 Line 29 seems like the right location. I don't have Sch C income, only Sch E. Do you know if your Sch C income is what allows the Line 29 deduction, or if Sch E would allow the same?

Thank you again.

Originally posted by @Dan R. :

Thank you Marie. 1040 Line 29 seems like the right location. I don't have Sch C income, only Sch E. Do you know if your Sch C income is what allows the Line 29 deduction, or if Sch E would allow the same?

Thank you again.

I don't know.  My understanding is that Schedule E doesn't reflect self-employment income, so I'm in agreement with your accountant that Sch. E doesn't mean you have a real estate business.

@Steven Hamilton II  Let's summon Steven to see if can chime in.  

Thank you Steven.

@Dan R.

I'll risk arguing with my colleague, even though he is the moderator :)

If you want to stay safe with the IRS, then yes, both your accountant and Steven are correct. The IRS does not recognize managing rental properties reported on Schedule E as a business. Consequently, they do not allow any business overhead deductions, including cost of health insurance. If you put it on Line 29 (you would have to force your software to do so), it will be flagged by the IRS computer and very likely result in an audit.

However, if you're really aggressive and don't fear a fight with the IRS, the law may actually be on your side, provided you have big enough portfolio. There have been court case precedents where the IRS was forced to treat significant rental (Schedule E) activities as "trade or business", and business overhead expenses were allowed. But if you go this route, you better be ready for an audit and a fight.

One other important consideration: the business has to be profitable to allow for the health insurance deduction. Most Schedules E for mortgaged properties show tax losses, not profits. If so, the deduction will not work for you anyway.

Lastly, you can restructure your business to allow for a "clean" health insurance deduction, via creating a separate property management business, but this is on the advanced side, not for a quick online tip.

Mandatory IRS disclaimer: Be advised that any tax advice contained in this communication, is not intended or written to be used and may not be used for the purpose of (i) avoiding any tax-related penalties imposed under Federal law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.