Health Insurance on Schedule E

10 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.

I am wondering if there has been any real solid resolution on this topic. My CPA has instructed me that the auto expenses (at least the proportion used for rental activities), overhead such as office supplies, software, tax preparation, and other items which occur to operate the rental properties (AS A WHOLE) are expensable on Schedule E relative to the activity (e.g. based on number of units per property) by "cost accounting or cost allocation". Specific repair projects and supplies, maintenance that are property specific are listed on the Schedule E for each respective property. The cost allocated overhead is divided based on number of units across multiple properties and added in. Where there is some additional questions are whether items like health insurance for myself and my wife (the premiums not the actual medical expenses) would be considered part of this overhead (in the past we HAVE NOT put this into the "cost allocated" calculations for Sch E but instead listed them in Sch A. I have seen on this website answers both ways regarding this (the site administrator saying leave it in Sch A, and his colleague (also a enrolled agent) advising that it can be written off in Sch E, but that there are certain restrictions mainly -- you must have passive activity gains where the deductions are covered (no passive activity loss carry over allowed. The enrolled agent on this site also goes onto state there is case law (court decisions) that were in favor of cost allocation on Sch E, but the actual cases were not cited, and that if you were "aggressive and willing to fight with the IRS" the case law might actually support this. I don't know about any of you , but I'd like to honestly get the deductions I am entitled to, pay my fair tax, and avoid any issues with the IRS, but not aggressively seek their scrutiny or wrath. The same enrolled agent also suggests that opening a 'property management' business should allow the deduction of the overhead 'cleanly', but frankly creating a Sch C business with only overhead expenses to support Sch E activities seems to be 1) a HUGE RED FLAG as there is NO INCOME to the business created, and only expenses incurred over SCH E activities only. What that effectively means is that a NEGATIVE INCOME (read LOSS) on SCH C occurs every year -- A KNOWN RED FLAG. To add another twist to this, it seems that Real Estate Licensees get special consideration as rental activities including acquisition, sale, and management of those rental properties may be considered NON PASSIVE (active) due to the professional occupation. -- I am a real estate broker. This grey area of filing really needs to be made more clear. The expenses are real. They are rental related only, but not being able to clearly know where to file them in SCH A, SCH C, SCH E, really is a big problem and audit risk. Big companies have COGS and Overhead cost accounting and allocations, why are landlords who actively manage their properties left in the murky water by the IRS? Why do 2 different CPAs and an enrolled agent disagree? Please help.... if you can cite case law, publications from the IRS, or anything that will give reference and cited guidance in this matter, I am sure all landlords out there would be appreciative and rendered better tax filers and tax payers as a result.

Originally posted by @Account Closed:

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?

From what I understand Schedule C income is taxed as Self Employment income and Sch E -- at least for a real estate licensee who actively participates in rental management -- would be taxed at a lower rate, so perhaps there is benefit.  But mainly, since all my income comes from rental property in SCH E, if I file "overhead" expenses that span across properties (like office supplies, my office maintenance, my office repairs, tax preparation fees, clerical contractors (file clerks and bookeepers who come in from time to time)) on SCH C but all my income appears on SCH E, then the Sch C looks like a money loser year in and year out which I understand is a HUGE RED FLAG FOR AUDIT.

Originally posted by @Michael Plaks :

@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.

@Jason Chu

This is an admirable but an impossible goal: "I'd like to honestly get the deductions I am entitled to, pay my fair tax, and avoid any issues with the IRS, but not aggressively seek their scrutiny or wrath." 

You have to choose. The tax law is one massive grey area. 

You can stay conservative and only deduct what the IRS easily allows. Then no health insurance premiums, no home office etc. for landlords. 

Or you can push the envelope and deduct more - but then you're running a risk of a fight with the IRS.

It really is either-or, cannot have both.

Creating a Schedule C for property management is more complicated than what you described. This is something for your CPA to explain to you in detail, if he is comfortable with this idea.

PS. Please try to break your posts into paragraphs, for easier reading. Thanks.

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