Claim business expenses when filing tax

Tax, SDIRAs & Cost Segregation
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Claim business expenses when filing tax

Joe Au
Investor · Draper, UT · Member since 2016 · 120 posts · 57 votes

Do you have to have an LLC in order to claim real estate related business expenses? If not, how many deals do you have to do per year so that you are consider as running a real estate business?

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Dave Holland
Certified Public Accountant (CPA) / Investor · Homer, NY · Member since 2016 · 68 posts · 52 votes
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@Joe Au

No you certainly do not need to have an LLC in order to claim business expenses, you simply must be operating as a business. If you haven't formed a business entity you would be a sole proprietor.

Let me know if you have other questions. 

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  • Dave Holland
    Certified Public Accountant (CPA) / Investor · Homer, NY · Member since 2016 · 68 posts · 52 votes
    9y

    @Joe Au

    No you certainly do not need to have an LLC in order to claim business expenses, you simply must be operating as a business. If you haven't formed a business entity you would be a sole proprietor.

    Let me know if you have other questions. 

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  • Scott Vance
    Investor · Fort Bragg, NC · Member since 2016 · 59 posts · 20 votes
    9y

    @Joe Au You do not have to be an LLC to claim a business expense. Operating as a business qualifies you to take the deductions. You still must follow each deductions particular rules and regulations. IE The home office deduction has some hoops to jump through.

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  • Joe Au
    OP
    Investor · Draper, UT · Member since 2016 · 120 posts · 57 votes
    9y

    And what is the definition of "Operating as a business"? Does it require actual profit?

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  • Daniel HymanBusiness Member
    CPA · Milwaukee, WI · Member since 2016 · 2k+ posts · 1k+ votes
    9y

    @Joe Au

    Basically, you would have to demonstrate to the IRS that you have an honest intent to make a profit.  The way to do that is by conducting the activity in a business-like manner by keeping good records and searching for profit-making strategies.

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  • Thomas Giganti
    Investor · Damascus, MD · Member since 2016 · 53 posts · 10 votes
    9y
    To piggy back on the original question, is there a limit to how much you can expense for the business? Does tax bracket effect this?
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  • Scott Vance
    Investor · Fort Bragg, NC · Member since 2016 · 59 posts · 20 votes
    9y

    yes and no.  The expenses affect your ultimate profit or loss from the business.  That profit or loss is then carried forward to your 1040.  If the business is a passive one it is a passive gain or loss, you can only offset a passive loss against a passive income.  If you are a buy and hold property owner you can offset a passive loss of up to $25,000 against your earned income, depending on your AGI.  

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  • Joe Au
    OP
    Investor · Draper, UT · Member since 2016 · 120 posts · 57 votes
    9y

    Thank you @Scott Vance @Daniel Hyman @Dave Holland

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  • Thomas Giganti
    Investor · Damascus, MD · Member since 2016 · 53 posts · 10 votes
    9y
    Scott Vance if I'm following you then if I had passive income of $25,000 for the year and had $25,000 of passive loss i.e. Renovations to space and what not then technically they would offset each other and I would not get taxed at all?
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  • Jassem A.
    Investor · PA · Member since 2013 · 1k+ posts · 602 votes
    9y

    Depends on if they are improvements or repairs that were made. You can deduct more by repairing what is already there but if it's an improvement you depreciate it over 27.5 years.

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  • Scott Vance
    Investor · Fort Bragg, NC · Member since 2016 · 59 posts · 20 votes
    9y

    @Thomas Giganti  Yes subject to income limitations and other stipulations.  Also to make sure my prior post is clear that $25k limit only applies to you if you are not a full time real estate person. Also the limit only applies to a passive loss as it is applied against earned income.  I am not aware of any limit to the amount passive loss that can be offset by gain.  So for example if you have a $500,000 in passive income you can offset it with up to $500,000 in passive loss.  Then still deduct up to $25k in passive loss against earned income.  Of course as always check with a CPA or enrolled agent as to your specific circumstances. 

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  • Account Closed
    Rental Property Investor · Orlando, FL · Member since 2016 · 463 posts · 220 votes
    9y

    @Dave Holland @Daniel Hyman @Scott Vance

    What if you are just starting out in REI, and haven't made any income yet? Are expenses incurred in visiting, purchasing and repairing/rehabbing property deductible as business expenses? The property isn't rented yet, and won't be until next year, but the expenses are incurred this year. How do I account for that in my 2016 taxes? Thanks for your help!

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  • Dave Toelkes
    Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
    9y

    @Account Closed.

    You never get to deduct the purchase price. 

    For buy and hold property you do not get any deductions for the costs to make the property ready for rental use (these costs include the repair/rehab costs, maintenance, upkeep, utilities, etc).  All of these costs are treated as capital improvements with the total make ready cost added to your tax basis, then recovered through depreciation only after the property is in service as a rental.

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  • Account Closed
    Rental Property Investor · Orlando, FL · Member since 2016 · 463 posts · 220 votes
    9y

    @Dave Toelkes

    Thanks for replying to my question. I should have clarified that I didn't think the purchase price itself was deductible, but driving here and there to look at properties! It's helpful to know that none of the actual repair expenses are deductible- what about mileage, though? Is this not a business-related expense, even though the house is not yet rented?

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  • Scott Vance
    Investor · Fort Bragg, NC · Member since 2016 · 59 posts · 20 votes
    9y

    @Account Closed  In general yes your mileage and other business related expenses should be included the computation of if you made money or not.  The costs directly related to getting the property ready for rental, repairs/rehabs, upkeep, utilities would be capitalized and depreciated once the property is in service as a rental.  

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  • Account Closed
    Rental Property Investor · Orlando, FL · Member since 2016 · 463 posts · 220 votes
    9y

    Thank you for your answer, Scott. It's very helpful!

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