Newbie tax questions

10 Replies

Ok all you smart BP members, I have a couple of tax questions. I'm new to real estate investing, and haven't made my first purchase yet. I have been trying to get some things in order while looking for a property. 1) Since I have not made a purchase yet, and don't foresee making one before the end of the year, will any of my expenses (such as training workshops, travel & lodging, office supplies, etc.) be deductible on my taxes? Will the business even be considered a business until I make a purchase? I have opened a Sole Proprietor business bank account for the business. 2) When I opened the Sole Proprietor business bank account, I transferred several thousand dollars from my personal bank account into the business account to have money available if I found a good deal. Will this money be considered business income? Thanks in advance for your help. I realize these are newbie questions, but that's exactly what I am. Thanks again.

There is a special tax rule called “start up expenses”. It always you to deduct the costs you incur to get your rental business up and running. You can deduct up to $5k the first year you are in business and anything over has to be expense over 15 years. So, you should be able to deduct your education, travel, and office expenses. Now once you get a property and it’s advertised for rent, you can not use the start up rules exemption anymore. Keep track of every $ you spend before that. As for the money you transferred over, try not to commingle personal and business funds.

Keep in mind, tax rules may change first of the year.

I am not a CPA so definitely speak with one.

@Brandon Hall if you have tax questions, he is your man.

@Michael Bertsch Thank you for your input. I didn't think about any consequences of transferring the money before I did it. Hopefully there won't be an issue.

@Barry Cooley - The money that you transferred into the business bank account is not considered income and you will not have to pay taxes on this. This would be considered a contribution.  I agree with Michael about making sure you do not co-mingle your funds.  This can affect you more from the law side, but it can make it more difficult to make sure you keep your books in an orderly fashion.  Almost all businesses will need a contribution made to allow the business to get started.  Contributions can be used to fund future projects as well.  

I am a CPA, but please consult your own CPA with all the details. 

I could be mistaken as I’m not a CPA, but from what I’ve seen and generally been told by my accountant is you wouldn’t really be able to deduct those expenses.

When I travelled to a city to look at properties (but didn’t yet own any) those expenses aren’t deductible. Now that I’ve bought one in that city, any time I travel there to see it or buy more it’s deductible.

Consult a cpa, no advice given

@Caleb Heimsoth - That was my concern...if I can claim expenses before making a purchase. But you nearly always have start up expenses. So, where do those come into play? Is not being able to claim those expenses just the cost of doing business?

Truly Barry,

I say consult your own CPA. They should give you a much better advice. However, what I have read is in agreement with Caleb, its not until you buy the actual property then those expenses become deductible. However, Caleb and I are not CPAs so please consult one before making any decisions.

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