Seattle, WA · Member since 2017 · 16 posts · 4 votes
Hi biggerpockets community! I come to you seeking sage advice yet again.
So here's my situation. I'm currently handling all management of a friend's downtown Seattle condo via Airbnb while he's living abroad. Things have been going really well, and he's asked if I would help him convert a second unit into an Airbnb from a long-term lease. Since there is significant upside for both him and myself, I willingly obliged and am happy to help with minor repairs and spend the time and money to furnish the unit in preparation for our first guests.
My question for you is what is the best way to handle the expenses associated with all of the costs needed to get the unit ready for Airbnb? We are planning to put up a coat of new paint as well as oversee contractors to replace the worn out carpet (has to be done, it was destroyed by the last tenant). The owner is overseas and so he was hoping that we could take on these expenses ourselves, itemize all expenses associated with preparing the unit, and then deduct those from his future payouts. We are currently handling the airbnb payout directly, and then plan to pay him his 80% cut after our management fee (and all associated expenses) have been accounted for. Can we do this without being a LLC or other business entity? The thought was that we should be able to cut him a 1099 at the end of the year for the revenue he will be bringing in, but neither my wife (an accountant by trade) or myself (software developer) have had experience with this before and don't want to get stuck not being able to expense all of these costs.
Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
7y
So you are basically acting as the PM for his rental business......and he wants YOU to front all the costs for the expenses to rehab a unit and make it another AirBNB.....and pay you back as HIS unit generates income?
No legit, professional PM company on the face of the earth would do that....NONE. So I'm not sure why you would want to do it, unless you are really a partner in the property..... i.e have some ownership or equity in the property
If you want to be the PM of your friends unit, then act like a pro PM would act...... the owner pays all the expenses and they pay you for your management. Don't treat this differently and screw around with how the $$ gets moved around just because you are friends....that's a recipe for disaster and an end to the friendship real quick.
If your friend wants you to front $$ for a unit rehab, then you need to make arrangements to be a bigger partner in this "business" and you need to work out those details. No way am I fronting $$ to rehab someone else's asset and then waiting to get paid back.... unless I'm now a partner and will be getting paid for my "loan" in some way, what's my upside? and I see a lot of downside for me..... no way.... what if it doesn't rent as well as we thought? am I cool with it taking many months or even a year to get paid back? You are floating your friend an interest free loan.... nope.....
If your friend just doesn't have the $$ to do the rehab, and you do then fine....lets partner to make it happen so we can both make more $$.....you need to get paid for your loan and the risk to your $$ involved.
It makes no sense that you would issue your friend a 1099. He's working for you. Plus he's making rental income, not ordinary income. These aren't the same thing.
If I were you I would set up a LLC that your friend "hires" to manage his rentals. You collect the rent, take out all the expenses and your fees, then pass the difference on to your friend.
Seattle, WA · Member since 2017 · 16 posts · 4 votes
7y
Thanks @Jaysen Medhurst. So I mean technically I am working for him since I'm the one managing his property for him. The difference is that instead of him collecting all the revenue and paying me my 20%, I am collecting the monies, deducting my fees and rental expenses, and then paying him his ~80%.
Are you saying we do need to be a business entity to operate this way? Or just that it would be your recommendation? At this point I don't want to overcomplicate the matter, but am just trying to understand what we need to legally operate in this context (it was suggested on one forum that a limited power of attorney might also be a viable solution). As well as what do we need to do from a tax documentation perspective to make sure Uncle Sam gets his cut.
The reason I suggested the 1099 is because Airbnb will issue us a 1099 since we will be doing more than $15k in business through their platform. We will deduct our expenses/fees from this, and pay the owner with the remainder. The issue is then how do we report that sum of money to the IRS so that it's accounted for on his return (and not ours)? Isn't that what a 1099 is for?
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y
@Robert Silvernagel, I'm not a lawyer or CPA, so I can't say what you need to do. Yes, I recommend setting up the LLC. It will make all of the accounting easier and help justify the money you're making as Qualified Business Income (QBI).
That being said, some states require a property manager to also be a RE agent. I don't know the laws of your state. You should definitely talk with a CPA and an attorney to cover yourself. Some cities like Seattle are putting all kinds of rules in place about short-term rentals. You don't want to get on the wrong side of them.
Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
7y
So you are basically acting as the PM for his rental business......and he wants YOU to front all the costs for the expenses to rehab a unit and make it another AirBNB.....and pay you back as HIS unit generates income?
No legit, professional PM company on the face of the earth would do that....NONE. So I'm not sure why you would want to do it, unless you are really a partner in the property..... i.e have some ownership or equity in the property
If you want to be the PM of your friends unit, then act like a pro PM would act...... the owner pays all the expenses and they pay you for your management. Don't treat this differently and screw around with how the $$ gets moved around just because you are friends....that's a recipe for disaster and an end to the friendship real quick.
If your friend wants you to front $$ for a unit rehab, then you need to make arrangements to be a bigger partner in this "business" and you need to work out those details. No way am I fronting $$ to rehab someone else's asset and then waiting to get paid back.... unless I'm now a partner and will be getting paid for my "loan" in some way, what's my upside? and I see a lot of downside for me..... no way.... what if it doesn't rent as well as we thought? am I cool with it taking many months or even a year to get paid back? You are floating your friend an interest free loan.... nope.....
If your friend just doesn't have the $$ to do the rehab, and you do then fine....lets partner to make it happen so we can both make more $$.....you need to get paid for your loan and the risk to your $$ involved.
Rental Property Investor · Issaquah, WA · Member since 2017 · 37 posts · 24 votes
7y
@Robert Silvernagel I think your question has multiple factors to consider. Here are my thoughts based solely upon my understanding and experience. I do not claim to be an expert in legal or tax matters, these are just my opinions. You should consult with the appropriate expertise to get the proper guidance you need.
First, you are wondering whether you can operate as a business in the manner you are describing. Based upon my experience, you are already acting as a sole proprietorship (or partnership with your wife) in the eyes of the IRS regardless of the existence of a legal business entity. Whether you can operate in this manner is irrelevant, because you are considered a business automatically based upon the income you are producing for yourself in this way. So, your taxes should be approached accordingly as a business operator. If you want to establish an LLC, it would be for legal liability protection only, because the IRS does not consider the LLC status for it's purposes. You are either a sole proprietorship, s-corp, corp, etc. You should consult an experienced accountant regarding proper handling of business expenses and revenue from your business arrangement with your friend. It's important to know how to run your own business in this situation.
Secondly, if you are in partnership with your friend, you should be protecting your interests with a solid business plan, operating agreement, etc. Regardless of whether you establish a business entity, you should have these details in place. It sounds like there is a grey line drawn here whether you are in partnership, independent operator, independent contractor, or employer/employee relationships. If you are partners, you should have an arrangement and it would be recommended to have equity or stake in the partnership in some way. If you are an independent operator as a property manager, then you should have a contract arrangement for such. If you are an independent contractor, primarily managing the property, then your contract should outline the details of your arrangement and determine whether your friend should be issuing you a 1099. If you are an employee, then your friend needs to set up the appropriate business entity and payroll. This is more about how you are setting up your business relationship with your friend and what you get out of the arrangement. As with the other posts, if you are being asked to front money for the operations of the business, which is what your friend is asking you to do, then you really should be a partner in the business and establishing the appropriate business entity would be recommended, in my opinion. Set up a business bank account as well and manage the cash flow and books appropriately. If he is the "passive" partner in the operations, then he would be receiving dividends from the business and you would probably need to provide an equity contribution to the assets as a partner in the business. If you wanted to stipulate that the money you fronted is your equity contribution, you could do that, but you would want the properties to be put into title under your name as well or the name of the business entity so that you could have an equity share. There are other ways to handle the title, but the bottom line is that you should have part ownership of business assets as a business partner. A good business attorney should be consulted to help you decide on the best business relationship you should establish with your friend, in my opinion.
Third, your friend should consider the implications of changing the operations of the real property assets as AirBnB versus rental properties. There may be important distinctions with local and state regulations as well as how the IRS treats the income and taxation of the property which requires different tax strategies. Finding a real estate tax specialist such as a tax attorney would be recommended to help make sure your friend is property informed. If he is a passive investor because he is out of the country, this will also affect his tax filings.
Again, these are thoughts that come to mind for me and are just my opinions. It sounds like you and your friend can find a good working arrangement and even build on it to make it an active business, but you should protect yourself first. You can do anything you want, in theory, whether it's a good idea or puts you at too much risk is the question.
Real Estate Broker · Poulsbo, WA · Member since 2018 · 121 posts · 66 votes
7y
In Washington, you do need to be a licensed agent to act as a property manager. Basically, if you're doing anything beyond simply providing information. Frankly, getting the license is not that difficult. Can do all the coursework online, and be all in for < $1,000 (coursework, fees, etc.). It's pretty easy to set up an LLC, too. IMO, if you're going to keep going with this, it'd be worth it. And always collect the $$ then take out your cut before passing it on to the owner. :-)
Hi biggerpockets community! I come to you seeking sage advice yet again.
So here's my situation. I'm currently handling all management of a friend's downtown Seattle condo via Airbnb while he's living abroad. Things have been going really well, and he's asked if I would help him convert a second unit into an Airbnb from a long-term lease. Since there is significant upside for both him and myself, I willingly obliged and am happy to help with minor repairs and spend the time and money to furnish the unit in preparation for our first guests.
My question for you is what is the best way to handle the expenses associated with all of the costs needed to get the unit ready for Airbnb? We are planning to put up a coat of new paint as well as oversee contractors to replace the worn out carpet (has to be done, it was destroyed by the last tenant). The owner is overseas and so he was hoping that we could take on these expenses ourselves, itemize all expenses associated with preparing the unit, and then deduct those from his future payouts. We are currently handling the airbnb payout directly, and then plan to pay him his 80% cut after our management fee (and all associated expenses) have been accounted for. Can we do this without being a LLC or other business entity? The thought was that we should be able to cut him a 1099 at the end of the year for the revenue he will be bringing in, but neither my wife (an accountant by trade) or myself (software developer) have had experience with this before and don't want to get stuck not being able to expense all of these costs.
Please advise, and thanks in advance!
Rob
The money you spend is not deductible at the rental activity level. Your owner didn’t spend the money. He will not get to deduct it.
If you spend that money, is it connected to your trade or businesses? Property manager will not usually take on repairs.
Why don’t you spend the money and recover that from the monthly rent until it’s recovered. At the end, the appreciation will be enjoyed by yhe owner, not you.
Having business entity has nothing to do with your expense question.
"It makes no sense that you would issue your friend a 1099."
It makes a heck of a lot of sense if you've read IRC Sec 6041. Property managers often issue 1099-MISC to clients for rents collected. Clients often, in turn, issue 1099-MISC back to property managers for prop mgmt fees.
If you're giving out advice, please make sure it's correct advice.
"The money you spend is not deductible at the rental activity level. Your owner didn’t spend the money. He will not get to deduct it."
Disagree. OP is acting as the property owners agent. Expenses he incurs on property owners behalf are deductible by property manager when incurred, and should be accounted for on both sides with hard receivables and hard liabilities (e.g. Loan Receivable from Prop Owner, Loan Payable to Prop Manager)
"It makes no sense that you would issue your friend a 1099."
It makes a heck of a lot of sense if you've read IRC Sec 6041. Property managers often issue 1099-MISC to clients for rents collected. Clients often, in turn, issue 1099-MISC back to property managers for prop mgmt fees.
If you're giving out advice, please make sure it's correct advice.
"The money you spend is not deductible at the rental activity level. Your owner didn’t spend the money. He will not get to deduct it."
Disagree. OP is acting as the property owners agent. Expenses he incurs on property owners behalf are deductible by property manager when incurred, and should be accounted for on both sides with hard receivables and hard liabilities (e.g. Loan Receivable from Prop Owner, Loan Payable to Prop Manager)
I agree, I meant without creating receivable and payable. I don’t think his intention is to create a loan. He wants to do that because there is an synergistic thing going on. Thanks for expanding.
