What rental REI expenses can I deduct while still a W2 employee?

Question

I am currently still a W2 employee while building my real estate business out of

My question is this, what can I write off on my taxes while I am still a W2 employee and not considered a "Real Estate Profressional"? I currently have one new construction SFR and I am currently building two more.

How does this play into my standard deduction on 24k annually on my personal return? If my expenses don't exceed that amount, do I not get any deductions? Can I write off my mileage, cell phone bill, travel expenses, etc.

A few insight facts:

1. I have an LLC

2. I frequently travel to my properties

3. I am a full time W2 employee but work only part time on my rental business - I am still fairly new.

Thanks everyone!

Ashish Acharya · Answer

Being real estate professional does help you deduct the losses (not expenses) that you would be other wise limited, but it hasn’t nothing to do with deducting expenses in the RE activity.  Also your definition of RE pro is different compared to what IRS recognizes.

Just investing in the RE doesn’t make you RE professional. Also, you don’t be have to be RE professional to get deduction for your rental activity. You might want to do quick search on that.

Standard deduction has nothing to do with rental expense. You still get your full SD even if you have 100 rentals. Rental gets its own deductions and are not limited if expenses are necessary and ordinary for the rental activity. Remember, losses from rental after you deduct all your expenses might be limited and might need to be carried forward if your AGI is above certain threshold.

If you have a good record,  you should have no issue deducting the necessary expenses related to rental.

Andrew Gingerich · Answer

To Ashish's point.. best line and to your question/point: "Standard deduction has nothing to do with rental expense. You still get your full SD even if you have 100 rentals."

Also, AGI = Adjusted gross income = the portion of your income that is subject to taxes.

Andrew Gingerich · Answer

Jess, I am not a CPA. But I once asked similar questions.

Your 24K deduction and your W-2 income is separate from your rentals- kind of. Here's the deal: You will fill out a schedule E on your federal return where you list all your income on your rental(s). From there you will deduct all your rental expenses: HOAs fees, paid utilities, interest from the loan, taxes, insurance, mileage driving too and from your rental or store to get supplies, the maintenance expenses, supplies for your rental (stamps to send tenants mail, new keys, cleaning supplies etc). Even 50% of the food you buy, while you are working on your rental, is deductible. If your expenses are more than your rental income in a given year then you will "show a loss", and at that point, will lower your W-2 tax obligation. But your rental income will be separate from your W-2 tax return through your schedule E. If you show a profit on your schedule E (rental profit) then your W-2 income and your rental income will be subject to your effective tax rate**.

One other note. Some bigger maintenance expenses and start up costs are often not deductible but instead are "Capital Expenses" and need to be depreciated over a period of time (you get a little deduction over 27.5 year as an example). Typically, these are expenses and items that you buy in a given year that are expected to last 10 or more years. For example, you spend 5 K on a new roof that has a 30 year life. This is an example of an expense that needs to be capitalized. Here you don't get to expense the entire 5K in one year, rather you take 5k and divide it by 27.5 year or a depreciation schedule and that's your annual deduction for that item in each year that follows. Consult a CPA or a few good books for more info. Or read more BP.

Best of luck

Andrew

** If you don't like how much taxes you are paying I'd suggest maxing out a IRA or some other nice tax shelter. For most of us that are newer to the game it is possible to pay very little tax if your work at understanding your obligation and have the ability to live modestly. I like traditional IRA's for lowering federal tax obligations in years where Uncle Sam wants my money. Completely legal, 60-70% never use them.

Ryan Ingram · Answer

@Phillip Weickert is a real genius with this type of stuff. Having a conversation with him may be super helpful.

Andrew Gingerich · Answer

@Austin Welty, @Daniel Hyman's recommendations are great ones. I really like Brandon Halls' website. He's answered a ton of questions on his site. You should check it out. I think you can find it at Therealestatecpa.com

Funny you should ask about books, I am partway through NOLO's Every Landlord's Tax Deduction Guide. It's a bit dense but not so much so.

Daniel Hyman · Answer

@Austin Welty

Check out the book that @Amanda Han put out. That's a great starting point. Also, @Brandon Hall has tons of great articles here on BP.

Su Deng · Answer

I have a question, if one year the repair expense on my SFR was so big that it offset all of the income from the property it self, can i use that repair expense to offset my W2 income?

Austin Welty · Answer

@Andrew Gingerich

Do you have any books you recommend specific to taxes and real estate investing? I'm still in the "research" phase of my REI journey and feel like a lot of books that I've read have a pretty significant gap in information on taxes and how they effect your cash flow, ROI, etc. I've talked with a CPA briefly, but there's so much to learn it can be overwhelming if I don't have some kind of baseline. Thanks!

Basit Siddiqi · Answer

@Jess WhiteFirst it depends on what you will do with the real estate that you are building. Are they a personal residence or are they rentals?The deductions you are entitled to take do not depend on if you are a W-2 employee or a real estate professional.The only difference between a real estate professional and a non-real estate professional is the limitation of utilizing passive losses on your return.Furthermore, rental deductions as part of the business are separate from the decision to take itemize/standard deduction.

Now if the properties are persona, you would need the items to be in excess of $24,000(if filing joint) for you to benefit from taking the itemized deduction.

Craig Jeppesen · Answer

If you will sell the homes, you report your income and expenses on schedule c and if you will rent them out it will be on schedule e. Yes you get to write off your expenses. Also, these expenses have nothing to do with your $24,000 standard deduction. Talk to your CPA about how this works.

What rental REI expenses can I deduct while still a W2 employee?

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