Am I a business or passive investor?

Question

I probably need to quit doing my taxes on TurboTax and just get a CPA at this point, but I am a "mom and pop" single family home rental property investor with now 20 properties. I hold title currently to all my properties under my own name (many have conventionally financed mortgages) and I have a full-time day job at the bank. I do self-manage my properties and I dispatch trusted vendors as needed to make repairs etc.

I've always checked the box in TurboTax saying that this is passive income, as I have always considered it to be just that (versus a full-time qualified business). I do have not issued 1099 MISC's to contractors either, as it had been my understanding that I needn't do that as a "passive investor."

Any thoughts on my approach? Am I an actual business that needs to do things more formally at this point? Certainly don't want to cause myself tax issues, but I'm not claiming to be a qualified business seeking higher deductions either.

Thoughts?

Natalie Kolodij · Answer

It's not really an optional thing

If you ARE a trade or business per IRC you should be doing that any way, now more people are just following through to ensure the 20% deductions

Linda Weygant · Answer

QBI is not really optional.  You either are or you aren't.  It's not an election that you make.  Your QBI losses now will go against any QBI gains in the future (or current, if you've got some self employment or the like). so you need to be claiming and tracking them.

And when you say "I'm at a net loss on most due to mortgages" - I hope that doesn't mean that you're trying to deduct the entire mortgage payment.  You deduct the interest, not the principal.  You can also deduct actual property taxes and insurance paid.  But to say that mortgages are creating the net loss - it really shouldn't be working that way.

Generally, you have a loss due to Depreciation, not mortgage.

Are you sure you should really be doing this yourself?

Linda Weygant · Answer

The 250 hour rule is the Safe Harbor, which is negated if you qualify as a Trade or Business (as @Natalie Kolodij originally mentioned).

I'm really glad you're going to an accountant.  Please do make sure they are very knowledgeable in real estate issues.  Tax Professionals are like doctors and lawyers.  We specialize in certain areas because nobody can be expected to be fully knowledgeable in all areas of tax law.  You wouldn't go to a podiatrist for a cancer diagnosis and you wouldn't go to a corporate attorney for your DUI case.  Same applies to tax professionals.  Make sure they specialize in real estate.  If you get one that focuses on Oil & Gas or Farming, for example, you could be worse off than you are now.

John Underwood · Answer

It is passive income.

You should get a CPA. They can often save you enough money to pay their fee.

Natalie Kolodij · Answer

These are two totally different tax codes.

Your rentals generate passive income per irc 459

AND

You are a business (and want to be ) with regard to the new 199A deduction. And that related to IRC 162.

Get a tax professional because you're literally going to be wrong with either way you fill it out based on your statement.

Michael Plaks · Answer

As was already mentioned on this thread, you're mixing together two separate issues.

1. Passive v. Non-passive income. This distinction controls whether you can claim all your current rental losses against your W2 income. You're passive in this respect, and your ability to take losses is limited.

2. Qualifying as a trade or business. Based on your description, you should qualify. There're two advantages you gain: you can deduct all business overhead expenses (as opposed to only expenses specific to maintaining the properties) and, if you have positive net profit after depreciation, you will be eligible for the new 20% QBI (qualified business income) deduction. With your "trade or business" designation comes your obligation to send out 1099s to contractors.

Travis C. · Answer

@Linda Weygant Totally agree! I bought 10 properties in 2019 so have really ramped things up. When I was smaller fries previously I was totally able to do everything with Turbotax comfortably and now I am seeing my own limits and need to cede to the pros on my tax accounting. Really appreciate it!

Travis C. · Answer

@Linda Weygant yes, interest on my mortgages. I don't spend 250 hours on managing any of this (believe it or not) separately, in aggregate, or otherwise, so not sure I qualify. Will be talking to my accountant. Yes, I already deduct taxes and insurance naturally. I'm not that far gone and my question was very narrow as related to QBI. Thank you for your comments.

Travis C. · Answer

@Michael Plaks I'm at a net loss on most due to mortgages. Would this make a difference do you think in how to proceed? I mean, why would I go QBI if I'm at a reportable loss on most of these? TIA.

Travis C. · Answer

@Christopher Smith I most probably am! Haha

Am I a business or passive investor?

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