Advise on tax return for RE investor and Realtor

Advise on tax return for RE investor and Realtor

Member since 2020 · 6 posts · 0 votes

Looking for some advice on finishing my 2020 tax return.

Here is the situation:

In 2020 I became a realtor and also acquired an investment property. 2 different activities that need to be reflected on my tax return. I had no income on either one of them last year.

  • – With RE agent activity – I am completing Schedule C for it. As I mentioned, no income in 2020, but have some this year, so want to make sure I do it right at start.
  • - Do I count all my expenses from the date I got my RE license? Or can I include expenses prior to it (setting up office, educational expenses, properties search driving)?
  • - I drove a lot (and kept my driving log) – I am in Arizona, where you could get 80 miles one way from Northwest Peoria to south east Gilbert. Will the fact that I did not make any profit put some audit prism on my driving log?
  • -Do I need to attach any other form, in addition to Schedule C? I am participating in this activity as Sole Proprietorship.
  • -I paid my teenage kid to create digital marketing materials for my realtor marketing. If I put in these expenses, I am responsible for payroll taxes? Form?
  • - 2nd Activity – Investment Property. I bought this in LLC (Arizona), with intent to hold and sell shortly. Had some expenses, but no income in 2020. This year I decided to keep it longer and put it for rent. I assume 2020 losses are still consider a passive income? I meet active participation test, but won't be able to claim due to other income exceeding thresholds.

To carry forward these losses I need to do Schedule E, Form 8582. But do I also need Form 1065 & 8825 (because the property is held by LLC)? I did not think I needed the partnership return forms, because LLC would be a disregarded entity. However, one of the CPA I talked to today, said I do. Please share if claiming the partnership status will have some advantages with recouping the passive losses.

Really appreciate some guidance on the topic. 

0Reply
55 views

Most Popular Reply

Ashish AcharyaBusiness Member
CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
5y
Originally posted by @Chris Little:

Looking for some advice on finishing my 2020 tax return.

Here is the situation:

In 2020 I became a realtor and also acquired an investment property. 2 different activities that need to be reflected on my tax return. I had no income on either one of them last year.

  • – With RE agent activity – I am completing Schedule C for it. As I mentioned, no income in 2020, but have some this year, so want to make sure I do it right at start.
  • - Do I count all my expenses from the date I got my RE license? Or can I include expenses prior to it (setting up office, educational expenses, properties search driving)?
  • - I drove a lot (and kept my driving log) – I am in Arizona, where you could get 80 miles one way from Northwest Peoria to south east Gilbert. Will the fact that I did not make any profit put some audit prism on my driving log?
  • -Do I need to attach any other form, in addition to Schedule C? I am participating in this activity as Sole Proprietorship.
  • -I paid my teenage kid to create digital marketing materials for my realtor marketing. If I put in these expenses, I am responsible for payroll taxes? Form?
  • - 2nd Activity – Investment Property. I bought this in LLC (Arizona), with intent to hold and sell shortly. Had some expenses, but no income in 2020. This year I decided to keep it longer and put it for rent. I assume 2020 losses are still consider a passive income? I meet active participation test, but won't be able to claim due to other income exceeding thresholds.

To carry forward these losses I need to do Schedule E, Form 8582. But do I also need Form 1065 & 8825 (because the property is held by LLC)? I did not think I needed the partnership return forms, because LLC would be a disregarded entity. However, one of the CPA I talked to today, said I do. Please share if claiming the partnership status will have some advantages with recouping the passive losses.

Really appreciate some guidance on the topic. 

Just looking at your questions, I can tell you will be at least losing out on tax savings. Please work with your CPA on this.  Here are your answers:

  • - Do I count all my expenses from the date I got my RE license? Or can I include expenses prior to it (setting up office, educational expenses, properties search driving)?
  •   ANS: Yes, if getting a RE license is the inception of your business. Remember, you cant detect more than 5k in startup and Org cost. There are other thresholds to this but I am sure it doesn't apply to you. I would be careful with the expenses before getting the licenses, cost have disallowed these costs before. Your situation needs to be analyzed to conclude. 
  • - I drove a lot (and kept my driving log) – I am in Arizona, where you could get 80 miles one way from Northwest Peoria to south east Gilbert. Will the fact that I did not make any profit put some audit prism on my driving log?
  • ANS: You can at the least take the mileage deductions. having profit is irrelevant. 
  • -Do I need to attach any other form, in addition to Schedule C? I am participating in this activity as Sole Proprietorship.
  • ANS: Yes, there need to be various worksheets and other schedules based on what you are presenting in the returns. Not sure what without actually doing your return. 
    -I paid my teenage kid to create digital marketing materials for my realtor marketing. If I put in these expenses, I am responsible for payroll taxes? Form?
  • ANS: If you never paid him W-2, no payroll tax on your end. He will pick up income. You need to issue 1099 and he will pay the Self Employment taxes. Is better to hire kids on W-2 if they are below 10 to save on SE taxes (FICA on W-2). 
  • - 2nd Activity – Investment Property. I bought this in LLC (Arizona), with intent to hold and sell shortly. Had some expenses, but no income in 2020. This year I decided to keep it longer and put it for rent. I assume 2020 losses are still consider a passive income? I meet active participation test, but won't be able to claim due to other income exceeding thresholds.
  • Yes- Passive but you might qualify for RE pro to deduct these. 

To carry forward these losses I need to do Schedule E, Form 8582. But do I also need Form 1065 & 8825 (because the property is held by LLC)? I did not think I needed the partnership return forms, because LLC would be a disregarded entity. However, one of the CPA I talked to today, said I do. Please share if claiming the partnership status will have some advantages with recouping the passive losses.

If SMLLC, no 1065. I don't think any CPA would say that you need 1065 for the disregarded entity. 

INVESTOR FRIENDLY CPA®4.9242 Reviews
TaxMD® | Tax Planning Software
See this reply in the discussion

11 Replies

Jump to latestLatest
  • Real Estate Broker · Salt Lake City & Oklahoma City · Member since 2018 · 3k+ posts · 2k+ votes
    5y

    Hi @Chris Little, I was tracking for a while and then I got lost in the details.  This is above my pay-grade for sure and I'd venture to guess that your tax situation is going to get more complex and not less over the years to come, right? 

    If you could use a savvy CPA to hire for a consultation I've benefited tremendously from my work with @Joshua Morphew and It sounds like that could be a boon for you, too!

  • Property Manager · Baltimore, MD · Member since 2014 · 1k+ posts · 1k+ votes
    5y

    Sounds like you need to be talking to a CPA, not a web forum. Good luck!

  • Investor · Granger, IN · Member since 2015 · 195 posts · 129 votes
    5y

    On the rental you do need a 1065 for the LLC and the costs of finding the property would go into the basis of the property IMO and be depreciated.

    On paying your kid, how much did you pay him?  If under $600 I would ignore it although you are responsible for the withholding tax if you were audited and they found it.  The work of going back and filing a 1099 for him (way easier than a W2 and sounds more accurate) would not be worth the trouble in my opinion.  Just know that going forward so keep track and have your CPA involved so you can file properly.

    Cost of running a business are deductible so I would expense those on a schedule C

    All that said I was a CPA for years and years but I don't know all your details so your local guy will spend more time and be more accurate than my quick response.  Good Luck!

  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    5y
    Originally posted by @Chris Little:

    Looking for some advice on finishing my 2020 tax return.

    Here is the situation:

    In 2020 I became a realtor and also acquired an investment property. 2 different activities that need to be reflected on my tax return. I had no income on either one of them last year.

    • – With RE agent activity – I am completing Schedule C for it. As I mentioned, no income in 2020, but have some this year, so want to make sure I do it right at start.
    • - Do I count all my expenses from the date I got my RE license? Or can I include expenses prior to it (setting up office, educational expenses, properties search driving)?
    • - I drove a lot (and kept my driving log) – I am in Arizona, where you could get 80 miles one way from Northwest Peoria to south east Gilbert. Will the fact that I did not make any profit put some audit prism on my driving log?
    • -Do I need to attach any other form, in addition to Schedule C? I am participating in this activity as Sole Proprietorship.
    • -I paid my teenage kid to create digital marketing materials for my realtor marketing. If I put in these expenses, I am responsible for payroll taxes? Form?
    • - 2nd Activity – Investment Property. I bought this in LLC (Arizona), with intent to hold and sell shortly. Had some expenses, but no income in 2020. This year I decided to keep it longer and put it for rent. I assume 2020 losses are still consider a passive income? I meet active participation test, but won't be able to claim due to other income exceeding thresholds.

    To carry forward these losses I need to do Schedule E, Form 8582. But do I also need Form 1065 & 8825 (because the property is held by LLC)? I did not think I needed the partnership return forms, because LLC would be a disregarded entity. However, one of the CPA I talked to today, said I do. Please share if claiming the partnership status will have some advantages with recouping the passive losses.

    Really appreciate some guidance on the topic. 

    Just looking at your questions, I can tell you will be at least losing out on tax savings. Please work with your CPA on this.  Here are your answers:

    • - Do I count all my expenses from the date I got my RE license? Or can I include expenses prior to it (setting up office, educational expenses, properties search driving)?
    •   ANS: Yes, if getting a RE license is the inception of your business. Remember, you cant detect more than 5k in startup and Org cost. There are other thresholds to this but I am sure it doesn't apply to you. I would be careful with the expenses before getting the licenses, cost have disallowed these costs before. Your situation needs to be analyzed to conclude. 
    • - I drove a lot (and kept my driving log) – I am in Arizona, where you could get 80 miles one way from Northwest Peoria to south east Gilbert. Will the fact that I did not make any profit put some audit prism on my driving log?
    • ANS: You can at the least take the mileage deductions. having profit is irrelevant. 
    • -Do I need to attach any other form, in addition to Schedule C? I am participating in this activity as Sole Proprietorship.
    • ANS: Yes, there need to be various worksheets and other schedules based on what you are presenting in the returns. Not sure what without actually doing your return. 
      -I paid my teenage kid to create digital marketing materials for my realtor marketing. If I put in these expenses, I am responsible for payroll taxes? Form?
    • ANS: If you never paid him W-2, no payroll tax on your end. He will pick up income. You need to issue 1099 and he will pay the Self Employment taxes. Is better to hire kids on W-2 if they are below 10 to save on SE taxes (FICA on W-2). 
    • - 2nd Activity – Investment Property. I bought this in LLC (Arizona), with intent to hold and sell shortly. Had some expenses, but no income in 2020. This year I decided to keep it longer and put it for rent. I assume 2020 losses are still consider a passive income? I meet active participation test, but won't be able to claim due to other income exceeding thresholds.
    • Yes- Passive but you might qualify for RE pro to deduct these. 

    To carry forward these losses I need to do Schedule E, Form 8582. But do I also need Form 1065 & 8825 (because the property is held by LLC)? I did not think I needed the partnership return forms, because LLC would be a disregarded entity. However, one of the CPA I talked to today, said I do. Please share if claiming the partnership status will have some advantages with recouping the passive losses.

    If SMLLC, no 1065. I don't think any CPA would say that you need 1065 for the disregarded entity. 

    INVESTOR FRIENDLY CPA®4.9242 Reviews
    TaxMD® | Tax Planning Software
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    5y
    Originally posted by @Greg Carrier:

    All that said I was a CPA for years and years but I don't know all your details so your local guy will spend more time and be more accurate than my quick response. 

    I'm glad you're no longer a CPA, as your advice is significantly off for a tax pro.

  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    5y

    @Chris Little

    As a licensed Realtor, you probably snicker at the homeowners who are trying to save on Realtor fees and sell their houses themselves. You're doing the same thing with taxes.

    There're many questions that need to be answered before you dive into the details. It starts with the most important ones:

    1. Have you started operating as a Realtor in 2020 or not until 2021?
    2. Was your rental property ready and available for rent by the end of 2020 or not until 2021?

    Answers to these two questions alter the answers to most of your other questions. For example, if neither business started in 2020, you literally have nothing to report on your 2020 tax return for your business.

    If one or both of these businesses did start in 2020, you may be entitled to claim some of the expenses in 2020. Yes, any business schedule with zero income but non-zero expenses is a classic IRS audit flag. Even if you're entitled to report these early expenses, it's worth evaluating whether it would be better to hold on to them and report in 2021 as start-up expenses. Such decisions are case-by-case.

    If your LLC is owned 100% by you, it is disregarded for taxes and does not need a partnership return (Form 1065). If you own it with your spouse, it still can be disregarded in AZ because it's a community property state. You can also report it as a partnership between you and your spouse in this case, but there're no additional tax benefits from doing so.

    Not all of your driving may qualify as business driving, it needs to be discussed.

    We just scratched the surface. Maybe better not to DIY it.

  • Investor · Granger, IN · Member since 2015 · 195 posts · 129 votes
    5y

    @Michael Plaks accountants are like engineers, they all think they are smarter than the rest, good point on disregarding the LLC but if he took his same details to five different accountants everyone would end up with a different taxable amount.

  • Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    5y

    Now now, let's be honest...there is NO greater, um, "light bulb installing" contest (I was going to use a far more vulgar descriptor, but it's BP) that a group of engineers debating the "correct" method of absolutely anything in life.  CPAs don't even begin to come close.

  • Member since 2020 · 6 posts · 0 votes
    5y

    Thank you for everyone’s input. Truly helpful!

    @Will Fraser – I was considering to post 2 situations in separate questions, as I figured together they might be confusing. And yes, DIY accounting was not my first choice. I called few local CPAs, but some were busy until the end of tax return season, and others did not sounded well-versed in RE returns, giving me the advice to submit 1065 form for LLC.

    @ Michael Plaks

    Yes, I validly started both business activities in mid-2020. The expenses I had (i.e. getting RE license expenses, property acquisition and repair expenses) are documented in 2020, so it is not something I could claim in 2021.

    @

    Just to clarify on expenses to be claimed BEFORE the date I got RE license – like actual fee for a RE licensing course and setting up my office – are they allowed on Schedule C (its instruction is not very clear – well, I can go on and on how you need to be a PhD in Accounting just to do for your “simple” and mandatory tax return J)

    Also, are the LLC start-up costs still considered passive loses too (due to that LLC holding an investment property?). Therefore, all my info on LLC goes to Schedule E and 8582, and not a 2nd Sch.C, correct?

    Thanks again!

  • Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    5y

    @Chris Little it's difficult - but not impossible - to prove that you were "in business" until you have revenue.  @Michael Plaks has pointed out the audit risk of doing so.  (Similarly, you should know, you generally have to capitalize expenses related to a investment property until it is placed "in service," but that's a separate discussion.)   In my own experience, we had one business in which we had to defer start up costs to the next tax year, but were able to write it all off at once, as it was below the $5K threshold; we had another where we had to defer to the next tax year, and are amortizing the excess costs over 15 years; another where the business started early enough in the year to include them in the same tax year; and yet another where the start-up costs are still in suspense because we haven't pressed "go" yet.  Every situation is different.

    You'll eventually be able to deduct all "ordinary and necessary business expenses" which would include the licensing course, etc., but doing so before you have revenue (or even contracts for revenue) is at your own risk.

    If CPAs you've contacted are too busy right now (for good reason!) you might file an extension for 2020, make sure that you've paid (or even overpaid) your 2020 taxes, and then start working with a CPA soon after May 17.  You will be penalized for not paying your taxes by May 17, though you can extend the filing until October 15.  Since everything you seem to have questions about involved deductions (not income), you should be able to calculate your maximum tax bill based on the rest of your 2020 situation.  If, after sorting out these details, you file by October 15 and owe less than you guessed, you'll receive a refund.

    P.S. You might even consider the CPAs that have been responding here on this thread (and elsewhere).  Your CPA does not need to be local to be effective.

    P.P.S. You can easily file an extension on the IRS website by making a payment of any amount.  That will give you the chance to interview CPAs when they become available, rather than hitching blindly to the one you convince to file your extension.  If I don't think I will owe more taxes, I pay $25.  If I think I do owe taxes, then I pay what I think I'll owe.  You have to do this by the deadline (May 17 this year) and you will be extended to October 15.  Check your state's rules on extensions as well.  In Arizona, I don't have to file an extension with the state; I just check a box on my tax form that says I filed an extension with the IRS and that's why my AZ return is coming in late.

  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    5y

    @Chris Little

    It's not up to you to decide whether these activities "validly started" in 2020. There're IRS rules. For instance, the rental property should have the rehab completed, and the property must be available for occupancy. Until then, you do not have a rental business. 

    Expenses incurred in 2020 absolutely can, and often must, be reported in 2021, including the start-up expenses.

    You're correct about taxation being ridiculously and unnecessarily complex and confusing. You're also correct to notice that an average tax person does not understand real estate taxes, and the specialists are busy, especially at this time of the year.

    So, your solution is to shoot yourself in the foot by hacking taxes yourself? Your decision.

Join the conversationCreate a free account to reply, vote on answers and follow this thread.