How to properly account for personal maintenance labor?

Question

Hi, I am just starting out as a landlord and am trying to learn from my mistakes. I believe I have not been adequately record keeping my maintenance expenses. I do repairs and upgrades myself and only keep records of the material receipts. At the end of the year I have my rental income minus the material receipts and income tax on the surplus. I must be doing this wrong. How do I account for my personal labor when calculating yearly profit or loss? Do I need to create an LLC to charge myself for my own labor? How does everyone else account for this?

Bruce Woodruff · Answer

I dealt with this for years...as a General Contractor, I spent years working on properties, and I mean some nice, high-end work. Never got paid for a dime of it.

We, as investors, get our $$ when we rent or sell the properties....and we save $$ by not hiring other people to do the work....

Linda Weygant · Answer

Landlords don't account for their labor from a tax standpoint.  This is what "sweat equity" is all about.

If you were to try to deduct your labor for rental purposes, you'd then have to claim it as income on a self employment schedule C and pay income and self employment taxes on it.  Doesn't make sense.

You should, however, write into your leases that your labor is valued at $XX /hour.  Then when you have to bill back a tenant for repairs either mid-lease or at end and deducting from security deposit, you're able to do so.  Absent that, you can't bill tenant back for your labor.

Steve Vaughan · Answer

Unless you need some earned income to invest in an IRA like I do, you won't want to turn passive income into ordinary SE taxed income.

I have a mgt co.  I have the right but not the obligation to pay it a mgt fee and maintenance/repair labor.  Otherwise I have had $0 in earned income since 2002.

'Earning' high dollar tasks you don't have to pay someone to do is the most efficient net way to save.

Antonette El Baz · Answer

It's important to keep in mind that your labor is considered part of your investment in the property, rather than an expense you can deduct. Like others have mentioned when it comes to accounting for your own labor as a landlord, it's not something you can typically deduct from your taxes. Like @Linda Weygant  stated, it's called "sweat equity," and it's not considered a deductible expense. If you tried to deduct it, you'd actually have to claim it as income and pay taxes on it, which is not really ideal.

Steve Vaughan · Answer

The biggest problem I have with hiring is the lead time.  We are replacing a fence for instance.  The estimator was 10 days out.  The bid 3 days after, work start = 6 weeks after that.

No way I'm even waiting 10 days to get an assessment if it's making my vacancy/ time to market longer.  I will figure it out in that case.

The other rudimentary 'formula ' is to not do things my teens or a basic handyperson can do.  I focus on doing things I'd otherwise have to hire a licensee or wait forever for like my fence or carpet.  (If you're replacing carpet, order it long before your place is vacant or switch to laminate/ lvp.)

If I was busy with a job/career I'd hyper focus on large dollar tasks in my wheelhouse.   Anybody can learn to transact themselves.   Last year alone I saved over $120k in commissions selling 5 buildings by owner, with LOs or having buyers pay for their own agents with a higher offer. Big dollar stuff only.

Alecia Loveless · Answer

@Michael Lettieri I’m not any type of financial advisor and my accountant strongly suggested I’ve gotten large enough to get a bookkeeper and tax planner this year. This does not constitute legal or financial advice.

That being said at the end of the year around December 15-20 when the books are caught up and I have a good idea of any expenses coming in before the end of the year and what cash is left over in the accounts I simply take an owners draw or a cash payment to myself which is income to me. I deposit it in my personal account before December 31 and then the expenses, repairs and maintenance, and mortgage interest, and depreciation and whatever other expenses I have go against it and in the end I get a refund on my W-2 job and alls well that ends well.

Granted it’s not like I’m at the point of taking tens of thousands of dollars in profits yet it was more like $8,000.

Simon W. · Answer

I am in agreement with @Linda Weygant

Charging your LLC for your labor, you will still have to record income for yourself.

To bring back @Alecia Loveless is saying, you might want to look into someone handling/maintaining your books just so you don't go crazy trying to figure out your bottom line number.

There are plenty of accountants/bookkeepers/consultants here on BP including myself.

Asking something on a forum will only give you a general idea unless we see your books.

Michael Lettieri · Answer

Thank you all for the advice. I need to have a better understanding of how much sweat equity my work adds to the home. It may be in my best interest to hire contractors because it may not be worth my time. I work full time and would probably make more picking up extra hours at work rather than worrying about sweat equity. Anyone have a formula or advice for when to do renovations or repairs myself versus hiring?

Michael Lettieri · Answer

Thank you. I'm feeling burnt out from all the labor I put towards maintenance. It sounds like the taxes I would save on hiring myself would be canceled out by taxes on the LLC.

How to properly account for personal maintenance labor?

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