How do landlords deduct expenses that span multiple properties?

4 Replies

I am wondering if there has been any real solid resolution on this topic. My CPA has instructed me that the auto expenses (at least the proportion used for rental activities), overhead such as office supplies, software, tax preparation, and other items which occur to operate the rental properties (AS A WHOLE) are expensable on Schedule E relative to the activity (e.g. based on number of units per property) by "cost accounting or cost allocation". Specific repair projects and supplies, maintenance that are property specific are listed on the Schedule E for each respective property. The cost allocated overhead is divided based on number of units across multiple properties and added in. Where there is some additional questions are whether items like health insurance for myself and my wife (the premiums not the actual medical expenses) would be considered part of this overhead (in the past we HAVE NOT put this into the "cost allocated" calculations for Sch E but instead listed them in Sch A. I have seen on this website answers both ways regarding this (the site administrator saying leave it in Sch A, and his colleague (also a enrolled agent) advising that it can be written off in Sch E, but that there are certain restrictions mainly -- you must have passive activity gains where the deductions are covered (no passive activity loss carry over allowed. The enrolled agent on this site also goes onto state there is case law (court decisions) that were in favor of cost allocation on Sch E, but the actual cases were not cited, and that if you were "aggressive and willing to fight with the IRS" the case law might actually support this. I don't know about any of you , but I'd like to honestly get the deductions I am entitled to, pay my fair tax, and avoid any issues with the IRS, but not aggressively seek their scrutiny or wrath. The same enrolled agent also suggests that opening a 'property management' business should allow the deduction of the overhead 'cleanly', but frankly creating a Sch C business with only overhead expenses to support Sch E activities seems to be 1) a HUGE RED FLAG as there is NO INCOME to the business created, and only expenses incurred over SCH E activities only. What that effectively means is that a NEGATIVE INCOME (read LOSS) on SCH C occurs every year -- A KNOWN RED FLAG. To add another twist to this, it seems that Real Estate Licensees get special consideration as rental activities including acquisition, sale, and management of those rental properties may be considered NON PASSIVE (active) due to the professional occupation. -- I am a real estate broker. This grey area of filing really needs to be made more clear. The expenses are real. They are rental related only, but not being able to clearly know where to file them in SCH A, SCH C, SCH E, really is a big problem and audit risk. Big companies have COGS and Overhead cost accounting and allocations, why are landlords who actively manage their properties left in the murky water by the IRS? Why do 2 different CPAs and an enrolled agent disagree? Please help.... if you can cite case law, publications from the IRS, or anything that will give reference and cited guidance in this matter, I am sure all landlords out there would be appreciative and rendered better tax filers and tax payers as a result.

I cannot answer specific questions, but I do suggest having an entity such as LLC or S Corp. The S corp I own, along with the fact that my wife and I are the only two employees, has allowed me to open a SOLO 401K to reduce taxable income. Furthermore, it is my understanding the S corp may pay out health insurance premium. As to allocating costs, I use quickbooks. I attach each specific invoice to a specific property. This has worked well to help me track which properties are performing the best. Pressure wash five different houses? Get five invoices and pay with one check, allocating the cost of each one to the specific property in QB.

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600
Originally posted by @John Thedford :

I cannot answer specific questions, but I do suggest having an entity such as LLC or S Corp. The S corp I own, along with the fact that my wife and I are the only two employees, has allowed me to open a SOLO 401K to reduce taxable income. Furthermore, it is my understanding the S corp may pay out health insurance premium. As to allocating costs, I use quickbooks. I attach each specific invoice to a specific property. This has worked well to help me track which properties are performing the best. Pressure wash five different houses? Get five invoices and pay with one check, allocating the cost of each one to the specific property in QB.

 Thanks!  how do you handle things like insurance on your office, office clerical staff, cpa fees across the properties?  what if you bought a pressure washer and did the work yourself?  how would you handle the cost of the washer across the properties?

Those expenses should just be divided among the properties by whatever allocation makes sense.  As long as it's not absurd and you actually spent the money you'll be fine.

I don't divide certain expenses across various properties such as my office rent, utilities, etc. I don't think that is necessary, but that is my opinion only. 

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600

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