Can you count your own labor for repairs toward expenses?

Question

If you do some maintenances on your rental property, such as fixing a clogged toilet, replacing a broken door, etc., can you count your own labor as expenses?

Thanks

Bill Gulley · Answer

Economically you can consider your labor, but not financially, even from one owned entity to another owned entity, you'll have issues of an arm's length transaction with the labor of the owner. :)

Why did this pop up when I hit quick reply.....strange thing are going on.

@J.scott, look up "sham transactions" the IRS does care, especially if such a transaction reduces a tax obligation. :)

Steven Hamilton II · Answer

@J scott,

Bill Gulley , is generally correct; however, there are situations where a management company and such are paying a salary and the subsidiaries pay the management company.

It must properly be accounted for.

Steven Hamilton II · Answer

Actually paying yourself for the work and then including it on Schedule C is just COSTING you more money as you will be paying both halves of Social Security and Medicare. Rental income is not subject to Social Security or Medicare (Excluding the Medicare surtax on certain investment income ranges).

-Steven

Pat L. · Answer

This is exactly why you have children/nephews etc (older than the one on your shoulders!!) who can work through your Management/Maintenance LLC.

I 1099 the work & spread the income for tax purposes.

The mileage allowances I paid them even passed scrutiny.

J Scott · Answer

Good info...

Thanks @Steven Hamilton II and Bill Gulley!

Bill Gulley · Answer

You can certainly have subsidiaries and pay actual expenses, a good example is an auto dealership where the body shop or the mechanics' shop is separate from the sales company, all cars taken in on trade run through the shop for repairs and are billed to the sales dept. When the car is sold the billings are paid and reduce the profits of the sales depart. If the amount of profit is basically the same margin as other similar jobs, that transaction is legitimate, however if the profits are significantly different, much higher, then the body shop or mechanics are skimming profits, this shifts profits we'll say from a higher profit center to lower profit center. The result can be lower taxes` paid by the body shop as such stays at a lower rate or has additional expenses to off set the profits. If the net profits go to the same owner(s), you have an issue of a sham transaction.

Sham transactions are also issues of self dealings, paying yourself for services and expensing the cost and then adding additional expenses to the service provided to reduce the income.

Shame transactions are more obvious with small business owners where a transaction is done to skim profits paying charges to a closely held entity that has no real business purpose or that makes no or little profits.

Cooking the books so to speak, to reduce income generated to the same or related owners.

If you are actually paying employees, like the body shop guy to make repairs, that is a legitimate expense. If it were the tax payer making the repair and claiming nothing on the sale but placing his profits in the shop that ultimately reduced his tax liability, there could be issues of sham transactions.

A sham transaction is one where the is little business purpose for profit, where the transaction is accomplished to derive some other benefit that would not have normally been conducted with an unrelated party. Or, is only accomplished to reduce tax liabilities that are not the normal course of business. In RE, another example might be the sale of property to a family member at a much lower price or financing it under terms that would not be granted to unrelated parties under similar circumstances. An issue of a transaction being at arm's length, for full value. That doesn't apply or effect gifting or transfers for estate purposes for such stated purposes where allowances are made.

In financing, a sham note can be one with zero interest where imputed taxes are assessed or where a note is made at a higher par/upb to make up an interest amount  to avoid interest or usury issues, it's a sham note.

Those who are inclined to be "creative" in their financing or transactions between closely held interests or even with other parties where the purpose is to avoid taxation or profiting need to study the issues of sham transactions.  :)

J Scott · Answer

@Bill Gulley -

You may certainly be right, but that's not the way I've understood "sham transactions."  In the OP's case, he's not purposefully avoiding making a profit in order to reduce tax burden.  In fact, one of his companies *IS* making a profit in the transaction.

I've always understood sham transactions as meaning a profit is foregone for the purpose of tax benefits.  And it doesn't seem like that's the case here -- remember each of his companies is a separate entity, and each should be trying to maximize it's profit potential.

But again, this is *definitely* not my area of expertise, and you may certainly be correct.  I honestly have no idea...

J Scott · Answer

Can't tell if you're serious or joking, Bill...

Since when does the IRS care about arms-length?

Bill Gulley · Answer

Economically you can consider your labor, but not financially, even from one owned entity to another owned entity, you'll have issues of an arm's length transaction with the labor of the owner. :)

Tom Goans · Answer

@Yinan Q.,

In my opinion, whether or not you move actual dollars around, your time has value and should be considered a part of the expense when evaluating an investment and return on the investment.

Can you count your own labor for repairs toward expenses?

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