All Forum Posts by: Bob Norton

@Monish Lillaney Unfortunately, you will have to document your time as @Natalie Kolodij describes.  Some of the activities that you describe are questionable whether the IRS would count them as qualified hours for as a real estate professional.

Seek out a CPA that is very familiar with the rules for this.

@Alexis Hassun Shop around. Since your LTV is lower than 80%, the lender is probably not including any escrowed items. Your refi costs are high due to the points you are paying up front. See what the cost would be without the points. Your rate will be higher, but rates are not as important as the cash flow from the rental.

@Brad Wood Yes, any funds you receive from your tenants are considered income.  In the case of the water bill, you would count the 1/2 they reimburse you as income and the amount of the expense you paid attributed to your tenant as an expense.  So, essentially they will offset each other.  

In the case of the deposit, if you did not count the deposit as income when you received it from the tenants, then any amounts that you keep from their deposit is considered income when they move out.  You get a deduction for the repairs you made attributed to the tenant.  Again, this income and expense essentially offsets each other.

Hope this helps.

The rules for a real estate professional are (1) more than 750 hours on real estate activities and (2) that you spend over half your time in a year on your real estate activities.  If you can document that you are working more than 40 hours per week on your real estate activities while working 40 hours or less on your W-2 job, then you technically qualify.  I expect that you would have a higher chance to be audited with a full-time job in this situation.

Find a CPA that understands the rules and can review your situation with you before you file as a real estate professional.

@Robert Fernandez Yes, the expenses of running the business would be considered overhead expenses.

If you are running a fix and flip business, then the overhead expenses that you mentioned would be deductible in the year that you spent them. Even if you did not have a property sale.  (The rehab costs would be deducted in the year with the property sale.)

However, if you are running a fix and hold rental business, then the overhead expenses would be included as rental expenses during the year.  And, if these overhead expenses resulting in you having a rental loss for the year, then they would be treated as a passive loss and subject to the passive loss rules.  Which means that if your W-2 income is higher than $100,000, then some or all of the rental loss will be suspended and carried forward to subsequent years.

@Robert Fernandez In your statements above, I didn't see where you would have any passive income.  If your intent is to fix and flip properties, then that is active income.  On the other hand, if you intend to fix and rent your properties, then that is passive income.  Since passive income is not subject to self-employment tax, I generally do not recommend paying yourself as a contractor on projects that you fix and rent.

As for setting up a Construction LLC, that's a separate issue. If you plan to fix and flip properties (or act as GC for other customers) then you probably want to setup the LLC for liability protection. For that to work, you would have to get the proper types of insurance and separate your business banking transactions from your personal banking transactions, at the very least.

Also, when you fix a property to either flip or rent, the costs of fixing the property are generally capitalized and depreciated over many years.  So, you would not be able to deduct your rehab costs against your W-2 income as you mentioned.  You would be able to deduct any general overhead costs that you incur.

@Stephen Sloane Yes, you will get that rebate check as well.  As long as you filed a tax return in 2018 or 2019, and your AGI is below the threshold amounts that you mentioned.

Asset Protection by Adkisson.

Landlords qualify for the EIDL grants, if your rents are down due to the pandemic.  Search for SBA coronavirus, click on the COVID-19 SBA website link, scroll to the bottom of the page and then click on the link to apply.

@Gordon Starr Then it sounds like you should not file a Schedule C.