Deductible expenses?

Question

OK, this feels like a stupid question, but....

--do you run your rental investments as a business, and...

--therefore, do you deduct all your business expenses, such as your REIA membership, miles driving around to explore neighborhoods, etc. etc. etc.?

I am starting out with research, want to join a REIA, and am going to start exploring and planning.  There will be expenses for books and miles and office supplies, etc. etc etc.

Are you set up that these are tax deductible, and should I start with a bank account for a sole proprietorship (and convert to an LLC when I actually am ready to pull the trigger and purchase properties?)  Right now I'm in the learning phase, and this phase could take several months or even a year.   I'm not spending a great deal of money, but if I should track and take deductions, then I'd like to.

Thanks so much!

Ned Carey · Answer

As a rule any expense that is "ordinary and necessary" in your line of work is deductible.  This is true whether you have an LLC or  "company" or not.

You get to deduct business expenses even if your business is set up as a sole proprietor. Even as a sole proprietor you should have a separate banking account for the business.

I deduct REIA memberships as a business expense.  "Dues and publications" is a common expense category. An REIA can be considered educational or also a place to transact business. I have done deals at a REIA.

Keep in mind educational expense to prepare you for a new or different business are not deductible.  Otherwise anyone could deduct college as a business expense.  Once you are in a particular business then educational expenses are deductible.  However possibly those educational expenses for a new business may be amortized as a start up expense but check with your CPA.

My guess is most of your expenses at this point could be construed as  "educational"   Good luck - Ned

Derek Smith · Answer

For my own personal clarification, from what I'm understanding is this...regardless if I own or have started a business (SP or LLC etc.) I may track my expenses for deduction. However, unless I purchase a property I may not actually deduct them on my taxes.

Did I read this correctly?

Steven Hamilton II · Answer

Correct.  If you do actually invest at that point they may be partiall expensed/ partially capitalized and expensed over 60 months.

Johann Jells · Answer

Aren't you quick to blame the victim Steve? It wasn't even a strategy question, his office made some basic mistakes on our return. I got the feeling there was little oversight from the CPA/EA, it was his office drones typing in what I had filled out on his "form", which was line for line the IRS data. Now, this was a guy that had sailed me through a triple year audit, I didn't doubt his expertise, but my returns didn't warrant his attention.

I like doing it on Turbotax because I get a real feel for how things are done and how they interact, but do you think I can get a CPA or EA just to troubleshoot as a consultant, rather than actually prepare the returns?  I've always figured they would charge the same amount, and with forms A, C and E, it's not a cheap return.

Steven Hamilton II · Answer

Everyone,

You better believe your REIA is a deductible expense as long as you are actually engaged in the trade/business of real estate investment.

Ned Carey is correct.

All of theses expenses can be taken at some point in time. You cannot deduct them until you are actually doing business.

Expenses related to a rental property will NEVER be deducted on Schedule C.  They would actually end up on Form 2106 on Schedule A.

Johann Jells,

I can certainly tell you that the software that I use is nowhere near what Turbo Tax is.  For just about anyone who is an investor, I'm 99% sure that I can find some type of mistake. 
If you were getting no value from your accountant isn't that your own fault?  Did you ask him to assist in creating a strategy with you?

Johann Jells · Answer

How do you deduct it if you don't own property yet? On a schedule C instead of E? I was puzzled by this one last year as I had expenses related to a purchase that took place in the tax year before the purchase. Form E often puzzles me, I split office expenses and other such "common expenses" between my properties. It's probably time I give Turbotax a rest and get an accountant to look at my stuff, but I started using Turbotax because I felt I was getting no value from the accountant.  I was paying top dollar for data entry into a twin of Turbotax!

John Thedford · Answer

Karen Mikolainis if we can get Steven the tax guy on this thread he is usually a big help. My recommendation is to keep track of everything you are doing now. Even if you don't have the answer your CPA will. I too don't know if I can deduct local REIA expenses but am going to book them and see what my tax guy says.

Karen M. · Answer

Thanks for the book recommendation, Jim!

Jim Wineteer · Answer

I'm not a tax pro, but I got a similar question answered by buying a Nolo book off of Amazon.  The thing with tax deductions is there are two classifications of landlords; business owner or investor.

Here's the table of contents for a relevant Nolo book:

http://www.nolo.com/products/every-landlords-tax-deduction-guide-dell.html

Deductible expenses?

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