Real Estate Professional · Philadelphia, PA · Member since 2015 · 36 posts · 1 vote
I will have 2 rental properties, each generating income and losses. Can I deduct my business expenses as a real estate investor (car, office expenses, business meals, computer, etc) outside of the profit/loss sheet for each property (interest, depreciation, maintenance)
I have a full time job so my understanding is qualifying as a real estate pro to overcome the 25K loss limit is near impossible, so can i deduct regular business expenses outside the actual property expenses (to maximize deductions).
Not trying to cheat the system, just wondering how to approach itemizing all these expenses and deductions ahead of time.
@Alex Ballas first you need to demonstrate that you are actively participating in a real estate business. This can range from making repairs and managing tenants, to making high level management decisions and managing contractors and property managers.
If you cannot demonstrate that you actively participate, the IRS will classify you as an "investor" (think investing in an LLC or private money loans). If this happens, it will be difficult to justify any of the business expenses you mentioned above. **Don't let this happen**
You can deduct plenty, but it needs to be "through the course of your business" and the expenses needs to be "ordinary and necessary." There are rules that apply to deductions related to cars, computers, business meals, travel, office expenses, etc. so make sure you know them or connect with a real estate savvy CPA who knows them.
So to answer your question, no you cannot deduct busuiness expenses outside of the business. Buusiness expenses as it pertains to passive real estate will be deducted on Schedule E and subject to the Passive Activity Loss (PAL) rules.
great info thanks Brandon! I am educating myself about the rules for PAL, I have a SFH now and will be moving into a 4 unit multi using 3.5% down FHA, pretty textbook investment.
My concern is that I would be running at a 49K loss with depreciation, interest, expenses and PMI, even thought the property is breaking even with me living there. Any thoughts on how to get beyond the 25K loss so I can maximize my job salary and raise cash aggressively?
@Alex BallasUnfortunately, since you have a (full-time?) job, you won't qualify as a real estate professional and will be limited to the $25k loss depending on your income level. Unless your full-time job is in real estate... is it?
So the question becomes, when and how will you take advantage of your passive loss?
Any loss not used is carried forward into future years, so it's not all doom and gloom!
I'd want to see your analytics for the property you are moving in to. As I'm sure you know, you cannot depreciate, or write off any business expenses (except a home office), the portion of the home you use as a personal residence.
Also, keep in mind that you have to "pay back" depreciation at a 25% rate when you sell your investment property in the future. Depending on your expected hold period, current effective tax rate, and expected future effective tax rate, you will want to either stack depreciation heavily or try to avoid it as much as possible.
These are the things a real estate CPA will walk you through :)
@Brandon Hall Brandon, do you have to be in an LLC in order to deduct those "ordinary and necessary" expenses "through the course of your business"?
I am just starting out in real estate and do not have a business entity and am working a full time w2 job. However, I am getting into wholesaling, and will eventually venture on to the other aspects of real estate investing. In order to do that I am marketing, driving to see properties, driving to find properties, paying for education, etc.
How would I go about making this into a business where I can deduct the expenses I am incurring in order to get this business going?