Advise on tax return for RE investor and Realtor

[Chris Little]

Looking for some advice on finishing my 2020 tax return.

Here is the situation:

In 2020 I became a realtor and also acquired an investment property. 2 different activities that need to be reflected on my tax return. I had no income on either one of them last year.

• – With RE agent activity – I am completing Schedule C for it. As I mentioned, no income in 2020, but have some this year, so want to make sure I do it right at start.
• - Do I count all my expenses from the date I got my RE license? Or can I include expenses prior to it (setting up office, educational expenses, properties search driving)?
• - I drove a lot (and kept my driving log) – I am in Arizona, where you could get 80 miles one way from Northwest Peoria to south east Gilbert. Will the fact that I did not make any profit put some audit prism on my driving log?
• -Do I need to attach any other form, in addition to Schedule C? I am participating in this activity as Sole Proprietorship.
• -I paid my teenage kid to create digital marketing materials for my realtor marketing. If I put in these expenses, I am responsible for payroll taxes? Form?

• - 2nd Activity – Investment Property. I bought this in LLC (Arizona), with intent to hold and sell shortly. Had some expenses, but no income in 2020. This year I decided to keep it longer and put it for rent. I assume 2020 losses are still consider a passive income? I meet active participation test, but won't be able to claim due to other income exceeding thresholds.

To carry forward these losses I need to do Schedule E, Form 8582. But do I also need Form 1065 & 8825 (because the property is held by LLC)? I did not think I needed the partnership return forms, because LLC would be a disregarded entity. However, one of the CPA I talked to today, said I do. Please share if claiming the partnership status will have some advantages with recouping the passive losses.

Really appreciate some guidance on the topic. 

[Ashish Acharya]

Originally posted by @Chris Little:

Looking for some advice on finishing my 2020 tax return.

Here is the situation:

In 2020 I became a realtor and also acquired an investment property. 2 different activities that need to be reflected on my tax return. I had no income on either one of them last year.

• – With RE agent activity – I am completing Schedule C for it. As I mentioned, no income in 2020, but have some this year, so want to make sure I do it right at start.
• - Do I count all my expenses from the date I got my RE license? Or can I include expenses prior to it (setting up office, educational expenses, properties search driving)?
• - I drove a lot (and kept my driving log) – I am in Arizona, where you could get 80 miles one way from Northwest Peoria to south east Gilbert. Will the fact that I did not make any profit put some audit prism on my driving log?
• -Do I need to attach any other form, in addition to Schedule C? I am participating in this activity as Sole Proprietorship.
• -I paid my teenage kid to create digital marketing materials for my realtor marketing. If I put in these expenses, I am responsible for payroll taxes? Form?

• - 2nd Activity – Investment Property. I bought this in LLC (Arizona), with intent to hold and sell shortly. Had some expenses, but no income in 2020. This year I decided to keep it longer and put it for rent. I assume 2020 losses are still consider a passive income? I meet active participation test, but won't be able to claim due to other income exceeding thresholds.

To carry forward these losses I need to do Schedule E, Form 8582. But do I also need Form 1065 & 8825 (because the property is held by LLC)? I did not think I needed the partnership return forms, because LLC would be a disregarded entity. However, one of the CPA I talked to today, said I do. Please share if claiming the partnership status will have some advantages with recouping the passive losses.

Really appreciate some guidance on the topic. 

Just looking at your questions, I can tell you will be at least losing out on tax savings. Please work with your CPA on this.  Here are your answers:

• - Do I count all my expenses from the date I got my RE license? Or can I include expenses prior to it (setting up office, educational expenses, properties search driving)?
•   ANS: Yes, if getting a RE license is the inception of your business. Remember, you cant detect more than 5k in startup and Org cost. There are other thresholds to this but I am sure it doesn't apply to you. I would be careful with the expenses before getting the licenses, cost have disallowed these costs before. Your situation needs to be analyzed to conclude. 
• - I drove a lot (and kept my driving log) – I am in Arizona, where you could get 80 miles one way from Northwest Peoria to south east Gilbert. Will the fact that I did not make any profit put some audit prism on my driving log?
• ANS: You can at the least take the mileage deductions. having profit is irrelevant. 
• -Do I need to attach any other form, in addition to Schedule C? I am participating in this activity as Sole Proprietorship.
• ANS: Yes, there need to be various worksheets and other schedules based on what you are presenting in the returns. Not sure what without actually doing your return. 
  -I paid my teenage kid to create digital marketing materials for my realtor marketing. If I put in these expenses, I am responsible for payroll taxes? Form?
  
• ANS: If you never paid him W-2, no payroll tax on your end. He will pick up income. You need to issue 1099 and he will pay the Self Employment taxes. Is better to hire kids on W-2 if they are below 10 to save on SE taxes (FICA on W-2). 
• - 2nd Activity – Investment Property. I bought this in LLC (Arizona), with intent to hold and sell shortly. Had some expenses, but no income in 2020. This year I decided to keep it longer and put it for rent. I assume 2020 losses are still consider a passive income? I meet active participation test, but won't be able to claim due to other income exceeding thresholds.
• Yes- Passive but you might qualify for RE pro to deduct these. 

To carry forward these losses I need to do Schedule E, Form 8582. But do I also need Form 1065 & 8825 (because the property is held by LLC)? I did not think I needed the partnership return forms, because LLC would be a disregarded entity. However, one of the CPA I talked to today, said I do. Please share if claiming the partnership status will have some advantages with recouping the passive losses.

If SMLLC, no 1065. I don't think any CPA would say that you need 1065 for the disregarded entity.