Tax Strategy - W2 Employee, Part Time Real Estate Investor

[Bryce Henson]

Hello all!

What tax strategies can I utilize this year? I am a full-time W2 employee and part-time real estate investor in California. I invest locally and out of state in fix-and-flip and buy-and-hold properties. This year, I will turn my primary residence spare bedroom into a home office. I also plan on making one of my credit cards for business expenses only so I can easily track business expenses. 

What should I charge to my business credit card? Can I write off my gas, Bigger Pockets subscription, cell phone, office supplies? Where is the line drawn as a part-time real estate investor compared to a full-time real estate investor? Maybe a good strategy is to charge all business-related items and refer to a professional CPA at the end of the year.

Does anyone have any tips on record-keeping strategies? I want to set up a system so it is easier for me at the end of the year.

Lastly, if you have any further reading and resources I can learn from please let me know!

Cheers,

Bryce Henson

[Frank Chin]

@Bryce Henson

Some years back, I had this dilemma, I had a high paying software W2 job, went into a small business and doing real estate on the side. The big problem was my health insurance which was carried by my employer, I have to pay and it was before ObamaCare, ran $2,500/month. I was looking for real estate deals driving around. Both of these things I can't deduct as expenses against my rental income.

What did I do? I incorporated a C Corp management company. This management company would charge me a fixed management fee per year roughly equal to what my expenses would be. This fee shows up for my rentals as a legitimate management fee on my schedule E. I then paid my health insurance, auto, and other expenses against the management company. To avoid double taxation of the C Corp, I'll have a slight income one year, and slight loss the next year. I later on had active businesses, auto repair and software, and the management company perform service for them as well. What I had to do is write up a plan for the business, compensation plan for officers, such as paying for medical insurance, co-pays, auto expenses, office expenses etc. so in the event of an audit, I'm covered. This company performs services for my other companies. I done that for a few years with no issues. I had to file a C Corp business return on the Federal and state level, and cost me small CPA fee.

If you're wondering where you can charge off the subscriptions, office expenses etc., it's a good way to do it. You'll have to check out the annual corporate fees in your jurisdiction, and other fees, such as CPA fees to see if it makes sense for you. As to record keeping, like receipts, I designed a monthly expense report, like the one I used to file with companies I work for, mark down miscellaneous expenses I spent and what the management company owes me, attach all the receipts including charges made to credit cards, and issue myself a check.