Hi Guys,
I am a W-2 employee. I took RE courses in 2005 and spent $22,000. Motivated, I also bought a rental property in 2005. I had bought a rental property in 1999 and sold it in 2002.
How can I deduct $22,000 from my 2005 taxes?
Not meaning to be critical, Syd, but for $22,000 they should have taught you the answer to that question and a whole lot more. $22,000!!! You could have picked up a couple of properties for that.
thanks for the reply.
I know. I’m really pissed about that. But I must move on. No pint in beating my chest and crying over spilled milk. On the positive side, I see this “mistake” as a great motivator. I want my money back and the only way I could do it is by becoming a succedssful real estate investor. The “mistake” is keeping me from giving up on real estate and stay happy but hand-to-mouth in my w-2 cube.
They told me I could deduct it by showing I’m in this business already. I could take a chance deducting it, but I do not want to get audited. I met a CPA who told me I could not deduct it. A real estate accountant told me I could. But I’m wary of the accountant. $22,000 is a huge amount to deduct and most definitely raise a red flag for the IRS. I’d hate to get audited.
I’ve a feeling it’s a sunk cost and is not recoverable. I just wanted to see if anyone has a good idea.
If you are in real estate as a business you can deduct your educational expenses.
that’s what the accountant, and the re course guy, told me. They said I had purchased properties (including my resident) in the past and also one in 2005. They said that’s the proof I’m “already” in the business, so I can deduct it. The CPA said, no, I can’t.
I most definitely want to deduct, but am scared of being audited because of it.
Maybe I should consult another CPA who exclusively does real estate returns.
Maybe “Dave T” will weigh in but I’m with your CPA – no you can’t unless this is your business…like incorporated, etc. WE may not have enough information from you to answer.
Keith
actually your best bet is try take the deduction on SchA since it will probably put above the 2% AGI threshold; however I think (but not sure) you will need a 1098-T to do that. I would ask the folks that charged you $22k for that document.
As for Sch E, you would need to show that expense was DIRECTLY related to operating your 2005 purchase rental. If you claim it helped you acquire the property, they would probably add it to the cost basis. Stuff you did in the past has little or no bearing on its deductibility.
As for SchC, you most likely will not meet the test for being a real estate professional so that there avenue is out.
I think you best bet is try for ScHA under “educational expense” , but you will need to read the instruction to see about requirments (if you need 1098-T, etc).
legitimate business expenses are ALWAYS deductible.
Mark Wagner, CPA
Just a note from a tax preparer that’s dealt with this.
Education expenses can be taken on Sch C against your EMPLOYEE income. Those would be related to your W-2 job. Don’t think you could take it there for your BUSINESS.
On Sch. E that’s your Rental Income and Expense, you would put the expense on the second sheet under the miscellaneous category. The only thing I’m concerned about is the amount. $22k is a lot to expense on one house for one item.
The other solution is taking it as a adjustment against your income. It’s about line 33 to 36 on 1040. It’s based on a percentage of Adjusted Gross Income. With a number that large that would probably be the best way to go.
Just an opinion. Anyone else want to weigh in???
Kevin
I’d put it wherever it benefited the taxpayer the most $$. If it is questioned by IRS, we’ll defend it as a legitimate business expense related to the business in question, supported by paid receipts.
There is no rule that the expense must be “smart”. Only that it is a legitimate business expense.
I don’t see a problem.
Mark Wagner, CPA
Evenin’ Mark,
Talked to our owner today who is also a CPA, and he said almost exactly the same thing. Looking at the different strategies, will tell us where to expense it.
I was just concerned with the amount of the expense, not so much the validity of it.
Just my .02,
Kevin
Well, it IS high, but legitimate. Unless the taxpayer has additional items on the return that would put it out of “normal” for similar taxpayers in a similar business it probably won’t even generate a question.
However, the most I can see is a letter asking for substantiation. Ususally a simple letter back with copies will suffice.
So, Syd, take the deduction and sleep well.
Mark Wagner, CPA