As I’ve stated, I’m just starting out. No property yet. What expenses can I now deduct from annual taxes?
books?
courses
club memberships?
auto expenses?
internet site fees?
What else at this point? Is this all dependent on actually purchasing property during the year?
Thanks,
Larry
…
the short answer is NONE; especially if you have not incorporated and/or do not have income from that activity.
there are two basic ways to take deduction related to REI activities----either Sch E of 1040 if you have rental property or Sch C if you are operating a business. I would refer you to SchC instructions for more discussion about the test for determing whether its a business. However, claiming your business is “real estate investing” or “professional investor” in light of having no income to take deduction against is probably not going to fly. There was an IRS case a few years ago where a guy took the home-office deduction as he claimed his business was day-trader or investor. I seem to recall that the IRS prevailed in that case.
There are better ways to save/make a few hundred bucks then taking questionable deductions on taxes (IMHO) (like doing hihgly profitable REI deals!)
Ask 100 people and get 100 different answers!!
Ask 1 good C.P.A. and get the correct answer!!
Do what you do best outsource the rest!
if you are asking a CPA, you are asking the wrong person. A true tax professional is known as an EA (enrolled agent) (check out www.irs.gov for more info); yes, some CPA are knowledgeable in tax and may provide correct tax advice.
I am not an EA however, I have worked closely with one with 30 yr. experience to prepare my taxes over the years including many real estate related issues. While there are certainly are many grey areas in the tax code, the scenario presented is not one of them.
I didn’t say I would not have any income, just not yet. My plan is to buy and sell atleast 2 properties in 2006. I’m just getting into the business as I continue to study.
So, I was just trying to figure out if my costs could be deductible such as club fees, property search fees, advertising and so on…
assuming, you are NOT doing this as a primary source of income, in general, if you are buying and selling properties, expenses are going to taken against each individual property on a property by property basis. Therefore, directly-related cost such as mileage, meals, broker fees, etc as part of the buying and/or selling process can be taken. However, if you buy a plane ticket to go look at a property, but do not buy it, then that travel expense is not deductable.
If you chose to use some other entity like and LLC or an S-Corp then things change a little bit; however, remember an LLC is a disregarded tax-entity (unless you chose otherwise) so in general the text above holds true. If you want more info this, I would encourage you to cruise over to the Legal/Asset Proetction forum as there are many, many old but very good post about different entity types and their associated tax treatments.
So, you mentioned a number of items like course, books, membership fees to clubs. In general, these are not going to be deductable (unless you choice to push the limits).
Real estate has a kind of special status in the eyes of the IRS and as such has special rules crafted around it. As a default, buying and selling real estate is going to be treated as investment income (and be dealt with on schedule D or E of 1040). This is not to say that REI can not be a Sch C (i.e. business) type activity, but you have a bit of an uphill battle and you needs be able to back it up and/or otherwise its going be treated as “passive income” and any loss can only be taken against passive income. See following link on page C-2, “Line G” instructions.
http://www.irs.gov/pub/irs-pdf/i1040sc.pdf
Here’s another useful links…
http://www.irs.gov/businesses/small/article/0,,id=98191,00.html
Happy Investing in '06 ;D
I found this book in Barnes and Nobles that has been quite helpful to me. “EVERY LANDLORD’s TAX DEDUCTION GUIDE” by Attorney Stephen Fishman. It taxes made easy.
I had the same questions several years ago when I was setting up a mortgage reduction business.
You can deduct EXPENSES for the development of your business. Initial searches, books, courses, travel and transportation…
If you set up a home office MAKE SURE you have photos of it and that there is NOTHING in that room that can be used for personal living. No Beds…But If it’s a sofa bed, you can probably get away with it.
You can move personal equipment( computers,fax machines, and the like) to your company and you can also do this with vehicles and SPECIFY the amount that you use the vehicle for business.
Oh, BTW, I am taking classses this next week and will be working with a tax preperation company. I’m not claiming to know everything, but I did this serveral years ago…
Kevin
yes Kevin in the above post is correct… up to $5,000 of start up business costs can be written off… however country club memberships cannot be. Look up " Tax stratagies for the self employed" by bradford… good system…based mostly for investors/realtors… check it out
If you want to optimize your tax write offs, create your corporations now. Your allowed to carry over your losses for 2 years so when you finally sell your properties in 2007 or 2008, you will be able to claim those expenses since you have no income right now in the corp.
I recommend 2 corp for your business…An LLC to buy/sell/hold. That would be its sole function and it takes no expenses. The create a C-Corp which will act as the property management company. You will be an employee of this company and use it for your write offs. IN fact you can write off many things thru it, including your health insurance, car payments, car insurance, doctor bills, business dinners, trips (you get 1 annual meeting a 1 in any destination, so take your trip and write it off), cellphone, internet service, computer, etc…
Of course you need to find a tax specialist that will understand this method to prepare your taxes correctly.
Also you want your property management company to have a different fiscal ending year (at least 6months apart from your LLC-holding co) so it will give you time to bill out all your profits from the LLC to claim a no gain on sales. This is done by your management company billing the holding company a quarterly or bi-annual management fee. You can then with the C-Corp before taxes are done is deduct all your expenses and then fund a SEP IRA if you want to apply some earning to your retirement account (remember to always pay yourself first). You can then pay the standard tax on a C-Corp or give yourself a W-2.
BTW…I am not an accountant or CPA but this is the method I was taught through a tax specialist in the REI world…
Hi Fireman18,
REOconsultants has the right advice. Ask a good CPA who specializes in real estate and business tax work. The enrolled agent may be good, but they do not usually have the level of education, licensing or expertise to handle the sophistication of a real estate investor. Don’t shortchange your tax advisor and preparer . . . you may end up paying dearly at the other end.
A good CPA who will advise you and do your taxes is one member of your team that you want to pick wisely.
Lastly, regarding entity formation, you really should consult an attorney for such advice. Again, another team member who, if picked wisely, will save you more money down the road.
Good luck.
Cate
I have a quick question for you. What other out sourcing agencies would you recommend I start trying to network with? I see from looking at your profile that you are in Denver. I’m in Colorado Springs and just beginning in the RE industry. I really could use some good advice from an experienced investor.
I’ve drafted some letters to attorneys who deal with divorce, bankruptcy, and real estate that I’m sending out in the morning with hopes of a reply. I want to get as many contacts in various diverse organizations and professions. Please advise!!! Terell
Fireman,
I am an accountant at a public firm who specializes in the real estate. I can answer any general questions you have. Yet, most people on this board is correct. You need a good tax advisor/CPA on your team.
yrush2000 got it right.
Bruce