Category Archives: Business

tax deductions for rental property travel

How to take tax deductions for travel to rental property

Deduct Mileage to and from Rental Property

You can take tax deductions for travel to rental properties if you know the rules.  Under normal circumstances travel from home to rental property would not be deductible.  The travel would be considered personal.  Traveling from home is commuting like driving to a job.

Like most things it is not black and white.  The key word in the sentence is the word “home.”  There is a provision to take a deduction for the travel if you meet certain criteria.

You can deduct mileage when traveling to your rental property if you meet two criteria

1)  You are engaged in the business of owning rental property

2)  You have a home office from which you commute.

So if you are in business and the primary location of the business is your home office, then the travel to the rental properties is deductible as a business expense.  You have to love our tax laws.

Rental Property is either Business or passive investment

26 U.S. Code § 1231 – Property used in the trade or business and involuntary conversions

(1)General rule The term “property used in the trade or business” means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in the trade or business, held for more than 1 year,

Rental Property Business Activity

The rental properties meet the Section 1231 definition of property used in a trade or business.  You qualify as a business when you materially participate in running rental properties.  Material participation should be ongoing and regular to qualify.  Participation includes activities such as maintenance, hiring contractors, collecting rent, keeping accounts, screening tenants. Etc.  See How to claim passive loss limitation exemption for more criteria on being considered a business with active participation.

Rental Property Passive Investment

If you do not participate in the running of rental property, the IRS will see the activity as a passive investment.  Passive investments ae not running a business.  For example, I own stock in my 401k.  I do not participate in the decisions of the portfolio or manage the fund.  I am not a mutual fund manager Therefore; I am a passive investor.

Home office

If my regular place of business is my home office, then travel to the rental property is deductible because I am traveling as an active part of my trade or business.  I must let contractors in for maintenance.  I show the property to prospective tenants.  In fact, travelling to the properties to conduct these activities is one way to prove I am actively participating.

Benefits of Real Estate Businesses

The tax benefits of owning real estate are accelerated and enhanced if running them is treated as a business.  Jodywallrealtor.com and Cincero Investment Properties, Inc. exist in order to make real estate investing available and easy.

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How to claim Passive Loss Limitation Exemption

Passive Loss Limitation Exemption

Passive Loss Limits

If you are invested in multiple residential properties and an active buy/fix/ hold investor, then you will come up against the $25,000 passive loss limitation imposed by the tax code in section  IRC § 469(g).  It is imperative that you understand IRC § 469(c)(7) for real estate professionals.

My Real Estate Professional Story 

Here is my story.  Two years ago I first became very active in buy/fix/ hold.  I studied the rules

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on capital gains vs. expenses.  I trained my contractors on what to do.  I kept meticulous records.    I was set to deduct my passive losses against my regular income and did I need it.  My husband got a new job and as part of the severance he had to cash in his stock options or lose them.  We had a lot of capital gains and did not withhold money to pay the taxes since we did not expect a job change.  We sent our records to our accountant and crossed our fingers.

The day came when the phone rang.  I knew it was our accountant before I picked it up.  I asked, “Bob, give it to me strait.”  He said we owed over $15,000 in taxes.  When I picked myself off the floor, I asked him how that could be?  We had so many deductions?  We kept good records.  I expected something but not that much.

He said, “Jody you are maxed on your passive loss deductions.  Your AGI put you over the amount for the $25,000 loss.  We will carry the deductions to the next year.”

“No way Bob! I cannot be maxed on the passive loss deductions.  I am a real estate professional.”

“I know.  You gave me your Realtor® number but that does not count.”

“Bob, you did not understand me.  I am an agent but I AM a real estate professional.  My occupation on the tax form says property manager.  According to IRC § 469(c)(7) for real estate professionals I am exempt from passive loss limitations.”

Bob agreed to re-figure my taxes and said he would get back with me at the end of the week. Later that week he called and said we will get about $5,200 back on our return.  After I came down from the ceiling I thanked Bob and asked for him to e-file our return.  Knowing this one section of the tax code saved me over $20,000 in taxes in one year.

Passive Loss Exemption Rules

Here’s what you need to do to qualify as a real estate professional.  It is not about being a Real Estate agent.  To qualify as a real estate professional, the taxpayer must spend:

  •  more than 50 percent of his/her time in real estate activities; AND,
  •  more than 750 hours in real estate activities.
  •  A real estate professional must materially participate in each rental activity for the loss to be deductible

How to qualify as a real estate professional

Real Estate Professional

Real Estate Professional

To be a real estate professional, you must spend the majority of your time in real property businesses:

  •            Development or redevelopment
  •            Construction or reconstruction
  •            Acquisition or conversion
  •            Rental
  •            Management or operation
  •            Leasing
  •            Brokerage, not sales agent

One spouse alone must meet both tests. In addition, services performed as an employee do not count unless the employee is at least a 5 percent owner in the real estate business.

You can show your real estate business activities in many ways. Like with anything, it takes good record keeping.

Hint:  Reduce the amount of time you work on your job.  You only have to count hours as work that you actually spend doing work.  Deduct vacation time from the total.  Travel time does not count as work.  You can deduct time you spend at meetings.  In all, you may not work a full 40 hours a week for 52 weeks. 

Achieve the real estate professional time requirements

Capitalize on down time to run your real estate business.  Education is material and necessary for your job.  You can listen to tapes to and from work.  You can search for properties during lunch.  Going to conferences and networking also count.  Did you show a property?  Place an ad?  Do tenant screening?  Select, hire and pay a contractor?  These activities will help you get to the 750 hours.

I document all of my appointments, viewings and travel in my Tax Bot.  I keep all of my expenses in there as well.

Finally, before rental losses are deductible without being limited by the passive losses rules, the taxpayer must materially participate in each rental.  This can be difficult to document.

Group properties to achieve material participation

Fortunately, you are able to make a one-time election to treat all of your rental properties as a single activity.   This filing is done once.  Add the statement to your tax return.  Even if you outsource the property management, be sure to have the contract state that you have final say on all tenants and that you must approve all expenses over a certain amount.  I would do this as a matter of good business practice.

Learning these rules and executing a plan can save you thousands in taxes.  I was able to put money down on another property with my tax savings for the one year alone.

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business-travel-deductions-meals

Tax Strategy: How to get 100% business entertainment tax deductions

Can you deduct 100% of business entertainment?

Saving money on taxes keeps money in your pocket.  Tax savings go directly to your bottom line.  The real estate business is a people business.  You can’t sit in your office and expect to meet clients, tenants, prospects, bankers, adjusters, appraisers and investors.  You are going to be out and about and you are going to eat.  The question is “Can I deduct 100% of my meal costs from my taxes?”  The simple answer is yes, if you follow the rules.  These tax rules are laid out in 26 CFR 1.274-2.  Don’t worry.  This article will explain it.

Business Entertainment Example

The short version says you can deduct your portion of the business entertainment meal if you have business reason to be there.  You must transact business with someone.  For example, you and Bob go to lunch and discussed the latest methods to get listings.  The tab is $30.  You pay your portion and Bob pays his.  You both deduct your amount of the lunch.  In this case, both you and Bob actively pursued future business.

Business Entertainment Rules

Let’s look at the rules.  There are two rules associated with the example above.

1)  The expenditure was directly related to conduct your trade or business.

2)  Either preceding or following the expenditure, there was a genuine business discussion.

How to document business entertainment expenses

As with any tax deduction, you must document that you met the requirements.  In the example above, you will get a copy of the receipt and note your portion of the meal.  You will write down who you transacted business with and what was discussed.  You do not need a long list of notes of the discussion.  Simply stating “discussed future business opportunities” will suffice.

Can you deduct your spouses meal?

A big investor is coming and you want to meet them.  Your husband is with you as you go out.  Can you deduct his meal as business entertainment?  Yes.  The states

The spouse of a person referred to in paragraph(c)(3)(iv) of this tax code will be considered closely connected to such a person for purposes of this subparagraph.

You must document who, what and where.  The expense must be for transacting business.   Good-will events do not meet the test.  You cannot take a group out for the night as a good will gesture and take a deduction.  You also cannot take a group a night club and expect to deduct it.  Nightclubs are loud and the IRS does not anticipate business discussions in such an environment.

Be sure you do not try to tax deduct taking your employee to lunch 5 days a week and deducting it.  The IRS will claim you are trying to offset normal living expenses.  Limit the number of times you take the same person out to less than 30 times per year.  Do not abuse the rule.  If you are deducting 300 meals per year, then you will raise a flag.   Remember, bulls get fed and hogs get slaughtered.

Tips to help you be audit ready

1 The expense must be directly related

  • You intend to do business at the time you spend the money
  • You discuss a topic that is intended to result in future business
  • The main reason you are there is do business
  • You spoke with person with whom you intend to do business

The expense occurs in an appropriate setting

  • The person you are with knows you want to conducting business
  • You spend the money in such a way to further your business
  •  This is not a meaningful social or personal meeting

It is a business setting

  • A nightclub or theater is not conducive for conducting business.  The business discussion can occur before or after the expense.  It must be documented.

Business entertainment can be 100% tax deductible when you learn and follow the rules.  If you found this article useful maybe you will enjoy

How to Deduct More Than $25,000 in Passive Losses Per Year

Tax Benefits of the Home Office

Make Your Next Sports Utility Vehicle Tax Deductible With Section 179

DISCLAIMER

This article is for training purposes only.  Jody Wall does not warranty the accuracy of the training.  It is not intended to be legal or accounting advice.  Seek competent consultation for your particular situation. Readers assume all responsibility for their decisions.

Cover photo from travelhelp-corporatehousing.com

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Graduates walking

How to get a college tax deduction paying your children

Pay for college and get a tax deductionTax Return

Learn a great tax deduction strategy.  Helping your children pay for college is one of those benefits of being a parent.  Helping them pay for college and getting a tax deduction is a benefit of being a business owner.  This post applies to your college age children over 18.  When you hire a child who is under 18 for your proprietorship, they are exempt from payroll taxes.  However, that is not the case for children over 18.  Here is how you get the college tax deduction.

Hire the child for odd jobs

Summer is a great time for children to earn some money for college.  You will likely have odd jobs around your Home Office during the summer months.  Things your children can do include

  • prepare mass mailings
  • distribute fliers
  • make home office repairs
  • Update social media campaigns
  • Work on your website
  • research blog posts

Contract labor rather than W-2 employee

If you hire your child as a W-2 employee, you will have to pay employment payroll tax.  You will not pay these taxes if you hire the child as contract labor.  You ask, “Does this make my child subject to self-employment taxes?”  No

The Supreme Court ruled that self-employment trade or business meant the job needs to be have continuity and regularity.  The contract jobs described above are not regular.  They are certainly not meet continuity.  They are not part of a trade or business.  There is no expectation that your child will start a business performing occasional tasks like those described above.  They are one-off tasks.  Such activity ends with the summer.

Because your child is not in a business, you provide all of the materials.  They provide the labor.  They should not have business expenses to claim.  

Making the college tax deductions work

You pay your child $10,000 for the summer.  There are no payroll deductions.  It is a business expense to you and you deduct the $10,000.  In the 30% tax bracket, you save $3,000 in federal taxes.  The child will pay 6% or $600 in taxes.  The net savings for the family is $2,400 and the added bonus of the child learning to earn money.

DISCLAIMER

This article is for training purposes only.  Jody Wall does not warranty the accuracy of the training.  It is not intended to be legal or accounting advice.  Seek competent consultation for your particular situation. Readers assume all responsibility for their decisions.

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Home office tax deduction

Home office tax deductions can save you thousands

Home Office Tax Deductions Defray Living Expenses

Home office tax deductions offer so many tax advantages it makes me wonder why more people

Home office

Home office

do not start their own business.  One of the rewards of being a business owner is cutting back on the daily commute grind.  The home office is a way to transfer some of your living expenses to your business and get a deduction.  Some of the benefits of the home office include:

  •  Deduct a portion of mortgage interest, taxes, insurance, utilities
  •  Repair deductions – repairs on your principle residence are not deductible but office repairs are.
  •  Pest control
  •  Office equipment depreciation
  •  Building depreciation

Home Office Tax Deduction Limits

These amounts really add up.  The amount of the deduction is limited to the income from the business.  If you no income, you do not have a deduction.  If you have little income, you have little deduction.  You may think, “I do not make any money now so the home office deduction is not worth it.”  That thinking is faulty.  I always say, “Every deduction is sacred.  Every deduction counts.  Deductions shall not be wasted.  Oh make the tax man shout.”  Claim the deductions now and every year.  They can be forwarded to future tax years in perpetuity until you do have income to attack.  If you are in business, you intend to make money.  When you do, limit the amount the tax man taketh.

Example Home Office Tax Deduction Calculations

 The table calculates the home office deduction of 10% office use of a 1400 square foot home.  You paid $140,000 for the home. 

Item Gross Expense Office Percentage Deduction
Interest $5,136 10% $513.60
Property Tax $2,400 10% $240.00
Insurance $800 10% $80.00
Utilities $3,200 10% $320.00
Depreciation $4,364 10% $436.40
Repairs – whole house $3,000 10% $300.00
Repairs -office $400 100% $400.00
Total $1,854.00
25% tax Bracket $463.50

I know I would rather have the $463 in my pocket rather than the governments. If I deferred this amount for two years, it will still be a tidy sum and will be added to the intervening year’s deductions.

Vehicle Tax Deduction

Commuting to work is not considered business miles.  Eliminating the commute will lower the number of personal miles on your vehicle.  You benefit from a higher percentage of business use and save yourself the wear and tear on your vehicle and your stress.  I certainly do not miss sitting in traffic 90 minutes a day.

DISCLAIMER

This article is for training purposes only.  Jody Wall does not warranty the accuracy of the training.  It is not intended to be legal or accounting advice.  Seek competent consultation for your particular situation. Readers assume all responsibility for their decisions.

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Renting to relatives

Beware! Renting to relatives can be a financial disaster.

Charge Fair Market Rent

Renting to relatives is fraught with financial disaster unless the arrangement is structured carefully.  When it comes to the IRS, no good deed goes unpunished.  You decide to help your kids get a good start in life and out of your house.  You buy an investment property and rent it to your child for enough to cover the payments but $200 less than fair market rent.  You don’t have a lease because it is your child.  You are not looking to profit from your child but don’t mind the tax breaks.  Everyone wins, right?  Wrong.

Pitfalls of renting to relatives

To be considered a business, the IRS expects that you have the intention to make a profit.  By charging your child less than fair market rent, your profit motive on buying the property will be destroyed. The IRS will consider the property a second home.  You will be able to deduct taxes and interest but you lose the following:

  1. Depreciation
  2. Repair costs
  3. Insurance
  4. You lose the possibility of the loss on sale deduction
  5. You pay tax on the income from the property

Avoid the pitfall of renting to relatives

The arrangement should look arms length and structured like any third party arrangement.

  1. Have a lease.  Formalize the arrangement between you and your relatives
  2. Establish profit motive.  Charge fair market rent.  Document the amount of the fair market rent. Do NOT discount the rent as a “gift”.
  3. Do not reduce the rent if they do repairs or upkeep.  Your brother should pay the rent.  You can pay him for the repairs as a separate arrangement.
  4. Have proof of payment.  Make sure the money goes from them to you.
  5. Make sure the property is your relatives primary residence.  If mom and dad spend most of the time in Michigan rather than the rental in Texas, the Texas property will be a vacation home.

Ways to help your children and preserve profit motive

You can give $14,000 per year per person with them paying no tax.  The gift should be independent of the rental agreement.  They should be able to use the money anyway they want.  It is a gift after-all.  In no way do you want to do anything to destroy arms length agreement that destroys the profit motive.

Conclusion on renting to relatives

Rental property is one of the best investments available to people today.  It builds wealth and reduces taxes.  Ensuring all arrangements are formal and arms length ensures you get the tax deductions  you counted on when you bought the property.

Image by: http://www.greenresidential.com/

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single family residence

How to select a single family residence investment property

Selecting the right single family residence investment property

This video contains criteria I use in selecting single family residence investment property.  You need to know your target client before you can even begin selecting a property to purchase.

Subscribe to my YouTube Channel to see my latest videos.

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familty business ownershp

Retire poor or financially independent. Family Business

Americans retirement future is in crisis mode

Americans are facing a retirement crisis.  Most are ill prepared for the realities of retirement.  Here are some sobering statistics:

  1. 10,000 baby boomers a day turn 65
  2. 45% of US retirees live below the poverty line
  3. Poverty is higher among women
  4. 90% of Americans do not own their own business

The situation is largely a caused by our 20th century world view.  My father and grandfather were taught to get a good education, get a job with a good company, live on less than you earn, and save.  For all of their good intentions, this is the recipe that led to mass poverty.  In nearly all of human history prior to World War 2, people remained in close family units.  They worked together to build a life.  They worked to pass it on to the next generation.  My great grandparents would have eaten dirt rather than sell their land. They valued giving it to the next generation.  Today, family units are scattered.  We rarely see each other much less work together.

A new business paradigm for retirement in a new century

Harvard Business Review recently published an article Why the 21st Century will belong to the family business.  Big corporations take the short-term view of the next quarters earnings reports.  CFO’s will sacrifice long-term good for short-term gain.  Family businesses are the opposite.  They sacrifice now for the long-term.  They look to add lasting value.  Their motivation does not come from the stockholder but rather making the family secure.

The Wall’s paradigm shift to retire with a family business

My husband and I do not think like average Americans.  We chose a different path.  We decided there would be no excuses and we will do what it takes to succeed.  We studied for two years before we started our business.  We realigned our resources.  We cast a vision and set a goal.  Here are some of the changes.

  1. We sold all of our stock and stock options and got completely out of the market
  2. I got my Realtor’s license
  3. We invested in property
  4. We moved in with our children and rented out our house.  This move cut $4,000 per month from our expenses, added $1,000 per month to our income and provided massive tax breaks on the property.
  5. My oldest son rehabs property, builds advertising and networks.
  6. My husband plans and executes long-term activities.
  7. My bother is the construction manager.
  8. My sister-in-law keeps the books
  9. I meet with bankers, investors, buy property, etc.
  10. My youngest son is in the Marines but has a law degree in tax and business entities.  He has an MBA and will come home to the business.
  11. My brother, both sons, my husband and I pooled our financial resources into an LLC to expand the business.

We act differently because we want a different outcome.  It is paying off.  Our retirement is realistically 4 years away.  It has been difficult.  We have made mistakes but we always fall forward.   Our passion is to help those around us achieve their own financial security.  If you read my blogs from that perspective, you will understand our soul.

We look forward to helping you on your journey to financial independence.

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Social Security

Why you must build passive retirement income

Social Security is half the income for 61% of Americans

You must have your own passive retirement income.  Social Security is anything but what its name says.  It is estimated the $2.8 Trillion in reserves will be depleted by 2034.  While 85% of Ameicans say Social Security is important, the facts are the remedy to the problem are political suicide.  Neither Congress nor the populous have the will to take action.  Kicking the can down the road makes the problem worse.  I am not betting my future on the hopes of millennial’s generosity to raise their taxes.  Passive income that you control is your own security trust fund.

Congress has embezzled $2.5 Trillion from Social Security

Congress has not met a spending bill it did not like.  The large trust fund sitting there waiting on your retirement was too tempting for them to avoid.  Buy votes today and leave an IOU in the cash register.  The reason Congress wants to cut or delay benefits is they do not want to face accountability of paying the money back.  The fact is they know it cannot be paid back.  The only real choice will be to raise taxes and remove the contribution ceiling.  Congress was not fiscally trustworthy for the last 50 years. Taking more money from the people will not cause their ways to change.

Passive income is exempt from Social Security tax

Earned income is subject to social security tax.  Currently, unearned income is not subject to the tax.  Investing in passive income streams like real estate gives cash flow that is exempt from social security.  Take you income stream out of the path on Congress.  Wise  financial planning would dictate you make it as difficult as possible for them to steal your savings.  Real estate passive income when held in a real estate business also lowers your overall federal income tax.  Not only are your social security and income taxes lowered but you get equity  build up with renters paying off your mortgage.  Moreover, the income increases with inflation.  We have recently raised the rents on all of our properties in-line with current market trends.  Our percent return increases each passing year.

Experts speculate Congress might raid private 401k’s

I am not a doom and gloom conspiracy person.  However facts are that desperate governments do desperate things.  The crisis will not go away and it will only get bigger.  Each day 10,000 baby boomers turn 65. Socializing retirement funds is one possibility for the government to remain solvent.  While it seems fanciful now, a Greek style crisis in America may cause a drastic shift in policy.  I have moved my 401k to be self-directed.  Moreover, we only contribute enough to get my husbands company match.  Our real estate business provides more than enough tax deductions to make our passive income tax free.  There is no need to defer taxes in a 401k.  There is no need to pay taxes on it in the future.  I am free to use it now, before 59 1/2 .  In addition, the money is in a corporation rather than a retirement account.  The corporation lives forever.  The children already own much of the stock.  The money is out of congresses reach in a retirement fund.  It will not be subject to a death tax when we die.

Take action now building passive retirement income

The time to prepare is before Winter comes.  Those of you who watch Game of Thrones heard winter is coming for several seasons.  Winter finally arrived.  Protect your sunset years from a harsh fiscal winter looming on the horizon.  Educate yourselves and take action today  building you passive retirement income.

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