Tax Preparing When Your 1099 for Rental Income Is Received — by Alex Craig

As the January 31st deadline for 1099’s to be sent out approaches, it is time to start thinking about filing your federal income taxes. While I do not like cutting the check to the IRS, I do find it interesting each year to see what I would have paid had I not owned real estate, which is absolutely something I consider in the ROI of my portfolio. As a real estate investor (not CPA), here are my tax tips to consider and share with your CPA. BTW, do not assume your CPA is aware of best practices in filing a return for individuals who own a rental property business. If you own 1 property, IMO, you own a business. Last week, I had to educate an CPA on behalf of one of our investors who had thought we had filed her client’s 1099 incorrectly; the end result was the CPA filing an amended return, which saved our client around $3,000. For all I know, this CPA could be the best tax preparer for charitable foundations, but not real estate. Ok, my quick tips:
  • Did you visit our office or go to a real estate conference? Hotel, rental car, mileage to the airport, parking and possibly meals. I say possibly meals because there has been some changes with meals & entertainment, but I am thinking meals were added back into expenses to write off during COVID to encourage business spending in support of restaurants.
  • Part of your home. You own a business, thus you need a home office. Part of your home can be written off as an expense.
  • Cell phone/Internet. I would say a portion if you can support that part of your internet/phone expenses was used for business purposes. You read this email–that is real estate education, thus you are officially using your phone/internet for a business expenses. Of course, you can’t write off the entire bill for reading this 5 minute email or logging into your PM software, but a small expense write off is appropriate. The more property you own, the more it is reasonable to write off.
  • Interest on mortgage. Your mortgage company will send you this statement.
  • Closing cost on your purchase. Make sure you send your settlement statement to your CPA.
  • Professional Services. Applicable expenses would be attorney fees to set up an LLC, accountants, property managers, etc.
  • Annual LLC renewal fees.
  • Real Estate Education. Any courses or educational material would be considered educational in purpose related to your business. I am a big fan of buying educational materials, just don’t go overboard. Avoid “gurus” who charge excessive fees for seminars. We had an individual visit our office several years back who spent $25,000 on Trump U. Like that seminar, these type courses prey on the desperate by encouraging them to max out credit cards. There is no course or “guru” worth that type of money. Most of what they will teach you can be found for free on Bigger Pockets and for a small yearly fee, your local REIA.
  • Depreciation. This one is a tad complicated. I do a cost segregation so that I can take all of those expenses in year 1. Consult with an CPA. Some will push you towards hiring someone to do a cost segregation, but that may not be necessary for a single family rental. Some CPA’s will disagree, but in case of an audit, given that I do my own renovations, I have an excellent grasp on the individual break out of the building cost. If you have questions as to expenses on your renovation, simply email us.
  • Vacation. Did you spend part of your family vacation looking at Real Estate? If so and you can support that your time doing this was legit, then consider writing off a day or 2 of your vacation expenses (hotel, mileage, rental car, etc).  I suggest to best support your vacation expenses is to keep records of what you saw and to further support your case, make an offer. If you are not interested in what you saw, make an ridiculous offer that if accepted, you could make something of that investment.

I took 2 years of accounting in college at the University of Memphis, which hardly classifies me as a tax expert. I am simply sharing the items I discuss and send to my CPA. Sometimes my CPA will push back on what I think is a write-off (like a new suit I purchased to present several years back at a RE seminar), but most of the items I listed above are a no-brainer. My last parting advice, keep excellent records.

Mark Twain said “What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin.” Clearly, he did not own rental property or he would have been talking about the money saved!”