Posted by Bob on May 16, 2004 at 24:52:24:
>The IRS has issues memos to its field agents to be on the lookout for investors taking “management fees” on
>schedule C for properties the same investor owns.
Why does the IRS object to receiving some extra SE tax?
Group properties in Schedule C - Posted by DavidGOR
Posted by DavidGOR on May 07, 2004 at 19:34:00:
I was just told by my CPA that we could group all the properties I have as rentals and selling on LSC into one single “Property” in Schedule C of my tax returns. He says this simplifies things (for instance not having to divide up the cell phone costs among all the properties). He also says doing this won’t make too much of diference unless I have more than $25,000 in capitol losses.
What are the pros and cons to grouping all the properties into one on Sched C? Is this common or uncommon?
-David G.
Re: Group properties in Schedule C - Posted by JOHN K HASLACH, CPA, MST
Posted by JOHN K HASLACH, CPA, MST on May 10, 2004 at 09:13:03:
Rental real estate activity belongs on Schedule E, if you own it personally. The passive loss limitations as to deducting losses do not apply if you are a real estate professsional.
Get a new CPA… - Posted by William Bronchick
Posted by William Bronchick on May 08, 2004 at 09:06:39:
By putting the properties on schedule C, it is treating your rentals a business, not an investment, thereby losing the tax benefits of depreciation, capital gains treatment of profits when you sell, and the ability to 1031x the property.
If you want to deduct “general business expenses”, do like Frank suggests - form a corporation to manage the properties, have the corp take a % of the rents as a management fee, then wash that income with the expenses of managing the property. The IRS has issues memos to its field agents to be on the lookout for investors taking “management fees” on schedule C for properties the same investor owns. By using a separate corporate return, the argument is stronger for you, plus less likely to be noticed, since corporate returns are audited much less than Sched C.
Other thoughts … - Posted by Frank Chin
Posted by Frank Chin on May 08, 2004 at 09:04:35:
Dave:
Another reason why you’ll have to report on a property by property basis, rather than one large one, is because you’ll have to maintain your “Depreciation Accounts”, and thus “Depreciation Expenses” on a property by property basis. Since you’ll be selling them one at a time, and even if you sold it all at once, you’ll have to report the disposition of each aseet, you’ll have to compute “the basis” of each of your properties, “the recapture” etc which means you’ll have to maintain the records by property anyway.
So why not do it right to begin with.
One thing I realize after many years in RE and other businesses, is you take a shortcut somewhere, you’ll pay for it many fold down the road. Which reminds me, I took a shortcut to the mall the other day, and got loss!! LOL.
If your CPA thinks using a Schedule C is OK, I’ll start looking for another CPA.
Frank Chin
Re: Group properties in Schedule C - Posted by Frank Chin
Posted by Frank Chin on May 08, 2004 at 08:46:36:
David:
Several other issues you have to consider:
1- My CPA was not in favor of me filing “Schedule C”, prefering to do a 1065 for an active business, due to the fact that Schedule C filers are normally cash based small businesses subject to a higher audit rate - according to him. If your rental business loses money year in and year out because of depreciation, it’ll be a red flag via the Schedule C. On the other hand, reported losses on your schedule E is far more normal.
2- If you’re fortunate enough to make a few dollars, instead of losing it, then you’ll be subject to “Self Emplyment” tax in the Schedule C which you’re not under the Schedule E.
3- The $25,000 loss you’re referring to is the “passive acitvity limitation” rule where you can deduct losses up to 25K if you make 100K a year or less on active income. By you CANNOT deduct anything if your income is over 150K. I don’t want to jump from Schdedule C to E and back base on changes in my tax situation. My Quickbooks is geared to Schedule E reporting.
4- As to splitting cell phone bills, that’s the least of my concerns. If you own enough properties, be glad that you have to split it. As someone with a finance background (MBA in Finance) I prefer to see my P&L on a property by property basis. I had a spreadsheet made for expense allocations, and I simply put the bill (for instance -cell bill) in a column, and it’s split across automatically to all the properties. If you use the same spreadsheet for your other expenses, such as auto mileage, tools, cleaning supplies etc, it’ll split along the same line.
5- I also use a C Corp Management Company that charges me monthly management fees based on a fixed formula, allocated to all the propeties, recorded via the Scedule E. Then the management company would in turn pay things such as phone bills on its 1120 Federal tax return without having to split the bills. I split bills using the spreadsheet I mention above when the expense is too large to put through the management company, or not budgeted, such as going to a convention.
Frank Chin