Real Estate Professional

[Strongsilence-CPA]

Client took a class called Open Spaces and paid a fee.  The CPA advising the students told her that this was a deductible business expense.  It is "not considered a new career but rather service fees for business formation" per the CPA I have my doubts that this is not training for a new career, but it is a plausible business expense.

Where are these that can’t be directly allocated to a property deducted?

Schedule C? RE professionals are not self-employed.

Other losses (non SE) line on Schedule 1?

Note:  She was an RE professional and met the material participation tests #2 and #3.

[qbteachmt]

"Schedule C? RE professionals are not self-employed."

You mean this person is a W2 employee of a brokerage? Then they submit for reimbursement and let the employer deduct that expense.

Otherwise, a RE professional is either self-employed or an employee of their entity, is that your taxpayer client?

How does business formation fit into this for your taxpayer? That advice is generic, not specific to your individual.

[Strongsilence-CPA]

RE professionals are not self-employed according to my research.  Is Schedule C filing required?  (This client is not a W2 employee.) 

per IRS Pub 925 "If you qualified as a real estate professional for 2023, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E."

Schedule E, not Schedule C.

[Strongsilence-CPA]

"How does business formation fit into this for your taxpayer? That advice is generic, not specific to your individual."

Thanks for the question.  She has set up numerous SMLLCs and I need to ask her more about her strategy.

Maybe I am wrong about not filing a Schedule C?  Yet, I don't find anything directly to this point and it seems wrong that the Schedule C will only have expenses and no income (because the income will be on E.)

@qbteachmt 

[PATAX]

What excactly does this RE professional do? Does he buy homes for himself and then rent them out (landlord)? Or does he sell homes that he does not own, i.e. real estate agent?

[Strongsilence-CPA]

She will invest.  She will buy, hold in an SMLLC, hold for long-term, then sell.  No rental management/landlord activities.

[PATAX]

if she is in business of "house flipping", then I would do google search.

[Strongsilence-CPA]

Thanks @PATAX i have googled and still have questions.

In the near future (2025 maybe) there will be multiple rental Schedule Es with profit.  She could deduct the common expenses on Schedule C or a deduct them on a unique and separate Schedule E.  Whether those are deducted on C or E probably doesn't matter as the losses will be deductible (due to her RE professional status with the election for a single activity.)

[BobKamman]

I think the question is, can education be claimed as an expense on Schedule E?  That's a good question.  I have had clients who owned out-of-state rentals and wanted to deduct travel to check on them in person, insisting that the primary purpose of the trip was to inspect investments and not to visit the grandkids.  And I have had clients who owned rentals but were also self-employed in real estate, as agents or brokers.  They could deduct classes.  

Google's AI tells me that "Open Space" classes could be "A program at Yale that teaches environmental science to 6th grade students in New Haven, Connecticut."  Or, they could be "A yoga center that offers a variety of classes, including gentle yoga, basics and beyond, intermediate, and mixed levels."  I would have to see a nexus between whatever this class taught, and the rental properties owned by this unemployed landlady.  

[Strongsilence-CPA]

@BobKamman 

can education be claimed as an expense on Schedule E? 

This is the class. I'm certain it is legitimate and ordinary.  https://www.openspaceswomen.com/

She was a consultant in a different industry prior to this real estate pursuit.

Nexus is relevant and is key, isn't it?  There probably will be a direct connection between her learning and her (future) income.  (Unless she decides not to pursue it.  She is a full-time stay at home mom, and I would not be surprised if that consumes all her time.)

[PATAX]

@Strongsilence-CPA you're welcome. Just out of curiosity how much did the class cost?

[BobKamman]

So she's not yet a real estate professional?  It was not for the production of current income, and it's not even a start-up expense because she's not going into business.  No deduction here, just another one of those seminar scams.  

[Strongsilence-CPA]

"Can education be claimed as an expense on Schedule E?"

Her note "all the real estate CPAs in the Open Spaces program all said it was deductible."  I will deduct it but note this in my file.

[BobKamman]

All of the other mothers are telling their kids it's OK to jump off the bridge.  

[Strongsilence-CPA]

I get your point.  I'll let her know that it doesn't appear to be deductible. I'm not going to be the bad guy.

[Accountant-Man]

Rentals don't go on Sch C unless they are defined short term rentals with significant personal activity on the rental properties, like short term RE, hotels and possibly AirBnBs.

The point of the the RE Pro designation is to get RE losses on Sch E to be non-passive and thereby currently deductible. REP doesn't turn the rentals into Sch C.

A W2 wage earner can be an REP if they're an employee in an RE business(like a RE repair or RE lawyer), even one not owned by them. A Sch C owner of a broker business can be a REP.

If you spend money for a business deduction and it is related to your one or more Sch E rentals you can allocate it between the properties. Emphasis on whether or not is it legitimate business deduction for the rental properties.

{Personal opinion only-"She has set up numerous SMLLCs and I need to ask her more about her strategy." - This is a lawyer's scam. More legal fees than she needs to pay.}

[qbteachmt]

"Whether those are deducted on C or E probably doesn't matter as the losses will be deductible (due to her RE professional status with the election for a single activity.)"

Of course it matters. It still isn't clear if she was an RE professional or is trying to be an RE professional. There have been lots of discussions on the difference between the tax phrase "passive or nonpassive income" and the actions of passive or nonpassive. The words are not used the same in tax prep vs reality.

You didn't note if she is "investing" to buy and rehab and sell = flipping. Or, buy and operate as constant turnover (short term stays). Or, buy and get residential tenants in (hopefully, long term and stable). Or, commercial tenants.

Sched C is meant to show they are operating a business. Sched E is meant to show they own and rent real property for income. Sched C has a reality check that includes providing services, such as hotel, B&B, perhaps having staff. Making LLCs is just like baking dog biscuits to keep on hand. It's an entity, not an operation.