Author Topic: Billing for rental upgrades for myself  (Read 4405 times)

hoping2retire35

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Billing for rental upgrades for myself
« on: December 25, 2015, 07:33:41 PM »
I am wondering if there is a legal way to bill myself(as a business) to do work on my own rental units?

I want to do this in order to have active income and reduce my passive income level. I would be interested in doing things like the MMM shower upgrades and replacing counter tops, and other work along this line. I have done small projects on my units in the past but never billed myself hours or whatever, just wrote off the cost of materials. If anyone needs more specifics ask I'll give, just didn't want to make a huge thread post.

Papa bear

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Billing for rental upgrades for myself
« Reply #1 on: December 25, 2015, 09:55:28 PM »
What purpose would this serve? It's been years since I did taxes professionally, but I believe once you have active income, you will have to pay both employer and employee side of FICA taxes, which is quite a bit. 


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Bearded Man

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Re: Billing for rental upgrades for myself
« Reply #2 on: December 25, 2015, 10:15:26 PM »
Following.

arebelspy

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Re: Billing for rental upgrades for myself
« Reply #3 on: December 26, 2015, 08:45:13 AM »
I am wondering if there is a legal way to bill myself(as a business) to do work on my own rental units?

I want to do this in order to have active income and reduce my passive income level. I would be interested in doing things like the MMM shower upgrades and replacing counter tops, and other work along this line. I have done small projects on my units in the past but never billed myself hours or whatever, just wrote off the cost of materials. If anyone needs more specifics ask I'll give, just didn't want to make a huge thread post.

There is, but it won't serve the purpose you seek--you'll pay more in taxes overall.
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malacca

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Re: Billing for rental upgrades for myself
« Reply #4 on: December 26, 2015, 11:16:29 AM »
There is a tax angle here. If your income is low but don't have earned income you don't qualify for EIC, property tax rebates (varies by state) and other benefits.

Further, if your unearned income is higher you won't qualify for anything.

My guess it is probably legal but you won't get a definite answer from a tax attorney or the IRS - as it is a gray area.

If there is a tax benefit I would do it. The IRS is soft on these types of gray areas. They are tough on unreported income or out and out fraud.

And if your income is low you won't be taxes much compared to the benefits.

The other option is to get a real estate license and then all of your rental income can be considered regular income. Plan your taxes accordingly.

I had a single dad friend who made a critical mistake. He works part time and takes care of his kids. Income is low and he usually qualifies for a bunch of benefits totally nearly $10K a year. One year he sold some of his stock and took capital gains of about $5K. Come tax time he lost most of his benefits. He would have been better of giving the stock away!

arebelspy

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Re: Billing for rental upgrades for myself
« Reply #5 on: December 26, 2015, 12:16:05 PM »
The other option is to get a real estate license and then all of your rental income can be considered regular income.

Sadly, it's not that easy or simple. Real estate has to be your primary business, and you must work in it 750 hours or more.  Google for more details (one sentence clearly won't suffice), but something as simple as "real estate 750" (without the quotes) should bring you plenty of reading.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

hoping2retire35

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Re: Billing for rental upgrades for myself
« Reply #6 on: December 26, 2015, 07:05:45 PM »
What purpose would this serve? It's been years since I did taxes professionally, but I believe once you have active income, you will have to pay both employer and employee side of FICA taxes, which is quite a bit. 


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I'll have to look into the employer side of FICA, not sure. It's. 15.3%

There is a tax angle here. If your income is low but don't have earned income you don't qualify for EIC, property tax rebates (varies by state) and other benefits.


I had a single dad friend who made a critical mistake. He works part time and takes care of his kids. Income is low and he usually qualifies for a bunch of benefits totally nearly $10K a year. One year he sold some of his stock and took capital gains of about $5K. Come tax time he lost most of his benefits. He would have been better of giving the stock away!

Yes, we are a HH of 5 and make the low-med income that allows us to get the free money. For those wondering; a HH of 5 can make between ~$12k-50k( haven't looked in a while so not exactly sure the numbers), pay nothing but payroll(which is 7% and change) AND get a huge check from the government, we will get $6k in about 6 weeks after I file. The one caveat is if your passive income is over 3300 you get nothing. $3299=$6k from government , 3301=nada.

Right now we have one place and after all the deductions we get adjusted passive income of ~$2000. So we have some room for one more if I can keep our passive down somehow. I could pay hoa fees earlier but that would only work for a year or two.

Since someone will bring up "how will I FIRE and do this" well because Roth accounts are amazing and I want to use it as an inheritance/life insurance tool I plan to keep working PT to continue maxing it out anyways. So I would prefer two units and working PT.

 Just trying to figure out a FIRE plan and $6k makes things a lot easier. Obviously if I have 4-5 units this hack gets really difficult if not impossible.

Drifterrider

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Re: Billing for rental upgrades for myself
« Reply #7 on: December 28, 2015, 05:26:11 AM »
I am wondering if there is a legal way to bill myself(as a business) to do work on my own rental units?

I want to do this in order to have active income and reduce my passive income level. I would be interested in doing things like the MMM shower upgrades and replacing counter tops, and other work along this line. I have done small projects on my units in the past but never billed myself hours or whatever, just wrote off the cost of materials. If anyone needs more specifics ask I'll give, just didn't want to make a huge thread post.

If you do work on your own rental units, you may be able to qualify for "active income".  You don't have to bill yourself, you just have to do the work.  The IRS publications can be confusing but the information is there.  Active means hiring, paying, supervising, and not just painting (although painting qualifies).  I hired the roofer, hired the electrician, painted, demolished the bathrooms and kitchen and replaced.  Per the rules I qualified as "active" and took expenditures last year against earned income (W-2 type).  I will be able to take more expenses this year as well as depreciation (finished the reno this year and rented).  The total will probably offset all the rental income plus some of my earned income.

money_bunny

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Re: Billing for rental upgrades for myself
« Reply #8 on: December 28, 2015, 06:05:15 AM »
Will this work? This is how I figured the people with more success than me did it.

Two companies. Rob's Property Management (RPM), and Rob's Repairs (RR). Entities do not matter. Possibly RA is a S-Corp for reasons someone stated above. Mind you RR is a legitimate company. Even if it is not doing that many jobs. Truck, tools, state contractors license. This is your FIRE hobby job.

RR buys a house, fixes it up, and then sells it to RPM. All of the work that you would have to get back via depreciation RR gets via the sale. You charge your labor as it is a flip. It's now some earned income that you have a SOLO 401K or similar to put into the FIRE war chest.

RPM now owns a rental house with the usual rules of having a rental house.

When the house needs work RPM pays RR to come in and do the work. Again turning unrecoverable hours into billable hours and income, which then goes into the 401k.

hoping2retire35

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Re: Billing for rental upgrades for myself
« Reply #9 on: December 30, 2015, 02:26:24 PM »
Will this work? This is how I figured the people with more success than me did it.

Two companies. Rob's Property Management (RPM), and Rob's Repairs (RR). Entities do not matter. Possibly RA is a S-Corp for reasons someone stated above. Mind you RR is a legitimate company. Even if it is not doing that many jobs. Truck, tools, state contractors license. This is your FIRE hobby job.

RR buys a house, fixes it up, and then sells it to RPM. All of the work that you would have to get back via depreciation RR gets via the sale. You charge your labor as it is a flip. It's now some earned income that you have a SOLO 401K or similar to put into the FIRE war chest.

RPM now owns a rental house with the usual rules of having a rental house.

When the house needs work RPM pays RR to come in and do the work. Again turning unrecoverable hours into billable hours and income, which then goes into the 401k.

I guess that would also be a way to avoid short term capital gains...or would it? but yes, have yourself or some 'entity' own the place and have yourself or some 'entity' do the repairs.
also may not need the contractor's license as long as is not structural/electrical, etc. just the finishing work, painting etc.

J Boogie

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Re: Billing for rental upgrades for myself
« Reply #10 on: January 11, 2016, 03:32:02 PM »
There is a tax angle here. If your income is low but don't have earned income you don't qualify for EIC, property tax rebates (varies by state) and other benefits.

Further, if your unearned income is higher you won't qualify for anything.

My guess it is probably legal but you won't get a definite answer from a tax attorney or the IRS - as it is a gray area.

If there is a tax benefit I would do it. The IRS is soft on these types of gray areas. They are tough on unreported income or out and out fraud.

And if your income is low you won't be taxes much compared to the benefits.

The other option is to get a real estate license and then all of your rental income can be considered regular income. Plan your taxes accordingly.

I had a single dad friend who made a critical mistake. He works part time and takes care of his kids. Income is low and he usually qualifies for a bunch of benefits totally nearly $10K a year. One year he sold some of his stock and took capital gains of about $5K. Come tax time he lost most of his benefits. He would have been better of giving the stock away!

I'm guessing he hadn't held the stock for over a year? Either that or the capital gains boosted his taxable income over the low-income benefits threshold.  I am under the impression that you can sell stock you've held for over a year and pay no capital gains taxes provided your income is beneath 72,500 for a couple and 36,500 for individuals. 

hoping2retire35

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Re: Billing for rental upgrades for myself
« Reply #11 on: January 12, 2016, 06:48:17 AM »
There is a tax angle here. If your income is low but don't have earned income you don't qualify for EIC, property tax rebates (varies by state) and other benefits.

Further, if your unearned income is higher you won't qualify for anything.

My guess it is probably legal but you won't get a definite answer from a tax attorney or the IRS - as it is a gray area.

If there is a tax benefit I would do it. The IRS is soft on these types of gray areas. They are tough on unreported income or out and out fraud.

And if your income is low you won't be taxes much compared to the benefits.

The other option is to get a real estate license and then all of your rental income can be considered regular income. Plan your taxes accordingly.

I had a single dad friend who made a critical mistake. He works part time and takes care of his kids. Income is low and he usually qualifies for a bunch of benefits totally nearly $10K a year. One year he sold some of his stock and took capital gains of about $5K. Come tax time he lost most of his benefits. He would have been better of giving the stock away!

I'm guessing he hadn't held the stock for over a year? Either that or the capital gains boosted his taxable income over the low-income benefits threshold.  I am under the impression that you can sell stock you've held for over a year and pay no capital gains taxes provided your income is beneath 72,500 for a couple and 36,500 for individuals.

that would knock him out of a lot of good tax credits. The EITC is refundable credit for a maximum of just under $7k, so that may have been what he lost since he had passive income was over $3300. The 3300 is an absolute number it does not decrease or increase with income/tax bracket/ or whatever.

electriceagle

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Re: Billing for rental upgrades for myself
« Reply #12 on: January 12, 2016, 08:01:12 AM »
I am wondering if there is a legal way to bill myself(as a business) to do work on my own rental units?

I want to do this in order to have active income and reduce my passive income level. I would be interested in doing things like the MMM shower upgrades and replacing counter tops, and other work along this line. I have done small projects on my units in the past but never billed myself hours or whatever, just wrote off the cost of materials. If anyone needs more specifics ask I'll give, just didn't want to make a huge thread post.

If you do work on your own rental units, you may be able to qualify for "active income".  You don't have to bill yourself, you just have to do the work.  The IRS publications can be confusing but the information is there.  Active means hiring, paying, supervising, and not just painting (although painting qualifies).  I hired the roofer, hired the electrician, painted, demolished the bathrooms and kitchen and replaced.  Per the rules I qualified as "active" and took expenditures last year against earned income (W-2 type).  I will be able to take more expenses this year as well as depreciation (finished the reno this year and rented).  The total will probably offset all the rental income plus some of my earned income.

If your area supports it, offer the property as an AirBNB rather than a traditional rental. That will generate Schedule C income that allows the self-employed health insurance deduction, solo 401k, etc.

hoping2retire35

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Re: Billing for rental upgrades for myself
« Reply #13 on: January 12, 2016, 08:25:06 AM »
I am wondering if there is a legal way to bill myself(as a business) to do work on my own rental units?

I want to do this in order to have active income and reduce my passive income level. I would be interested in doing things like the MMM shower upgrades and replacing counter tops, and other work along this line. I have done small projects on my units in the past but never billed myself hours or whatever, just wrote off the cost of materials. If anyone needs more specifics ask I'll give, just didn't want to make a huge thread post.

If you do work on your own rental units, you may be able to qualify for "active income".  You don't have to bill yourself, you just have to do the work.  The IRS publications can be confusing but the information is there.  Active means hiring, paying, supervising, and not just painting (although painting qualifies).  I hired the roofer, hired the electrician, painted, demolished the bathrooms and kitchen and replaced.  Per the rules I qualified as "active" and took expenditures last year against earned income (W-2 type).  I will be able to take more expenses this year as well as depreciation (finished the reno this year and rented).  The total will probably offset all the rental income plus some of my earned income.

If your area supports it, offer the property as an AirBNB rather than a traditional rental. That will generate Schedule C income that allows the self-employed health insurance deduction, solo 401k, etc.

I doubt I could claim depreciation, which is a huge tax break, so that would probalby not work. But why would I need to use AirBNB? Could i not just do the paperwork(tax treatment) differently and continue to have annual leaseholders?

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Re: Billing for rental upgrades for myself
« Reply #14 on: January 12, 2016, 09:13:06 AM »
The other option is to get a real estate license and then all of your rental income can be considered regular income.

Sadly, it's not that easy or simple. Real estate has to be your primary business, and you must work in it 750 hours or more.  Google for more details (one sentence clearly won't suffice), but something as simple as "real estate 750" (without the quotes) should bring you plenty of reading.
Excellent point.
I have a real estate license and I still don't qualify, despite being fairly active outside my regular job. I know an IRS auditor currently pursuing a case against someone who falsely claimed this status for tax purposes. The only winner is the taxpayer's lawyer, who's gladly billing a ton of hours to obfuscate and delay the inevitable fallout.

braje

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Re: Billing for rental upgrades for myself
« Reply #15 on: January 12, 2016, 10:57:35 AM »
Quote
I doubt I could claim depreciation, which is a huge tax break, so that would probalby not work. But why would I need to use AirBNB? Could i not just do the paperwork(tax treatment) differently and continue to have annual leaseholders?

If you have rental properties you should be taking depreciation on them.

hoping2retire35

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Re: Billing for rental upgrades for myself
« Reply #16 on: January 12, 2016, 12:08:33 PM »
Quote
I doubt I could claim depreciation, which is a huge tax break, so that would probalby not work. But why would I need to use AirBNB? Could i not just do the paperwork(tax treatment) differently and continue to have annual leaseholders?

If you have rental properties you should be taking depreciation on them.

I do. I meant if I did a Schedule C with them as electriceagle said would work, then I wonder if I could take the depreciation deduction on them.

electriceagle

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Re: Billing for rental upgrades for myself
« Reply #17 on: January 15, 2016, 12:29:37 AM »
Quote
I doubt I could claim depreciation, which is a huge tax break, so that would probalby not work. But why would I need to use AirBNB? Could i not just do the paperwork(tax treatment) differently and continue to have annual leaseholders?

If you have rental properties you should be taking depreciation on them.

I do. I meant if I did a Schedule C with them as electriceagle said would work, then I wonder if I could take the depreciation deduction on them.

Regardless of whether you produce schedule C (nighly rental) or schedule E (long-term rental) income, you should be taking depreciation. You will have to add depreciation to the value of your property when you sell, so you'd better take it now.
« Last Edit: October 07, 2019, 07:24:26 AM by electriceagle »

NoNonsenseLandlord

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Re: Billing for rental upgrades for myself
« Reply #18 on: January 15, 2016, 07:00:42 PM »
Just give yourself a 1099.  File and pay SE taxes on the amount.  It's that easy.  You can deduct the amount from the rental passive income.

Or you can just make up a number and send yourself a 1099.  The IRS doesn't care if you pay more in taxes than you have to.
« Last Edit: January 15, 2016, 07:04:43 PM by NoNonsenseLandlord »