Do You Keep Detailed Records Of Your REI Activities?
I keep hearing about how the IRS is really cracking down on people pretending to have a home business but don't (they are just trying to get tax deductions). I've just formed my LLC, am attending seminars and am starting many REI business functions. Do I keep record of what I'm doing, even if its just in a Franklin Covey planner and keep it incase I'm challenged at some later date? Also I've been told its good to keep a record of hours spent so I can prove I've done 750+ hours so I can claim to be a Real Estate Professional. Whaddya think?
Thanks,
Ginnie
Hey,
You need to track your RE activity, but it has nothing to do with the IRS. You need to know how much time and money you are spending on any given process versus the rewards of that process.
For example:
1) you spent 60 hours (in a month) going door to door and got 5 leads
2) you spent 10 hours researching names at the courthouse
3) you spent 20 hours mailing out letters
4) you spent 15 hours driving around neighborhoods looking for houses
5) etc.
You then can figure out what works best for you. Keep all your number (mileage, expenses, etc.) in your journal, along with WHAT you were doing and what the results were.
What is this 750+ hour rule???
Thanks Bruce! Insightful as always! I like how you've broken it down.
The 750 hr rule was what Diane Kennedy said (a Rich Dad Advisor) and I think I did see it on the IRS website. By documenting my activities I could help prevent myself from being labeled a dealer, but then some people say there is too much stink being raised about being a dealer. Just go out there and make some money.
750+ hr. rule is a threshold developed to determine whether or not a person is a full-time real estate investor. Above 750 = full time.
Regarding the home office, make sure you take pictures of the home office. To the IRS it must look like an office. i.e. computer and desk - no sofa or TV allowed in the room.
It is not as much of a red flag as it used to be. I am full time, but even if you're not, if you spend signifincant time in your home office on your business activities, I think you should take the deduction.
The only time you might not want to is if you plan on moving within 2 years of the time you start taking the deduction. Since the home office is really partial depreciation on your home, you may have to give back some of that deduction later if you sell your home. Talk to an accountant about this if it may apply to you.
Regarding the 750+ rule, this is what determines if you are a real estate professional or a passive investor in the eyes of the IRS. The tax rules are different depending on which one you are.
I'm going from memory here but I think you can deduct all (or at least most of your loss if you have one) if you are considered a real estate professional. If you are only a passive investor, you are very limited in the amount of a loss you can carry. I think the limit is $25,000.00. Again, don't quote me, but I think you get the idea.
The 750+ rule also mandates that your main source of income is from real estate. Thereby givnig them the ability to claim more than 25k in deductions (or is it depreciation?)
Hey,
I will have to look up this 750 rule; it sounds interesting..
But I don't think it effects must of us. If you have an LLC or a company, that entity is what takes the deductions, etc.
Therefore there is no "test" to pass! (Which makes me happy, as I had not studied!)
I've not heard the part about real estate being your main source of income as a qualifier for being a "real estate professional". That's not the way my CPA described it last year, but he may've just neglected to mention that part. I thought all you had to do was spend x number of hours per year in real estate activities, classes, looking at properties, whatever, and you could qualifify.
That's what Diane kennedy says in her book, might be outdated, don't know
thanks everyone! Lots of good info. I'll keep a record of my activities and the time spent in the meantime and talk with a CPA and see where that leaves me.
We converted our formal living room, which we never used, into my office. But we haven't figured out what do do with that nice couch yet. 
Melissa - well, I do actually have a couch in my office.