Owning real estate can offer several benefits, from generating regular cash flow to tax write-offs. Many real estate owners seek to expand their knowledge through various educational programs, conferences, and courses. A common question that arises is: “Are these educational expenses tax deductible?”
The answer hinges on whether your real estate activities are classified as a business or an investment. This distinction is crucial in determining the tax treatment of your educational expenses.
Business or investment: Why does it matter?
If your real estate activities are a business, your education expenses may be tax deductible. However, attending real estate courses, conferences, or seminars is not deductible if they’re considered an investment.
Let’s look at each of these classifications in more detail.
Real estate as a business
If you’re engaged in real estate activities as a business, the IRS allows you to deduct the cost of education related to your business. This includes the direct costs of courses or conferences and associated expenses like traveling to and from the event. For instance, if you attend a real estate seminar in another city, your airfare, hotel, and even 50% of the cost of meals can be deductible as business expenses.
Having your real estate activities count as a business for tax purposes benefits you in several ways beyond the ability to deduct educational expenses. For example, you may qualify for:
- the Section 199A deduction, which allows owners of pass-through businesses to deduct 20% of their qualified business income
- the home office deduction if you have a home office that you use regularly and exclusively for business
- Start-up costs
- Section 179 expensing of qualified property
- Deducting passive losses from real estate
For tax purposes, it’s always better for your rental activities to be a business rather than an investment.
Real estate as an investment
Conversely, the situation changes if your real estate activities are more passive and classified as investments. The Tax Cuts and Jobs Act of 2017 eliminated the deduction for investment expenses. However, even before the TCJA eliminated the investment expense deduction, expenses for investment conventions and seminars were not deductible.
Section 274(h)(7) of the Internal Revenue Code does not allow taxpayers to deduct expenses related to conventions, seminars, or similar meetings associated with learning more about investing or designed to encourage you to purchase a particular kind of investment.
Congress enacted this exclusion in 1986 to prevent abuse of travel and entertainment expense deductions. Many of these seminars and conferences are held in appealing vacation destinations and scheduled in a way that allows attendees substantial recreational opportunities.
This means if you’re purchasing properties for long-term appreciation and rental income without being actively involved, your educational expenses are not deductible.
Is your real estate a business or an investment?
For rental property owners, deducting education expenses isn’t as simple as stating your real estate activities are a business. You have to meet strict requirements.
Criteria for business classification
Owning rental property qualifies as a business if you do it with the primary goal of earning a profit and working at it regularly and continuously. This might sound like subjective criteria, but some relevant factors the IRS might consider include:
- The type of property you own (commercial vs. residential)
- The number of properties you rent out
- Your level of day-to-day involvement
- Whether you provide any ancillary services under the terms of the lease
- Whether the lease is long-term or short-term
- Whether you file all required informational returns, such as 1099s
You don’t necessarily need to own multiple rental properties to have your real estate activities qualify as a business. In fact, owning a single rental property qualifies if you are actively involved in managing it.
Let’s consider an example. Sarah owns an apartment building with eight rental units. She rents out all the units to unrelated individuals and charges market rent. Sarah personally interviews and screens potential tenants, collects rents, pays the mortgage, property taxes, utilities, and other expenses, and oversees contractors who provide landscaping and cleaning services.
Sarah is clearly actively involved in running and managing the rental properties, so they qualify as a business. If Sarah attends workshops or seminars to improve her skills and learn about new legal requirements, she can deduct these expenses as they are integral to her business.
What if Sarah hires a property manager to handle much of the day-to-day work of running the property? Sarah’s rental activities may still rise to the level of a business because the property management company would be acting on her behalf. The IRS would take all of the facts and circumstances into account.
Criteria for investment classification
Owning real estate is an investment rather than a business when you do it to earn a profit but don’t work at it regularly or continuously—either by yourself or with the help of an agent or manager.
Some relevant factors the IRS might consider include:
- Limited day-to-day management or operational involvement
- Focusing on long-term appreciation of the property rather than current rents
- The existence of a triple-net lease that requires the tenants to take care of the property and pay the property taxes, insurance, and other operating expenses
Let’s consider another example.
John inherited a rental property from his parents that had been rented out to the same tenant for several years. The same tenant continued to occupy the property until John sold the property a decade later. Over the years, John did little besides cash rent checks, although he occasionally took care of details such as hiring a roofing company to repair the roof and replacing the furnace. Because John’s landlord activities are minimal, they don’t rise to the level of a business. If John attends a seminar on real estate investing, it would be a non-deductible investment expense.
Determining Your Status
To determine whether your real estate activities are a business or an investment, consider the following:
- Time and effort. How much personal time and effort do you spend managing the property?
- Income dependence. Is this your primary source of income?
- Decision making. Are you actively making management decisions?
- Number and type of properties. Do you have multiple properties, and how are they used?
Some real estate activities don’t qualify as a business. If you engage in any of the following, the IRS will likely consider you an investor rather than a business owner.
- Buying and holding land for future sale
- Passively investing in mortgage notes
- Investing as a limited partner in a real estate syndication
- Having a small portfolio of rental units that are leased out and don’t require much management
- Owning triple net lease properties
Tips for turning your real estate activities into a business
If you own one or more rental properties and want to ensure it qualifies as a business, a few strategies can help:
- Keep good accounting records. If you own multiple rental properties, keep separate books and records for each property.
- Actively work on the properties. Log at least 250 hours of rental and maintenance services per year. Keep time records, calendars, and other documentation showing the hours you worked on the property and the tasks you performed.
Navigate the complexities with a trusted advisor
The tax treatment of rental real estate is complex. Whether you need help determining whether your activities qualify as a business or investment, filing tax returns, identifying tax planning opportunities, or dealing with IRS challenges to your deductions, Cerebral Tax Advisors can help.
Check out our ROI page to see if you’re a good fit for a complementary tax analysis. Remember, getting it right can have significant financial implications. Let’s ensure your real estate journey is as tax-efficient as possible!