Recordkeeping for the Real Estate Professional – Part 2
In a previous post, I told you about Alvin Jones, an insurance agency owner whose recordkeeping (or lack thereof) cost him an important tax deduction for being a real estate professional when his records didn’t allow him to prove that he spent more time involved in his real estate activities than he did in his insurance business.
The purpose of this email is not to list and explain all the requirements of being a real estate professional. Other resources are easily available for that. I want to explain some of the technical recordkeeping that is required if you have other business endeavors besides being a real estate professional.
As I’m writing this, I’m thinking of a good friend of mine who is a real estate investor, and he is involved in a multi-level marketing company. My counsel to him would be to keep records distinct for both those business endeavors. How many miles did he drive each day relative to each business? How many hours each day did he work on real estate matters versus marketing matters? This would obviously require keeping separate and distinct business checking accounts and separate business operations.
For those whose only source of revenue is working as a real estate investor, this is a reminder that you still need to keep records of your activities, such as the number of hours you work, because you do have to prove that you put in a minimum number of hours in the year. Fortunately, the time spent driving counts toward those hours, which underscores the importance of keeping an adequate log for all your driving activities.
I recognize that keeping records of all the things you do – all the places you drive and the purpose for the drive including beginning and ending mileage, how many hours per day you spend on real estate versus any other business activity – sounds like a colossal pain in the neck, but it is important you develop a system for quickly and accurately doing that. Keep a log in each vehicle you own with columns for the date, beginning and ending mileage, destination and reason for the trip. You can use a calendar to keep track each day of how much time you spend in your business activities. For those of you who include in your log the activity of driving around looking at houses, please keep a record of what houses you looked at or what neighborhoods you were in during the day.
Being in business requires you to become skilled at having systems and processes in place to make things run smoothly. The case of the Joneses is an example of the necessity of having systems and processes in place to keep track of important information to substantiate valuable tax deductions. After the Tax Reform Act of 2017, the real estate professional tax deduction is more important than ever before.