Question
I have a client who works in corporate America. He is also in the business of real estate and plans to use this platform to support his transition out of corporate life.
In 2019, he created a single-member LLC (business license, tax ID number, articles of organization, etc.). He took some expensive real estate courses in 2019 and 2020.
My question is, will it raise a red flag writing off the classes in 2019 on a Schedule C? He is not a licensed real estate professional at this time, but this is part of his transition plan in 2021 or so.
He owns some land, and I think a piece of real estate outside of his personal residence. The real estate was acquired before 2019 and is not rental real estate.
I want to take advantage of this write-off for my client, legitimately.
Answer
Be careful here. You are looking at bad news by doing this wrong, but good news by doing it right.
Let’s start with the bad news. The real estate classes are not deductible as business expenses in 2019. Your client was not in the business of real estate when he took the classes. His desire to be in the business does not put him in business.
The land does not put him in the real estate business. The non-rented real estate does not put him in the business.
Now, let’s turn to the good news. Your client can benefit from the monies he spent on the real estate courses if he starts a real estate business in the future for which the classes were taken. In this case, he’s looking at deducting start-up expenses.
We had a similar question some years ago, and the article we wrote is right on point for your client (see Two Paths to Deducting Certain Business Education Expenses).
Although the cost of the classes is going to be amortized over 15 years, you save the deductions for your client with the start-up classification. And based on your question, you may find a number of other deductions when you read the article linked above.
Takeaways
When you have an existing job or business and are on a path to starting a business, many of the costs you incur before you start the business are deductible and amortizable as start-up costs.
Step one on this path is to make sure you capture the costs that qualify as start-up expenses.
Don’t make the mistake of claiming the expenses as business expenses before you start the business. Such improper planning can cost you all the tax deductions that you were otherwise entitled to.