Tax Strategy
TOPIC: TAX STRATEGY
How to Properly Deduct all kinds of Office and Home Expenses: An S-Corp can’t claim the home office deduction directly, but you can still benefit by using an accountable plan to reimburse yourself for the business use of your home. As the shareholder-employee, you calculate the percentage of your home used regularly and exclusively for business and apply it to qualifying expenses. These reimbursable expenses can include rent or mortgage interest, utilities (electricity, water, internet, gas), homeowners insurance, property taxes, repairs and maintenance (pro-rated or direct to the office), trash removal, HOA fees, security systems, and even depreciation on your home. You submit an itemized expense report with supporting documentation to the S-Corp, which then reimburses you. The S-Corp deducts these costs as business expenses, while you receive the reimbursement tax-free. You must avoid double-dipping—don’t claim the same home office deduction on your personal return. This strategy shifts otherwise nondeductible personal expenses into fully deductible business expenses when handled correctly.
How to Off-Set your Ordinary Income and W-2 Income: Startup costs for a new business, including those in real estate, are considered intangible assets and must generally be amortized over 15 years (180 months) under IRC §195. However, the IRS allows an immediate deduction of up to $5,000 in the first year, as long as total startup costs do not exceed $50,000; above that amount, the $5,000 deduction phases out dollar-for-dollar. The remaining costs are amortized evenly over the 15-year period. If the business is later abandoned without generating income, and you can demonstrate a clear intent to discontinue operations, IRC §165 allows you to deduct the remaining unamortized startup costs as an ordinary loss in the year of abandonment. This can offset other income, including W-2 wages, business income, or investment income, without being subject to the $3,000 capital loss limitation. This strategy can be used effectively by real estate investors launching side ventures such as short-term rental businesses, note-buying entities, syndication funds, property management firms, or LLCs formed for specific acquisitions. Even if the business fails or is never fully launched, the expenses are real and deductible, provided there was a genuine profit motive and the abandonment is documented properly. Often, while the original entity is closed and the tax loss is taken, the entrepreneur may still benefit indirectly—such as gaining future consulting income, joint venture deals, or reusable assets—without disqualifying the original write-off. When used strategically and legally, this approach provides both tax relief and long-term opportunity.
Further info to use Start-Up Deductions and a C-Corp Option: Startup costs for a new business, including those in real estate, are considered intangible assets and must generally be amortized over 15 years (180 months) under IRC §195. The IRS allows an immediate deduction of up to $5,000 in the first year if total startup costs are $50,000 or less, with the remainder amortized over time. If the business is later abandoned, and there’s clear documentation that it will not proceed, IRC §165 allows the remaining unamortized startup costs to be deducted as an ordinary loss, which can reduce other types of income like W-2 wages, business profits, or investment income without being subject to capital loss limitations. However, if you anticipate a very large amount of startup costs (well above $50,000), forming a C corporation may be more advantageous. C corps can fully deduct startup and organizational costs over time without the $5,000 cap and can more aggressively deduct other business expenses. The trade-off is that C corporations do not offer the same flexibility in distributing profits, since earnings must be distributed via dividends (which are taxed again at the shareholder level), whereas S corps and LLCs allow passthrough treatment and more control over distributions. Travel, costs, education, research, office. These can all be start up costs which are not deductible immediately beyond $5000, they have to be taken over 15 years.
A general rule: Never have two tax returns on one set of books.
The $25,000 loss rule for Ordinary Income Earners: The other exception is if you are an “active manager” – managing the manager – you can take up to 25,000 and losses against your ordinary income, but it phases out after 100,000. You can also try to meet the test for a trade or business and demonstrate material, participation and expertise, which would allow you to take expenses and help offset your ordinary income.
How to ‘Offset’ Interest Income: from note investing is considered portfolio income by the IRS, which means it cannot be offset by passive or active losses from real estate, even if you qualify as a real estate professional. However, there are still legal and effective ways to reduce or offset the taxes owed on that interest. The most direct method is using the investment interest expense deduction via Form 4952. If you borrow money (e.g., using a line of credit or HELOC) to invest in income-producing assets like mortgage notes, the interest you pay on that borrowed money is deductible—up to the amount of interest income earned—and any excess can be carried forward. Another method is through itemized deductions, such as charitable contributions or high medical expenses, which won’t directly offset interest income but may reduce your overall taxable income and therefore lower your tax liability indirectly. A more strategic approach involves treating your note investing as a business, using a formal entity structure like an LLC taxed as a partnership or S corporation. If the activity is consistent, profit-driven, and involves material participation (like underwriting, managing, or servicing notes), you may qualify for trade or business treatment. In this setup, ordinary and necessary business expenses—such as due diligence tools, legal fees, travel, and software—can be deducted within the entity, directly reducing the taxable income before it flows to your personal return. This isn’t “offsetting” in the passive loss sense, but it’s highly effective for managing tax exposure. This model works best for active note investors buying pools of loans, creating financing instruments, or participating in JV deals. For investors with heavier startup expenses, even forming a C corporation could offer benefits, such as full amortization of startup costs and the ability to retain earnings. While interest income can’t be wiped out by rental losses or depreciation, thoughtful structuring and leveraging the correct IRS provisions can significantly reduce its tax impact.