Are you a landlord that rents out a single-family home, an apartment complex, or even a business space? If so, then you must have wondered if your rental property is considered a business when it comes to taxes. There are two main classifications when it comes to rental properties and taxes. This blog will go over what criteria make a rental property considered a business and what you can do to make sure it is regarded as one.
Is a Rental Property Considered a Business?
First of all, is a rental property considered a business? Unfortunately, there is no straightforward “yes” or “no” answer to it. Like most tax-related questions, it depends. Your rental property can be considered either an investment or a business, depending on a few different factors. Below we’ll go over what those factors are and what rules you should follow to make sure your rental is considered a business.
Rental Properties That Are Considered Investments
Generally, owning a property that you rent is an investment. That’s because you are earning a profit but not necessarily working on the rental property. Many times, landlords hire help from property management companies or maintenance crews to do the work for them. According to the IRS, if you have a property that you rent to a tenant and use that money to pay bills related to that specific property, then you have an investment, not a business. To prove to the IRS that your rental property is a business, you would have to show evidence that your management activities on the property are continuous throughout the year.
You should also note that if your rental property is vacant for an extended period of time, the IRS may consider it an investment because you seemingly don’t spend enough time working on the property or with tenants. If you are invested in a property for tax purposes and aren’t involved in management duties on a regular basis, then the IRS will consider it an investment. This can include
- Limited times partners
- Real estate investment trusts
- People who own shares
Rental Properties That Are Considered a Business
As mentioned above, if you want your rental property to be considered a business, you will need to earn a profit and work on the property regularly. For example, let’s say that you own three apartment complexes. These complexes have tenants and you can be seen working at all units. The work you do can consist of many different things, such as:
- Finding new tenants
- Posting advertisements of empty units
- Physical work such as putting in new furnishings, cleaning empty units, and looking at maintenance requests from renters
The good news is that you don’t necessarily have to do all the work yourself for your rental property to be considered a business. You can hire 3rd parties like property management companies to help you. If you don’t have the time to manage all three properties, you are allowed to hire a real estate agent or property manager to assist. Even if you spend very little or no time managing the property, it can still be considered a business. Why exactly? Because the property requires considerable time and effort that can’t be done by you alone. Ultimately, you can demonstrate that you were in business through your agent/property manager.
Tips for Making Your Rental Property a Business
Here are a few tips to make turning your rental property into a business a little smoother:
- Maintain separate records and books for every rental property you have.
- Have at least 250 logged hours of rental services or maintenance that was performed each year by you or an independent contractor.
- Have time reports or any documents showing the number of hours you’ve serviced to the property, along with descriptions of everything you’ve done.
- While you may be required to put in hours at the property for it to be considered a business, you can hire people, such as property managers, to help make the job a bit easier. As long as these people are working under you, you can still claim the property as a business.
When it comes to rental properties, determining whether or not it’s considered a business can get confusing. That is why it’s a good idea to know what criteria makes a rental property an investment or a business. We hope this blog helped you see whether your rental property is a business, and if not, how to turn it into one. At MFI Works, we know these topics can be complicated, so don’t hesitate to contact us if you have any questions. To schedule a free initial business strategy session, click here.
