So You Want to be a Landlord? Part One: The Tax Man Cometh

Note: I am daily bombarded with click-bait ads touting “Millions to be Made in Real Estate Investing!” I figured I would begin a series to serve as an antidote to all the hype that surrounds this topic, providing what I hope will be a more clear-eyed view from ground level for the benefit of those considering giving it a try. There are pluses to the business, but there are minuses as well. Since I was already writing about the implications of owning rentals come tax-time, why not call it Part 1 of the series? So that’s what follows. A less nuts-and-bolts account of my landlording adventures can be found in my Slip Slidin’ to Slumlordin’ series.


We had a glorious ten-inches of snow this past weekend. I truly enjoyed the snow since, as it happened, I was scheduled to work over the weekend but instead got to putz around in my shop. I like putzing around in my shop. I made a video, which you can watch here. I like making videos.

I also worked on my taxes. I hate doing taxes. Not just the paying of them, but the figuring of them, all of the accounting work. And it dawned on me this weekend that a whole lot of my accounting burden derives from my rental properties. I began to reminisce, fondly, about the long-ago years when I used to submit the “EZ” form, which took all of about thirty minutes to complete.

Another thing had gotten me to think about the old, simpler tax days: John Collins‘ arguments against home ownership. He points out that one of the oft-touted “advantages” of home ownership, tax-deductible interest payments, turns out to be largely inapplicable because most people wind up using the “standard deduction” anyway.

Ah, the old standard deduction. I had forgotten what that was. I looked it up for this year:

So, for married couples filing jointly (my situation), the standard deduction is $12,600. For most people, the standard deduction is more than they would deduct for mortgage interest. So strike one against home ownership.

But what about investment properties? Well, if you get into the landlording business, you are most certainly going to do some itemizing come tax-time, because you are now going to want to deduct not just your personal mortgage interest, but the interest on your investment properties (assuming you don’t own them outright, of course), and the depreciation of them, and the depreciation of any capital improvements you may have made to them, and the costs of any repairs or maintenance, and any utilities you may have paid, and so on, and so forth. The good news is that your itemized deductions will almost certainly add up to more than the standard deduction. The bad news is that you are going to have to work to figure all that stuff out.

A couple of years ago, I decided I would experiment with the whole “real estate as passive investment” idea. I had a vacancy, so rather than advertise it myself per usual, I decided to hire a management company. I also decided to hire an accountant, come tax time. Both experiments turned out to be disasters. I’ll save the details on the property management fiasco for another article; for now I’ll just relay my disappointments with professional accounting.

The thing is, I expected too much. I knew I was going to be forking over hundreds of dollars to the professional accounting firm, so what I expected in return was a radical reduction in my own paperwork, plus some top cover in the case of an audit. Turns out you get neither. I wanted to be like the old cowboy rancher who drops off the coffee can full of receipts at the end of the year and says, “Figger it out. Send me the bill.” But it didn’t work out that way. Instead, the accountant gave me a bunch of homework to do—“Get these figures. Get those figures.” Pretty much the same figures I was figuring previously. I had to sort through my own coffee can. All they did was plug my figures into their tax software, same as I had previously plugged them into TurboTax, which task required only about 30 minutes of my time. So the $600 bill saved me about 30 minutes of work. And the $50 cost of the software. So $550 for thirty minutes.

Oh, and forget about top cover. You sign all sorts of liability waivers with these folks. It’s still your ass on the line, not theirs. So I went back to TurboTax. I am a fan of TurboTax. Be aware you need the “Premier” version to handle rental properties:

Now, in the midst of sorting through my coffee can this year, with the question of “How much extra work are these rentals costing me?” running through my mind, I downloaded the actual IRS forms to have a look. It was the first time I had done so in years.

First off, turns out the EZ form is only for people without dependents, so that wouldn’t apply to us anyway. So forget that fantasy. 1040 it would be, regardless. On to the question of itemization.

Looking over the ol’ 1040, we see it is all about the schedules. And guess what? The standard deduction question is moot, because it is an entirely separate matter from rental income and loss. Two completely different schedules are involved.

Basically, Schedule A is where “normal” people (people without rentals or other side-hustles) would itemize deductions like home mortgage interest, medical expenses, gifts to charity, and so forth. If none of that is worth the bother in your situation, you just take the standard deduction and rock on. Even if you have a side hustle. Doesn’t matter. Whatever your side hustle might be, there will be a separate schedule for it.

My particular side hustle, rentals, are covered under Schedule E, and that is the bugaboo I’ve been dealing with for the past ten years or so. Now that my memory has been jarred, I do recall filling out Schedule Es in the past, manually. With multiple properties, it can be a pain in the butt. In my personal opinion, TurboTax earns its price by handling Schedule E, particularly when it comes to multiple properties and depreciated assets. So that one schedule is really the totality of your increased tax workload. A $50-60 (depending upon vendor, coupon availability, etc.) investment takes care of the back-end of that chore. The front-end, the sorting through your virtual coffee can to tally up all of those receipts for supplies, your rent checks received, court costs for that eviction you had to order–That’s all on you, unless you hire a bookkeeper (not an accountant, a bookkeeper; two separate things).

You may think that having a property management company will relieve you of that chore, but it sure didn’t work that way for me. It made it harder. Perhaps that is because of the way this particular company did its own bookkeeping; I do not have experience with any others from which to judge. All I can say is that I found myself having to decipher their statements to find the checks from the tenants as my own income and the fees paid to the management company as my own expense in each individual case. And that was not easy at all. You would have to see their statements to understand what I mean–It was as though they were deliberately trying to obfuscate their/my cashflow. Which perhaps they were. Bottom line is that it’s now back to me, my coffee can, and TurboTax. Riding off into the sunset.

With three properties, data entry for all of my receipts and whatnot takes me a good eight-to-twelve hours, depending upon whether I’ve done major renovation or repair work that has generated a lot of receipts. Once I’ve got all my data squared away, TurboTax takes about thirty minutes to an hour. If I kept up with my bookkeeping throughout the year, I wouldn’t have this pile of work come tax time, but that’s just crazy talk. I doubt I’ll ever get into a regular bookkeeping routine unless I retire from my day job and find myself twiddling my thumbs a lot. That’s just me being me.

Now, supposing that, rather than invest in real estate, I had instead invested my seed money into the market. What would the burden be like at tax time? If the money all went into tax-advantaged vehicles like 401Ks and IRAs, I would have virtually no time burden, at least up until I hit the age at which I begin withdrawing. If I put the money into taxable investment accounts, then I really have no idea what it would be like, since I’ve never done that. I’d be getting into Schedule B territory, and the only thing I know about that world is that it can be a nightmare for day traders. But sensible people aren’t day traders anyway.

I’ll leave off here. I think my next post in this series will further explore the “What if?” scenario–What if I had taken the seed money we originally plunked into real estate and done something else with it instead? I have a feeling that’s going to be painful going for me, but in the interest of science, sacrifices must be made.