Common Expense allocation for Real Estate

[ACCLIGHT]

I have searched far and wide turned up little on the matter of common expense allocation for Rental Real Estate. What is the proper way to allocate common indirect expenses not attributable to any one property across a range of properties including land and not in service locations? Should they be allocated uniformly to all properties including land or not in service locations. Should they be allocated as percentage based on income of the properties, or allocated uniformly only to active in-service properties? Should they be listed as a location on the return rather than being allocated to individual properties? Should they be simply expensed with no allocation to properties? I have on CPA that did one way, another that did something else and one that seems to make more sense to me. Fully confused. Help will be appreciated.

[dkh]

I'm guessing by Common Expense you are referring to things like tax preparation fees?

I have one client that I deduct all of the tax prep fees on one of the many rental properties.   I have another client that I divide the fees equally amongst all the rentals only because this is how it was done by previous preparer.

[ACCLIGHT]

Thanks for answering. Common fees (indirect expense) would be anything not directly resulting from  a specific property so bank account fees, umbrella insurance, general business consulting/accounting fees, mailing and so on. Obviously the expenses specific to each property appear on the corresponding 8825 entry but not clear on where common expenses would best appear and be accounted for. 

[dkh]

you mentioned 8825 so this is rentals under either LLC or SCorp.   Setting up an 8825 just for these doesn't seem correct. 

If it were me, I'd allocate expenses to properties.  My last choice would be to deduct on page 1 of the return.  

Be sure to allocate to properties not in service if the expense (such as insurance) covers those properties.

[ACCLIGHT]

Wow. You picked up the situation quickly, it is an LLC. One CPA in previous years would book Common Exp. as an 8825 location which did not seem right. As you mention I have allocated insurance to land and properties which are not in service but have not done so with any other common expenses. For all other common expenses I have simply applied the balance across all the 8825 entries of properties which are in service.

It was suggested to me to allocate based on a percentage of property income but that is a bit complicated and has some potential for being inaccurate (such as a vacant property). I also recognize that by applying common expense only to active properties (other than insurance) the net effect is a deduction of expenses which some might contend apply to all properties and perhaps a portion should be allocated as holding expense to inactive properties rather than being expenses. I want to be accurate but don't want to end up with a yearly allocation nightmare. Thanks so much for your effort. 

[dkh · Accepted solution]

I agree allocating based on percentage of income has the potential to be inaccurate.  And I agree you have to be careful not to deduct expenses for inactive properties on the active properties.

I think as long as you use a reasonable method and are consistent with that method from year to year, IRS will be happy.