Real Estate Education Expenses

By Jason Watson, CPA
Posted Saturday, September 21, 2024

There are many conference organizers offering real estate investment and landlord-related classes, seminars and online education. Some good. Some bad. At times the scene from Good Will Hunting comes to mind where Will states “you wasted $150,000 on an education you coulda got for $1.50 in late fees at the public library.” In other words, these real estate conferences might be a tad oversold to the person looking for some simple knowledge. Your limiting factor for building wealth with real estate is likely money and not smarts. We digress.

There are three situations for education expenses.

Education as a Start-Up Cost

You want to buy a rental property, but you are unsure about some of the basics. You attend a conference for $3,000. Later, you purchase your first rental property. Yay! This $3,000 might be considered a start-up cost and deducted accordingly (see our start-up costs section for various rules and limitations).

Education as Improvement or Required

As such, under the first provision, you would need to demonstrate that the education maintained or improved your current skills as a rental property owner. You can get a little nutty with this as well. There are tax court cases on both sides of the aisle about deducting the cost of an MBA. Taxpayers have successfully argued that the cost of their MBA improved their current skills as a business owner. Some taxpayers have lost miserably yet arguably with the same set of facts. Yuck.

Here is some gee whiz stuff to think about- In Singleton-Clarke v. Commissioner, Tax Court Summary Opinion 2009-182, the court ruled in the taxpayer’s favor. Lori was an established nurse, and she went back to school to obtain an MBA in Health Care Management. She was already in charge of quality control from a management perspective, and the MBA did not lead to an additional and discernable skill. Additionally, the court stated that the MBA improved her current work skill as a quality control coordinator. Subtle difference.

However, in Colliver v. Commissioner, Tax Court Summary Opinion 2017-93, Mary Colliver held a Bachelor’s degree in speech pathology and was offered a position with a hospital doing similar work. The hospital position required Mary to obtain her Master’s degree in speech pathology, but the hospital allowed her to complete her studies while performing the tasks of the position. Specifically, the Master’s degree allowed her to be a medical speech pathologist.

Mary subsequently deducted about $8,500 in qualified education expenses, and upon examination the IRS disallowed the deduction. The Tax Court also agreed with the IRS and their summary concluded that the tasks and activities before and after the additional education were different enough to qualify as a new trade or business. In other words, Mary could not work in hospitals without the Master’s degree, and her education allowed her to do so. The Tax Court found this convincing enough to deny the qualified education expense deduction.

Education That Cannot Be Deducted

If you only take real estate related classes and attend seminars, but never actually pull the trigger on purchasing a rental property, then these expenses are not tax deductible. Why? They are not start-up costs nor are they improving your current skill as a landlord (since you aren’t one).

Another example- let’s say you do not own a rental property or have any real estate investments. You feel that obtaining a real estate license would be a good thing to have. This education unfortunately leads to a new trade or profession, and therefore is not deductible.

However, if you own a rental property and purchase education materials to obtain your real estate license, you could easily argue that this improves your current work skills as a landlord. Subtle differences indeed, and a lot of this is influenced by timing.

Lifetime Learning Credit

Don’t forget that other education-related credits exist. While you might not qualify for the American Opportunity Tax Credit (AOTC) you might be able to leverage the Lifetime Learning Credit. There are several resources out there to help with this tax credit.