I have read your excellent articles on hiring my children.
I think I have the perfect jobs for them in connection with my rental properties.
My concern is that there is no line item on Schedule E for wages. Does the lack of a line item mean that I can’t
deduct the wages I will pay my children?
No, it simply means that the wages go on line 19 of Schedule E in the “other” expenses category.
The IRS has only so much room to list the names for individual line items.
The IRS says in its regulations that you may deduct the ordinary and necessary expenses paid or incurred to
manage, conserve, or maintain your rental property.
On page 6 of the instructions for completing Schedule E, the IRS states:
Enter your rental and royalty expenses for each property in the appropriate column. You can deduct all ordinary
and necessary expenses, such as taxes, interest, repairs, insurance, management fees, agents’ commissions, and
In thinking of ordinary and necessary expenses, think business expenses including travel, seminars, business
meals, and vehicles, in addition to the expenses noted above and the wages you will pay your children.
More Than One Property
Your question indicates that your children will work on more than one property. No problem. You need to allocate
the wages and associated expenses to the properties on a reasonable basis, the most apparent allocation basis for
the money you are paying the children being time spent by the children at each property.
In the Business?
Your rental properties might rise to the level of a business. Should the rentals rise to that standard, you can qualify
for tax-favored Section 1231 treatment, the home-office deduction, and deductions for seminars and meetings.
Against your rental property income, you deduct the ordinary and necessary expenses of generating
that income. If the tax form does not have a line item for your ordinary and necessary expense, list the expense
in the “other” expense section. When an expense applies to more than one property, allocate the expense using an appropriate
allocation method, such as time spent by your children.
Check the rules to see when your rental property activity becomes a business and gives you the
possibility of additional tax breaks.
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