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Is That Deductible? Home Ownership: Asset or Liability?

Apr 22, 2024

Navigating Business Expenses and Home Equity: A Financial Journey as an S-Corp Owner

This week, I will be discussing a topic that frequently intersects with our "Is That Deductible?" weekly post - it involves your home and household expenses. I understand that many of you have embraced the American dream of home ownership, viewing it as both a right and a financial asset or liability. After all, doesn't every doctor deserve a nice home that becomes a haven of peace, quiet, and preferred lifestyle? Your home is essentially your personal escape from an ever-demanding world!

This week, I'll prompt you to analyze your home in a different way. Instead of just viewing it as a comfortable retreat, I want you to consider it as a financial asset or liability. Regardless of how you view it, your home is yours to do with as you please, and for many of you, it's an appreciating asset that adds to your net worth. We can delve deeper into this debate a little later on.

Let me warn you that your self-employed tribe members in our community likely have a different vantage point that than our traditionally employed members. Let me explain.

W-2 Workers

Home ownership can be a financial liability for W-2 workers, especially those in professions such as doctors with large, expensive houses. While owning a home is often seen as a cornerstone of the American dream, the reality is that it can sometimes become a burden rather than an asset.

For doctors who have invested in spacious and luxurious homes, the financial implications can be significant. Maintenance costs, property taxes, insurance premiums, and mortgage payments can quickly add up to create a substantial financial strain. Additionally, high-end properties often come with hefty price tags, leading to increased debt and limited liquidity.

Moreover, for W-2 workers like doctors who rely on steady income from their jobs, owning an expensive home can tie up a significant portion of their earnings. This limits their ability to invest in other assets or save for retirement effectively.

It's essential for professionals in high-income fields like medicine to carefully consider the financial implications of homeownership. While owning a home can provide stability and comfort, it's crucial to strike a balance between enjoying the benefits of homeownership and ensuring long-term financial security. Consulting with financial advisors and creating a comprehensive budgeting strategy can help mitigate the potential downsides of owning an expensive home.

Self-Employed Micro-Corporation Owners

As a physician and proud S-Corp owner, I’ve learned how to leverage home ownership into an asset more than a liability. The key is is managing to incorporate as many pre-tax business expenses through my own home as possible—it is akin to navigating a complex medical diagnosis. The tax code, like a patient’s symptoms, requires careful examination and strategic treatment. Through household expense optimization, I am able to move as many expenses as possible from post-tax to pre-tax expenses. It’s a bit of a puzzle, but one that small business owners tackle all the time.

So let’s delve into the world of deductible business expenses, demystify the Augusta Rule, and explore the contrasting perspectives on home equity. Buckle up—we’re about to dissect the financial anatomy of S-Corp ownership.

The S-Corp Advantage: Deductible Business Expenses

1. The Basics of Business Expenses

S-Corps offer a unique blend of liability protection and personalized taxation. But what about those elusive deductions? Fear not—here’s a glimpse into the best tax strategies for S-Corp owners:

  • Business Expenses: As an S-Corp, you’re entitled to write off legitimate business expenses. These include everything from office supplies to professional development courses. The beauty? S-Corps don’t report these deductions on a Schedule A, bypassing the 2% adjusted gross income threshold. It’s like treating a patient before the symptoms worsen.

2. The Augusta Rule: Unlocking Tax-Free Income

Now, let’s talk about the Augusta Rule. Picture this: homeowners renting out their residences during the annual Masters golf tournament in Augusta, Georgia. But guess what? This rule isn’t exclusive to golf enthusiasts—it applies to any U.S. homeowner whose primary residence isn’t their primary place of business.

  • What Is the Augusta Rule?: You can rent your home to your S-Corp for up to 14 days annually without reporting that rental income on your individual tax return. Tax-free money, anyone? It’s like a vitamin boost for your net worth.

3. Home Equity: Asset or Liability?

Here’s where perspectives diverge. As an S-Corp owner, should you include your home in your net worth calculation? Let’s dissect:

  • The Argument Against: Some financial experts advise excluding your primary residence. After all, you need a roof over your head, and liquidating your home is unlikely. It’s like a doctor prescribing preventive care.

  • The Equity Factor: But wait! Your home’s equity matters. It’s part of your net worth. Equity—the difference between your home’s value and mortgage—adds muscle to your financial health. It’s like a hidden vitamin boosting your immunity.

4. Net Worth: The Big Picture

Net worth—the ultimate vital sign. Calculate it by tallying assets (liquid, investment, and personal use) and subtracting debts. Your home? It’s in the mix. Whether you’re a W-2 worker or an S-Corp owner, net worth reflects your financial pulse.

In Conclusion

If you are a traditionally employed W-2 worker, I invite you embrace what your micro-business peers have learned and start doing the same. You might ask how? Follow these 4 steps:

  1. Step 1: Form your professional micro-corporation. You can here to learn more about starting your business here, and learn more about my soon to be published course “Doctor, You Are A Business”

  2. Step 2: Grab a side job that provides 1099 income and flow that through your micro-corporation

  3. Step 3: Downshift your 1.0 FTE W-2 job to 0.7 to 0.8 FTE and create margin or space to job stack 1099 income that flows your micro-business. You can read more about this at my post: Begin Your Self-Employment Freedom by Downshifting Your W-2 Job

  4. Move as many pre-tax household business expenses that the tax code allows into your micro-corporation.

As an S-Corp owner, embrace the Augusta Rule, wield deductible business expenses, and recognize your home’s worth. Whether it’s an asset or a liability, it’s part of your financial DNA. So, next time you step into your home, remember: it’s more than shelter—it’s a piece of your net worth puzzle.

The truth is there is a lot to learn about self-employment and operating your professional micro-corporation. Your best action step is to become a member of our SimpliMD community and unlock over $2500 in products. And today is your lucky day, follow this link to get 50% off your membership, and if you are a resident, go here.