Being able to take advantage of tax deduction is often what makes owning a rental property worthwhile. These deductions can offset taxable income.
You may only deduct expenses if they are considered ordinary and necessary in the line of business:
POINTS OF CAUTION
COMMON TAX DEDUCTIONS
Depreciation expense is used for those things you have purchased for your business which have a useful life beyond the current tax year. For something to be considered depreciable, it has to meet 3 rules:
Examples of depreciable assest are:
Assets will have different useful lives, such as a refrigerator or a building. There are different types of depreciation, such as straight line depreciation and accelerated depreciation. Consult the IRS or your accountant to determine the type of depreciation to use and the useful life of each asset.
PASSIVE ACTIVITY LOSSES
Owning rental property is considered a passive activity. There are complex rules which apply to passive activities, but in short, they limit your ability to claim losses incurred in passive activity against other types of income.
There are certain exceptions:
You may deduct the expense of repairs. Repairs are considered work that is necessary to keep your property “in good working condition”. They do NOT add significant value to a property. Repairs include things like painting or roof repair. It is important to understand that all maintenance you do on your property is NOT considered repair. The IRS makes a distinction between improvement and repairs.
Improvements are seen as adding value to the property. For example, an entire new roof would probably be considered an improvement. Improvements CANNOT be deducted in full in the year they incurred. They must be capitalized and depreciated over their useful life.
Landlords are allowed to deduct certain local and long distance travel expenses that are business related. This does not include commuting expenses, meaning traveling from your home to your everyday office or place of business.
If you have your own vehicle for local travel, you can take your deduction using either the standard mileage rate or using the actual expenses incurred, such as the cost of gasoline and maintenance on the vehicle. You can also deduct parking fees and tolls, interest on a car loan and any applicable registration or license fees and taxes. If you do not have a vehicle, you can deduct your public transportation expenses for business purposes.
Many rental property owners live in other states from their rental properties and sometimes travel to visit the property. If you travel to visit your property, don’t forget to keep all receipts and take advantage of these deductions.
You can deduct the interest you have paid on business related expenses. For example: You can deduct the interest you have paid on mortgage payments or other business loans, car loan payment (but only the part used for business purposes) and the interest paid on credit cards used solely for business purposes.
You can take the home office deduction if you use a part of your home exclusively as an office for your business. You must conduct the majority of your business here to claim the deduction. The amount you can deduct depends on the percentage of your home that your home office takes up.
Unfortunately, entertainment costs do not refer to costs used to entertain yourself. Entertainment costs mean those incurred during business dealings. For example, taking a client to your country club or giving a potential investor tickets to the theater are entertainment expenses.
LEGAL AND PROFESSIONAL FEES
This includes the fees you pay to an attorney, accountant, real estate agent or fees paid to other professional advisors.
You can deduct the wages you pay to someone who does work for you, such as the wages of both full-time employees, such as a live in Property Manager or Maintenance employee and part time employees, such as a contractor you hire once to fix a roof leak.
You can deduct your property taxes, real estate taxes and sales tax on business related items that are not considered depreciable for the year. You can deduct fees for tax advice and the preparation of tax forms related to your rental real estate property. However, you cannot deduct legal fees from defending title of the property, to recover property or to develop or improve property. You must add these types of fees to your property’s basis.
You can deduct the premiums you paid on most types of insurance including health, accident, causality, theft, flood, fire, liability, vehicle and health insurance for your employees.
If your property was damaged by a catastrophic event like a fire, you may be able to deduct some or all of the loss. The amount you can deduct will depend on your insurance and the amount of damage to the property.
OTHER COMMON TAX DEDUCTIONS INCLUDE:
YOU SHOULD ALWAYS CONSULT THE IRS OR A CPA TO DECIDE WHAT DEDUCTIONS ARE APPLICABLE TO YOUR SPECIFIC SITUATION.
Because of the complex nature of real estate investor taxes, you should keep complete and detailed records of all important documents, income and expenses throughout the year in order to take advantages of the many available tax deductions. Knowing what records to keep for tax purposes can save you money and stress!
Keeping detailed records can help you for many reasons:
WHAT RECORDS SHOULD I KEEP TRACK OF?
The short answer is EVERYTHING! The IRS is notorious for auditing small businesses, especially those that show a loss in consecutive years.
Also, many IRS Agents do not understand the tax nuances that apply to real estate investors, making them more likely to question your filing. You will need to have proof if the IRS questions any of your items or even in the everyday course of business, if someone tries to question a payment.
You need to keep PERMANENT RECORDS and SHORT-TERM RECORDS.
Not just a couple of months, but you will want to keep any documents you deem important enough to claim on your taxes for a minimum of 5 years.
Keep anything that counts as income or an expense for the given tax year, such as:
HOW SHOULD I KEEP TRACK OF MY RECORDS?
You should keep a digital copy (computer) and/or a hard copy (paper) of all your records.
You will want to use a program such as Quicken or just create a spreadsheet with Excel. You should do this as soon as the income comes in or the expense occurs. Include as much detailed information as possible – the date, time, who you paid or who paid you, what the income or expense was for and the amount. Also include method of payment – cash, check number, credit card, money order, etc.
Some software programs will link directly to your bank accounts and will record your income and expenses for you. However, a simple spreadsheet will do the job. You should set up separate records/spreadsheets for each property, for each type of expense and for separate types of income. The point is to record as much information as you can at the time of the transaction, so you can easily create financial reports in the future. It is MUCH easier to keep records as you go than it is to dig them up for recording, at a later date.
You should always back them up on CD or an external hard drive and even with a paper copy. They should be printed out at the end of every month and/or at the end of the year.
You will want to make sure you have a paper copy of your most important documents. If possible, you will want to store them in a fire-retardant filing system or safe deposit box. If you cannot find one large enough for all your files, keep the most important ones, such as titles to the property in this box. Organize everything by year and then alphabetically sort the files so they are easy to find.
Just a bit of organization along the year will save you money and reduce stress at tax time!
Tax day is just around the corner and for many investors, panic can set in. Maybe all your tax documents have not arrived yet, maybe someone made a mistake. Maybe you can’t find the receipt for that large improvement or any number of other hold ups.
Don’t worry, just file a tax return extension! The IRS realizes that not everyone has a quick and easy return and if you are a real estate investor, your return is probably not “quick and easy”. If you feel like you are rushing to get everything together and feel the stress of that rush, it might be a good idea to file an extension.
NOTE: Extension are only for additional time to file. All taxes due are still due on the actual due date. The best way to get the tax paid on time is to estimate what you owe. Contact your CPA and ask them to prepare an extension payment calculation for you using the information you have received so far. If you are not sure what your profit or loss will be from your rental properties, use an estimate along with the rest of your tax documents. If your extension payment ends up being more than you owe, then you can have the excess refunded when you file your returns.
HERE ARE A FEW REASONS WHY IT MAY BE IN YOUR BEST INTEREST TO FILE AN EXTENSION:
If you have a new investment, you may not be sure what documents you are supposed to receive. If you miss a document, the error is fixable, but this will probably be at an additional cost to you.
Then there is increased risk that your CPA or tax preparer will make a mistake in the RUSH of getting the huge volume of tax returns prepared in a short period of time. Most tax preparers are working LONG hours during tax season, so that increases the likelihood of a mistake, as well as added IRS audit risk. So why not extend and make sure you don’t miss anything and give your preparer more time to devote to your taxes?
Extending your returns will give you additional time to ensure your taxes are done correctly and that ALL of your tax deductions are captured and you receive the maximum refund possible!
If your investments didn’t grow as well as you expected, you are able to undo the conversion and put the funds back in a traditional IRA. After your taxes are filed, this perk is gone.
Potential strategies include changing accounting methods, making elections to carry-forward or carry-back certain losses or taking advantage of the bonus depreciation or cost segregation for real estate. With a better idea of how the following year will turn out and what new tax laws might be, you can make better informed decisions.
As always, consult with your CPA or tax advisor for professional advice on your particular situation!
Don't find yourself here:
Plan ahead and enjoy life!
The newest investment opportunities in the Kansas City MO area are in South Kansas City due to the major development of the old Bannister Mall area.
Cerner Corp., the health care IT company is building their Cerner Innovations office campus where the old Bannister Mall was. They are currently moving the first 3,000 employees into the first building and they will eventually have a total of 16,000 employees! This is a $4.5 billion campus! These employees are going to want housing and shopping nearby.
The Kansas City Star has reported a Blight Study has been approved in the East Bannister area of South Kansas City MO. The Planned Industrial Expansion Authority has approved financing for a blight study in 3 specific areas near the Cerner Innovations office campus.
The blight analysis, estimated to cost $16,000 to $20,000, would help pave the way for an East Bannister Area Plan, designed to encourage commercial and residential redevelopment.
PIEA executive director David Macoubrie says this plan is designed to map specific areas where development or redevelopment projects would be eligible for public incentives. This effort is an unusual “proactive plan”.
“We want to start momentum, to create a framework to make properties eligible for PIEA benefits”, Macoubrie said.
The plan targets a broad area along East Bannister Road, immediately South and East of the Cerner Innovations campus. It also specifies 2 other smaller commercial areas, one further East on Bannister and one on 87th Street.
Former Kansas City councilman John Sharp, representing the South Kansas City Alliance, said neighborhood groups have endorsed the proposed East Bannister Area Plan.
Sharp said new tenants are needed in the Robandee Shopping Center at Bannister and James A. Reed Road and in the Loma Vista Shopping Center at 87th and Blue Ridge Boulevard and that areas residents are clamoring for “new retail and residential.” He said there also is ‘a lot of vacant land available for multifamily and single family development.”
Steve Renne, business development officer with the Economic Development Corp of Kansas City, said he has attended multiple neighborhood meetings in South Kansas City and that “all thought they needed more goods and services in the area’ plus a general upgrade.
The Cerner Innovations campus along with Cerner’s nearby Realization campus will house thousands of employees who are potential shoppers, diners and nearby residents. But Sharp said it is important to aim for commercial services that the Cerner workers would use and not things like “a luggage store” that they wouldn’t.
Cerner employees have taken an extensive survey about their retail and restaurant preferences to help development officials determine what they might use off campus.
The PIEA vote permits Macoubrie to contract with a company that does blight analysis. A finding of blight is necessary to make tax incentives available to the plan area.
NOW is the time to make the investment before prices increase drastically as development expands. This area WILL be redeveloped, because a $4.5 billion employment investment will support the development. NOW is the time to get in and reap the financial benefits in the years to come.
If you recently purchased or currently own a rental property, you may be thinking that self-management would be easy enough. After all, how hard can it be? Place a tenant, the rent will arrive every month, avoid the expense of a Property Manager…sounds easy enough.
…….Until your perfect tenant moves out…………
What now? How do you find someone new? Do you have the time to find someone new? Where do you advertise? Do you know the laws…Fair Housing, Landlord-Tenant Law, local laws, etc?
Once the calls start coming in, do you have the time to take the calls? Do you have any sales experience? Do you know how to pull Credit Reports, obtain financial histories and other details?
Here is one Landlord’s story:
My wife took the call from a prospective tenant, spoke with the person for some time and hung up. “We are so lucky, there are the perfect renters. Two young women who love to decorate and work in the garden. They are going to be great.” I was a bit concerned that we should get more information on them, but my wife said “Oh, they have jobs, no worries.” We decided to make a call to the previous landlord. Oh yeah, that was a good idea! Our fabulous prospective tenants were described as “the tenants from hell”. They had gotten into a row with their landlord over delinquent payments and when they left, they trashed the place. We were both listening on separate phones and we looked at each other and sighed.
We had never thought the time would come when we’d so eagerly accept the idea of paying someone else to manage our property, but that Management Fee sounded very cheap! In the twenty-five years since, we’ve purchased several more rentals and we have never regretted our decision to outsource the day-to-day responsibilities to the experts.
Benefits of using a Property Manager
Screening out problem tenants:
While there is no way to 100% predict what a tenant will do, experienced Property Managers see hundreds to thousands of applications, so their trained eyes are more likely to notice potential red flags when reviewing an applicant’s paperwork. Letting Turn-Key Properties, LLC manage the tenant screening process can improve your chances of landing a reliable tenant.
Acting as the point of contact for tenant concerns:
Furnaces break down in the middle of the night and on holidays, too. Do you want to take these calls 24/7? A Property Manager can address problems at all hours and arrange for a service provider to make repairs. Or if you have a tenant who always seems to have a complaint, be it the noisy neighbors or the barking dog next door, you can breathe easy knowing the Property Manager is the point of contact for these calls.
Decreasing tenant turnover:
A good Property Manager knows how to keep their tenants happy. They are responsive, available and take care of problems as they arise. Happy tenants are less likely to look for another place to live and more willing to accept reasonable rent increases.
Ensuring rent is paid on time:
Since Property Managers deduct their fees from the monthly rent, we are motivated to keep those payments flowing in. Property Managers will enforce Lease policies if payments are not received. It is so much easier for a tenant to give you a sob story and make you feel like a heel for demanding the rent. We can easily treat the situation as the business situation that it is and collect the rent you deserve. We know the proper steps to deal with the situation, including filing eviction, if needed.
Reducing your rental headaches:
If Turn-Key Properties, LLC is handling the daily management of your rental property, you will have fewer complications and commitments to worry about. It will give you more time and less stress in your life.
Investing in rental real estate can contribute to your monthly cash flow and build long-term wealth – but day-to-day management is not for everyone. If you just want a rent check and don’t want to be responsible for all of the details, leaving it up to the pros can make your life easier and ultimately increase your bottom line. Call Turn-Key Properties, LLC today and enjoy your life!
There is a widely used “50% Rule” used to estimate what the expenses will be on a single family rental investment property. Not perfect, but it’s a very good tool to use over the long run.
Definition: THE 50% RULE IS JUST A BASIC ASSUMTION THAT 50% OF YOUR RENTAL INCOME WILL GO TOWARD ALL OPERATING EXPENSES. OPERATING COSTS EXCLUDE PRINCIPAL AND INTEREST PAYMENTS, BUT INCLUDE EVERY OTHER EXPENSE YOU MAY INCUR ON THE INVESTMENT PROPERTY. (Paraphrased from REICLUB)
Your first thought may be that 50% is WAY too high and sometimes it is. However, this “rule of thumb” has been used by seasoned investors for years for one reason – it just seems to work!
For example, you may have 3 years with a great tenant, few repairs, all goes great. Then that tenant moves out, you have repair expenses, advertising, utilities, loss of rent, etc. You get the property re-rented, all going great again, then the water heater starts leaking and you must replace it. The roof is going to need replacement at some point, along with the furnace, etc. Over 10 years, you can see how the yearly figures might not be accurate and you can see how the 50% rule comes into play over time.
One of the biggest mistakes Investors make is not budgeting for repairs. Your rental property may have a cash flow, but you need to expect to use a portion of that money on repairs, upgrades and capital improvements along the way.
Successful rental property investment is usually achieved over a long term. The tenant is paying your mortgage, the property value usually increases over time and at some point, the mortgage will be paid off and when you sell, you reap the rewards the tenant paid for.
In my opinion, the worst thing a rental property owner can do, is rent a property for say 3 years, not have the cash flow they want and sell it. Especially when there is a good tenant in place with intentions to stay indefinitely. That is a situation where you can build wealth!
What Operating Expenses does the 50% Rule include:
Property Management Fees
Capital Expenses (or saving for capital expenses)
Remember….Principal and interest payments are NOT included.
Conclusion: The 50% rule allows you to look at cash flow over the long run. If it ends up being less – that’s extra in your pocket! But, at least it gives you an idea of what to expect over years of rental property ownership and helps you budget over time.
Note, the 50% rule is typically not used for multi-family dwellings, only single family dwellings.
There is a difference between a Service animal and an Emotional support animal.
The life-saving tasks a trained service animal can perform are remarkable! Service animals have been known to predict impending seizures, perform complex household tasks, protect their companions from oncoming traffic and even provide a calming influence for suffers of autism or post-traumatic stress disorder. Registered service animals, as defined by the Americans with Disabilities Act, or ADA, are limited to canines and miniature horses and are required to have rigorous training to qualify for a service role.
In contrast, emotional support animals, or ESAs, may be untrained members of almost any animal species who are said to provide some therapeutic benefit to their human companions. Applications for ESA certifications are up about 279% since 2011, showing the huge increase in this trend.
How exactly does an ESA differ from a registered service animal? And for a landlord faced with a prospective renter demanding tenant rights to fair housing; what reasonable requirements are necessary under the ADA and the Fair Housing Act? This is the question!
Service animal or emotional support animal:
The difference between a service animal and an emotional support animal is training. A service animal must undergo a lengthy preparation and evaluation process, while an ESA does not require a single day of doggie school and does not even need to be a dog.
According to the ADA, service animals are defined as “dogs that are individually trained to do work or perform tasks for people with disabilities. The emphasis here is on the word “trained”. This training typically begins in puppyhood and lasts two years or more.
After completion of training, the animal must also be certified by the state regulatory agency. Then the animal is granted “public access” and “state and local governments, businesses and nonprofit organizations that serve the public generally must allow service animals to accompany people with disabilities in all areas of the facility where the public is normally allowed to go”.
GRAY AREA: Assistance animals
The Federal Housing Administration has a more inclusive definition of service animals and refers to “assistance animals”. As a Landlord, you should understand this definition, because penalties for refusing access to a real assistance animal can be extreme. In general, you must make reasonable accommodations for an assistance animal even if your property maintains a no-pets policy!
Unlike the definition with the ADA, an assistance animal does NOT have to be trained for a particular set of tasks as long as the animal “works, provides assistance or performs tasks for the benefit of a person with a disability, or provides emotional support that alleviates one or more identified symptoms or effects of a person’s disability.
Emotional support animals:
An emotional support animal, as traditionally regarded within the service animal community, is an animal without specialized training that serves as a companion for someone suffering from certain mental health disorders, including anxiety and depression. This term is not recognized by the ADA and is only vaguely mentioned in some interpretations of the Fair Housing Act.
However, the “emotional support” referred to in the ADA-approved definition above pertains to mental health assistance provided by the animal to an owner suffering from the emotional side effects of an underlying recognized disability, including PTSD or autism.
Landlord’s responsibilities and obligations:
Now to the part that all Landlords will perk up their ears for……..The Department of Housing and Urban Development has issued several interpretive statements regarding a landlords duties with regard to renters seeking accommodation for an assistance animal.
First, you may NOT ask for documentation if the disability is obvious or apparent. If the disability is not obvious, you can only ask these two questions:
If the answer to either of the above questions is “no”, you are within your rights to deny the request for a waiver of your no-pets policy. In making that decision, you can request medical documentation from a licensed doctor indicating the applicant does suffer from a disability, but you CANNOT ask to review the applicant’s medical records.
You cannot impose weight or size restriction on an assistance animal, provided the animal can be kept on the property without reducing the property value or creating undue financial hardship. Typically, a landlord would have a difficult time establishing an undue financial hardship.
It is generally accepted that you can collect a Pet Deposit for an emotional support animal and require that the animal be spayed or neutered, but if the pet is a “service animal”, you cannot charge a Pet Deposit.
A true emotional support animal has been prescribed by a physician and a letter should be easy for the tenant to provide.
If you have questions, consult a legal professional for advice. This article is for informational purposes only and is not legal advice.
This an emerging issue for Landlords and there are many court cases already. Bottom line…..This is just beginning and it’s best to be very careful with this new issue!
Adding your own touches helps make a new place feel like home! Just be sure you understand the terms of your Lease before modifying anything and if you get permission to make modifications, GET IT IN WRITING!
Weird smells happen. Even when the property was thoroughly cleaned, some smells can come back. Try to find the source of any unsavory odors.
Find your style
Not sure if you prefer contemporary, traditional, country or cottage? Search decorating sites to find the style that suits you best. One decorating site is Zillow Digs where you can filter by room type or color, if you really want that one certain color. An eclectic mix of styles, like sleek modern with vintage accessories, can help strike a comfortable balance and really make your place feel like you! The key is finding what inspires you and incorporating elements of it throughout.
Make your temporary mark
Even though you can’t make permanent changes, there are plenty of ways to personalize a rental.
Plant a container garden
Show off the place
The place really feels like home when you entertain friends and family! Having guests is the best motivator to get your place into shape. Worried about entertaining tight quarters?
Cheers on finding your new place! Enjoy!
If not, there are some important points you should consider.
First and possibly most importantly, LLCs limit personal vulnerability to potential lawsuits related to the property.
Consider the situation where a tenant has a back yard BBQ and the tenant’s guest falls over the deck railing and is injured. In today’s legal climate, it is quite possible the injured guest would pursue a claim based on the “unsafe condition” of the deck. The Owner will be named in any lawsuit.
If the rental property were owned by an individual, he or she would have to defend his or her personal assets from the plaintiff’s claims. In contrast, if the property were owned by an LLC, the owner’s risk exposure would be insulated by the protection of the company and only the assets owned by the LLC would be exposed to potential lawsuits (as opposed to all the Owner’s personal assets.)
Insurance: Yes, your Insurance policy would kick in and be some protection, however, if the lawsuit were to go beyond your policy limits or exceptions and carve-outs, then your personal assets would be vulnerable. While the chance of a loss that exceeds policy limits may be small, the consequences can be devastating.
An alternative, or for additional protection to forming an LLC in terms of asset protection is an Umbrella Insurance Policy.
Tax Advantages: An LLC can offer options of pass-through taxation or avoidance of double-taxation you can get taxed as a partnership. If you have the LLC taxed as an S-Corp you may be able to use that to reduce self-employment tax or other taxes. The tax advantages must be tailored to your specific structure and situation and not all the options apply to everyone, so you would want to discuss tax advantages with your tax advisor.
LLCs Can Make Business Life Easier, opposed to other entity forms:
When delegating management responsibilities, LLCs have greater flexibility than a corporation or partnership. While corporations are required to have officers and directors, the LLC can be easily managed by its owners or third-party managers.
In the many states that impose increased fees based on the authorized number of shares, LLCs may pay lower state registration and maintenance fees than corporations.
Owners of LLCs have flexibility in distribution of profits, as determined by the LLC’s Operating Agreement. Cash flow distributions do not have to be pro rata according to ownership like an S corporation. This gives owners the ability to financially reward the “sweat equity” effort of select members through distributions of cash flow.
Unlike an S corporation, foreign ownership and investment in U.S. real estate is possible through an LLC.
LLC owners can easily transfer ownership in real estate holding by proactively gifting the company’s membership interest to their heirs each year. Over time, it is entirely possible to pass ownership of real estate owned by an LLC to loved ones without ever having to formally execute and record a new deed. This enables property owners to avoid transfer and recording taxes and fees. These fees can be substantial in many states.
Disadvantages of an LLC:
Cost? In some states, there is a reasonably small fee to form an LLC and no yearly fees. That makes an LLC very affordable. Legal Zoom even offers a form to use. (Not recommending that without some advice from your advisor, but it is an option out there.) For example, in the state of Missouri, forming an LLC is easy and not very costly.
Other states are much more expensive and can have an $800 yearly fee and possible other costs. Get advice regarding the regulations in your state.
Financing: Some lenders won’t lend money to an LLC and if they do, it may still be backed by your personal name. This probably is not a factor if your primary goal is to limit personal liability.
Triggering Due-on-Sale Clauses: If you already own your rental property and want to quit claim it to an LLC, there is a slight risk it could trigger the “due-on-sale” clause in your loan agreement. You could then owe the remainder of the loan immediately or must re-finance. Word is this is a very small chance, but it is thrown out there as a possibility.
To LLC or Not to LLC?
The insulation from personal risk exposure for real estate investors provided by an LLC, the relative ease of administration and potential tax benefits, make ownership of rental property with an LLC a desirable option in most instances.
But, before you make any decisions, consult a licensed professional who specialized in real estate investing to guide you on what is best for your individual situation.
Turn-Key Properties LLC
Combined 53+ years of real estate and property management experience serving Missouri and Kansas.