It’s tax season! If you started a rental business this year, you’ll want to know how to deduct all your expenses. Or perhaps you’re researching how to start a rental business and need to know how taxes work.

This guide explains how to deduct startup expenses, what the tax rules are for expenses after you start the business, and changes to the 2018 tax laws that affect landlords.

Rental property startup expenses

Use the $50K rule.

Keep startup expenses under $50,000. You can deduct $5,000 the first year and amortize the rest over the next 15 years. Above that amount, the first year deduction becomes less and less.

The $50,000 limit is easy to meet for most rental businesses. But it can be exceeded with a BRRR—buy, renovate, rent, refinance. That renovation can certainly add up.

What expenses can be deducted during the startup phase?

The “startup” phase is before the unit is rented and no income is coming in. Any expenses that incur during this period are considered “startup” expenses.

These expenditures can include:

• Repairs that get the unit or property ready to rent
• Office expenses like office supplies, phone service, or office space
• Time related to researching rental properties
• Pre move-in rental expenses such as landscaping, handyman, cleaners, or leasing agent
• Any business permit or license fees
• Fees for attorneys, accountants, property managers, or other professional services

When starting up a rental business, try to keep these expenses under $50,000. Do this by holding off on items that can be purchased after the place is rented. Once it is rented, you can deduct your expenses fully each year.

Tax write-offs for rental businesses

Each year, landlords can deduct many of their expenses related to their rental business.

Related: How to track property expenses and streamline taxes

What can landlords deduct on their taxes?

As a landlord, you can deduct many expenses on your taxes. Keep all your receipts and use a CPA (certified public account) to make sure you don’t miss a write-off. Each one counts!

• Interest on the mortgage
• Depreciation
• Repairs
• Personal property used in the rental or office space
• Travel to and from the rental—including gas, upkeep, and wear and tear
• Contractor costs for repairmen, property managers, leasing agents, cleaners, or handymen
• Insurance
• Professional services such as lawyers and accountants

How does the 2018 tax law affect landlords?

Landlords benefited from the 2018 tax law.

An updated pass-through law lets landlords “pass-through” the profits from their rental property to their personal tax rate (IRC Sec. 199A). If you make $30,000 in profits on your rental properties, for example, and your personal tax bracket is 24%, you would pay $7,200 in taxes.

If your rental business qualifies as a business, now through 2026, you can deduct 20% of your rental income plus expenses. From the previous example, if you make a profit of $30,000 from your rental properties, you can deduct 20% from your profit. This brings your taxable income to $24,000. If your tax bracket is 24%, you now pay $5,760 in taxes, saving $1,440. Be sure to ask your CPA if you qualify for this bonus deduction.

Conclusion

The updated 2018 tax law benefits landlords. Make sure you get all the new deductions available to you. Find a tax accountant that understands taxes for landlords. The new tax law is complicated, so it’s time to bring in the experts to get your landlord deductions right.

What do you do if you’re underwater on your investment property mortgage?

I have been there. Most likely, many who bought during the infamous real estate bubble have been there, too. In 2009, I thought the bubble had burst and prices dropped as much as they would. How wrong was I? I bought an investment property and quickly became underwater on it. I was drowning on that mortgage, and I didn’t know what to do. However, I had options, and so do you.

Let’s take a look at some baseline numbers to determine your best move.

Are you making a monthly profit?

The first thing you will want to do is look at the month-to-month profitability of the property. While a rental unit might not have equity, it might have profitability each month. To determine the profit you make each month, add up your mortgage, monthly taxes, monthly insurance premium, and anything else you pay. Then, subtract this number from the rental income you make on that property.

(monthly PITI, maintenance, 10% to reserves) – Rental income = Profit

Related:  How to set the perfect rent price for your rental properties

Questions to ask yourself

1. Are you in the positive?

If so, hold out on selling. If you are making a profit, it makes sense to hold the mortgage and wait for the value to increase to build equity.

2. Are you breaking even?

If you are breaking even, it might be a good idea to hold the mortgage. Each year, you pay down the principal a bit more. Your rent check each month brings you closer and closer to the surface. Unless you truly don’t enjoy being a landlord, or it is more work than you can handle at this time in your life, keep it in your portfolio.

3. Are you in the negative?

Did your calculations show that you were in the negative? That doesn’t necessarily warrant selling. Can you foresee an eventual turnaround? Real estate historically increases in value as time goes by.

What if I have a negative cash flow/loss?

For my property that was underwater, I was making negative cash flow the entire time I owned it, but I could afford to cover that cost. I covered the negative cash flow for nine years, knowing that the market would turn around, and it did. Earlier this year, I sold it at a profit. While it didn’t make sense for me to hold it as a rental because my mortgage was too high to ever have a positive cash flow from rent, it did make sense to hold until I could sell for a profit. My renters helped me pay down my mortgage and I made a little money in the end.

Look at your scenario and ask yourself these questions:

1. Can you afford a negative cash flow?
2. Will your property ever regain its value?
3. Do you have consistent renters that help pay down your mortgage balance?

If you answered “Yes” to these questions, it makes sense to hold the property. However, if you answered “No,” it might be time to look at your options.

Related:  When to sell a rental property?

What are your options to sell an underwater property?

When you have an underwater property that you have decided to unload, you have three options:

1. Short sale

To sell a property with a short sale, the owner needs to negotiate with their lender to accept a lower payoff than the balance. An owner or their Realtor can call the lender and speak with the real estate short sale or work out department to begin the negotiation process. Once you have found a purchaser, the lender needs to approve the purchase price and might decline to pay certain added items such as inspections. After the lender approves the purchase price, you can request they do not report this to credit reporting agencies, and they may or may not comply with your wishes.

2. Foreclosure

While no one wants to go through a foreclosure, sometimes choices are limited. When starting a foreclosure, the first step is defaulting on the loan. After 30 days, a lender sends a notice of default. This likely comes after they have reached out trying to change the loan payments to work with your financial situation. After 90 days of being in default, the owner gets a notice of sale. The last step is selling the property at auction.

3. Sell + pay loan balance

You can avoid short sales and foreclosures if you have cash on hand. The last option for homeowners is to sell the property for what it is worth and bring a certified cashier’s check to the closing for the shortfall. While it is not ideal to pay to get out of the mortgage, it keeps your credit intact.

Conclusion

Investment properties with underwater mortgages can make an owner feel helpless and stuck. However, there are options. In my situation, my property was underwater for about five years. I was losing money each month, but it was a manageable amount. I chose to wait it out, and eventually I sold for a profit. But each person’s financial situation is different. Look at yours to determine what the best move is for your lifestyle.

You’ve made the decision to convert the home in which you live, in other words, your primary residence, to a rental house.

Maybe you’re moving, or maybe you figure you can make some good money, collecting that all-important cash flow, by making your home your rental property. Whatever the reason for the change, congratulations on your decision!

But you can’t just move out and declare your home a rental. There are some things you need to do first. Find out what they are.

You need to take care of some business before you can turn your primary home into a rental property.

You might need to wait if you have a mortgage

Do you have a mortgage on your home? If so, you generally need to live in the home for at least 12 months before converting it into a rental. Why? Certain perks are associated with buying a primary residence as opposed to investment property.

You often get a lower interest rate and can put down less of a down payment when the mortgage loan is for your primary home versus a vacation home or an investment property.

If you say you’ll live in the house but you really are buying it as investment property, you are committing mortgage fraud. The penalty? Your lender could call in the loan immediately upon finding out. And that will probably lead to foreclosure.

Read your loan paperwork or call your lender to find out the waiting rules that apply to your loan. After you’ve lived in the home for the required time for your mortgage, you’re free to turn your primary residence to rental property.

Find out whether you can get another mortgage

When you move from your primary home, you might want to buy another home to live in. If that’s the case, find out whether you’ll qualify for another mortgage before you rent out your current home.

Your lender might consider the rental income you’ll get, but they might not. Either way, get the ball rolling by talking with a mortgage lender before you make any moves.

Check with your homeowners association

If your home is in a neighborhood governed by an HOA, you need to find out whether there are any restrictions regarding renting out your house. Some HOAs have no restrictions, some allow only a certain percentage or a certain number of homes in the neighborhood to be rentals, and some ban the practice altogether.

Change your homeowners insurance policy

Insurance policies for primary homes differ from insurance policies for rental properties. “In my experience, the insurance classification is really the biggest issue when converting a primary home to a rental property,” says Lucas Hall, Landlordology’s founder and Head of Industry Relations at Cozy.

And Lucas makes a great point. Why? If you need to file an insurance claim after you convert your home to a rental, but your policy has not been changed to a landlord policy, your insurer could deny your claim. “New landlords need to make sure they change the policy from a homeowner occupied policy to a landlord’s policy,” says Lucas.

Related:

• The 6 Most Important Clauses in a Landlord Insurance Policy
• Carry Adequate Insurance
• Umbrella Insurance: can it replace an LLC?

Learn about tax changes

It’s best to consult a tax professional both for your rental property and for your primary residence. But you shouldn’t be totally in the dark about taxes. Here’s what you need to know.

The bad news (regarding taxes) is that if you make money, that money is taxable income, so you should figure out how that might change your tax rate.

But here’s some good news. Once you have rental property, you get to take these deductions for rental property expenses:

• Utilities (if you pay them)
• Homeowners association fees
• Landlord insurance policy
• Repairs you make to the house
• Property taxes
• Mortgage interest

Related: Top 15 tax deductions for landlords

Ask your tax advisor or find out from your local municipality about the homestead exemption you probably have on your current home. You are allowed to have that only on your primary residence, so find out what you need to do when you wish to convert your home to a rental.

Ready your property

Look at the competition. Are the rental homes in your area upgraded? If they are and your home isn’t, you should consider putting some money into your home to help ensure you’ll get renters and at market rate.

A new coat of neutral paint throughout the house and nice landscaping in front are good starts. You might want to then make a list of all the improvements you’d like to make and get them done gradually. At the very least, make sure your home is well-maintained and that everything is in working order.

Related: Top 10 Amenities Renters Can’t Resist

Learn how to be a landlord

Once you rent out your home … hello, you’re a landlord. Many of us, myself included, learned the business by jumping in headfirst. But, you are apt to make costly mistakes this way. I know I did.

Related: 5 Unexpected Traits of a Profitable Landlord

But lucky you: If you happened to find this site, browse around. We are here to help you along the way with informative articles, a comprehensive state law section, and a toolbox with tons of resources to help landlords succeed.

I often hear people talk about the day they’ll sell their rental property.

That’s a big assumption. There’s no law that says you must sell a rental property someday. You can hold onto rental property throughout your retirement years if it’s bringing positive cash flow.

But there are legitimate reasons to sell a rental property. So how do you determine the reasons and timing?

You want to cash in

Guessing the market is one strategy—buy low, sell high. This is a favorite strategy of house flippers who traditionally sell after holding the house a year or less. House flippers are typically not buying property to use as rental property. That’s usually Plan B if the house won’t sell. But some flippers have a five-year plan, where they hold a property for five years or so, making improvements gradually while collecting rent. Then when the house is sufficiently upgraded and if prices have risen in the area, they sell.

The property isn’t performing well

The best way to determine whether your rental property is doing well is by cash flow. Are you making or losing money each month? Determine this by taking your rental income and subtracting all your expenses associated with the property, including a mortgage payment. If you’re losing money, you might want to sell.

But first consider whether you can tweak the numbers so that you will have a positive cash flow. Do an analysis of what similar rental properties charge for rent in your area. You can save yourself some research time by getting a Rent Estimate report in Cozy. If you find you can get more for your rental than what you’re currently charging, consider raising the rent as soon as you can and keep the property.

For a more in-depth look at number crunching, check out this blog post. (I’ve interviewed this author many times, and he knows his stuff.)

You’re not cut out for the job/you’re just over it

Some people like the idea of renting property, but they let their emotions get in the way. They may become friends with their tenants, for example. If that happens, they don’t make the best business decisions. They may let tenants make late rent payments, for example, or they may waive their right to make periodic inspections because they feel awkward doing so. Landlords like this, may find—as what happened to me with my first rental—that their tenants have become way behind on rent and have damaged the place beyond repair. If that happens, it could be time to sell—either that or hire a property manager.

Related: The temptation of being friends with your tenants

You’re moving

If you manage your own rental properties, it’s easier to do so when you live nearby so that you can pop over when it’s time to inspect and maintain the property or to make or arrange repairs. If you want or need to move, you can keep your rental property and manage it from afar. You’ll probably need to hire a property manager, though. Another option would be to sell, especially if you’re moving to a favorable spot for rental property investment. You can buy another property in the new location.

Related: Should I invest in local or long-distance rental properties?

You want to trade it for something else

The rental property you own might be due for some major repairs, such as a new roof or HVAC system. You might want to sell rather than shell out a lot of money to replace big-ticket items. Or you might have bought an inexpensive property, but now you want to buy a nicer property and collect higher rents. If you decide to trade up, consider doing a 1031 exchange to postpone paying tax on any income gain your receive through the sale.

Related: The complete guide to 1031 exchanges

It’s time based on your plan

You might have bought rental property knowing that an event would trigger its sale. This could be sending a child to college, buying your dream home, or getting ready to retire. A death in the family or a job layoff are other reasons you might want to sell your rental property. But don’t make rush decisions. You might wish to meet with a financial advisor during emotional times in your life. It might make more sense, for example, to hold the property if it’s a good income stream for you.

The bottom line

If you decide it’s time to sell a rental property, you can feel better about your decision if you have a solid reason. Note that you can sell your rental property at any time, even with tenants in it. Just make sure you are doing so correctly.

Related: Tenant’s rights when selling an occupied rental property

By: Dwight Kay

by Kenneth Ziskin, The Apartment Owners’ Estate Planning Attorney ^SM

Tax reform finally became law late in December, 2017, even though passage required it to give up its common name, the Tax Cut and Jobs Act (“TCJA”).

For most of you, the TCJA will give with one hand, and take away with the other.  For some, the act will be a lump of coal, and taxes will, unfortunately, go up.  For others, the act will be a real Christmas present that brings real tax savings.  You probably cannot just intuitively figure out whether you got a real present or a lump of coal until you model your situation, and possible planning opportunities.

Many of the law’s provisions were not finalized, or even discussed, in committee, and we will not understand the full impact for months, or maybe even years.  But, while all tax professionals (including me) are trying to get a handle around the impacts of the TCJA, I want to try to give you an idea of some of the major impacts and a few planning implications.

By Karla Dennis, E.A.

With the real estate market being better than it has been in a long time, many of you may be considering selling your real estate, doing a 1031 exchange or converting a rental to a primary residence.  Whichever decision you make, here is an outline of some of the key considerations to think about when pondering the idea.   Buying , operating and selling a rental property can have profound tax ramifications.

By Jon Coupal

What’s the difference between a tax and fee? There is no easy answer and the political class likes it that way. In fact, they would prefer that the public remain confused to the point of apathy.

The political class, of course, consists of elected officials, bureaucrats and their special interest allies who are to the Capitol what insider traders are to Wall Street. Working in lockstep, their approach to increasing the take from taxpayers was best outlined by Jean Baptiste Colbert, Minister of Finance under Louis XIV of France: The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.

But taxpayers are not defenseless because they have approved three constitutional amendments defining – and limiting – taxes and fees. These include Propositions 13 (1978), Proposition 218 (1996) also known as the Right to Vote on Taxes Act, and Proposition 26 (2010) which provides comprehensive definitions of taxes and fees. All three provide effective weapons against an insatiable government ever in search of more revenue.

However, to protect themselves, taxpayers must be knowledgeable, alert and ready to fearlessly protect and exercise their rights.

Therefore, while most taxpayers don’t have a law degree, here are some basics about the difference between a “tax” and a “fee.” There are very few legal limitations on “taxes.” About the only way a tax could be unconstitutional is if it impaired a fundamental right (a “poll” tax on the right to vote) or if it singled out some group for discriminatory purposes. But fees are different. A fee is a charge for something that confers a benefit to the fee-payer that is not available to those who do not pay the fee. A classic example is a charge for entering a state campground.

Until the passage of Proposition 26 in 2010, the legislature could approve fees with a simple majority vote. But in 2011, the Legislature approved, with a simple majority, charging 850,000 rural homeowners an annual “fire fee” of $150. The “fee” was not accompanied by any additional benefit or service, clearly making it a tax requiring a two-thirds vote of the Legislature. This issue is currently being litigated by taxpayers, but it is a classic example of the dishonest ends to which tax raisers are willing to go to wring ever more money from taxpayers.

Moreover, the political class has a habit of pursuing taxes that are not apparent to the general public. Almost any tax on business fits into this category. As Howard Jarvis liked to say, businesses do not pay taxes, “we do.”

As part of Obamacare, the federal government imposed a tax scheme designed to stop employers from offering top quality health plans. Backers of the Affordable Care Act included a 40 percent tax on providers of what were derisively described as “Cadillac” plans.  As these plans disappear, the uninformed will assume that it is their employer who is responsible, when, in fact, it is government.

Here, in California, a major hidden tax is cap-and-trade legislation, not approved with a two-thirds vote, that compels companies to buy carbon credits. Of course, these costs are passed on and drivers feel the impact every time they fill up with gasoline that costs, by the most conservative estimates, an additional 12 cents per gallon with more increases on the horizon. Unaware of the impact of cap-and-trade, many motorists may mistakenly assume that the high cost of gas is entirely due to the petroleum companies.

This is why taxpayers are closely watching a case just argued before the Sacramento appeals court, where opponents argue that cap-and-trade charges amount to an unconstitutional tax. The court is expected to render a decision within 90 days but, regardless of the outcome, the loser is likely to appeal to the California Supreme Court.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.  

By Becky Bower | ApplyConnect.com

As the year comes to a close, take the time to prepare for tax season early. With just a little extra prep work, you’ll avoid a huge headache next year. Here are 4 tax resources to get you started on organizing your office, getting all the deductibles you can get, and achieving a stress free tax season.

1. Organize Your Home Office in 4 Easy Steps

When it comes to taxes, before you can do anything, you need to be organized. In this article, we break down the organizational process into 4 easy steps. Your office never looked so clean. Read More!

2. Use Apps to Deduct from 2016’s Business Tax Return

You want to get as many deductibles as you can get, but compiling the mileage, paperwork, and receipts behind those hefty tax deductibles can be stressful. By utilizing apps, you can cut down on the physical paperwork and access everything from your phone or laptop. Easy. Read More!

3. Cash in on Tax Deductions for Your Rental Properties

When you have a rental property, utilizing every tax deduction you can is very important. Take advantage of our common deductible checklist and organizational list now. This can help you make sure no stone goes unturned. Read More!

4. Tips to Having a Stress Free Tax-Season

There’s no denying that tax season can be pretty stressful. While utilizing handy apps and utilizing deductibles are certainly important, it’s also important to maintain good communication with your tenants during this time, and setting goals for 2017. Read More!

By Michael Trainotti

It has been over two weeks since the U.S. Treasury Department issued on August 4, 2016 proposed regulations under Internal Revenue Code Section 2704 that, when finalized, may substantially increase your wealth transfer taxes by blocking a common estate planning strategy. The new regulations would only apply to individuals whose family assets are more than $5,450,00 or married couples above $10,900,000.

Some commentators believe that if they are finalized this would be the most significant change in the estate planning area since 1986.  You may have read that planning ahead is key. Since the new regulations will not be finalized until early next year, everyone who would be subject to estate taxes should strongly be thinking about making gifts this year based upon the planning example below that will not be available after the new regulations are finalized.

Historically, taxpayers could reduce the value of their taxable estates by placing assets in partnerships, LLCs or closely held corporations and claiming lack of marketability and/or lack of control discounts. These discounts typically reduced the value of the ownership interests by 25% to 45%.

Thus, for example, placing $10 million worth of assets inside a closely-held entity might reduce the value of the estate by $2.5 million to $4.5 million and, given the current 40% estate tax rate, reduce the estate tax payable by $1 million to $1.8 million.

The above example is also true for making current gifts or sale of assets that you believe will appreciate in value over your life expectancy.  Gifting or selling of assets freezes the value of your assets today and shifts the appreciation to other family members.  The sale concept is true for the sale of assets to children, especially if there is a sale to a grantor trust where there is no recognition of income or the assets sold has a high basis and no or little income tax is recognized.

I will be preparing an article shortly explaining in more detail some of the planning opportunities that can be key if the new regulations are finalized. I want to point out that there have already been comments that the proposed regulations in current form, if finalized, may violate the congressional legislative history of allowing discounts, ignoring state law provisions governing business entities and general valuation principals occurring daily in the marketplace.  If that is the case, legal challenges will be a certainty.

You should contact your advisor(s) regarding whether or not the new proposed regulations may have any impact on your family assets if they become finalized.

Don’t miss this Important Tax Article in the September 2016 Issue of Apartment Management Magazine!

Michael Trainotti, Inc., A Law Corp
400 Oceangate, Suite 520
Long Beach, CA 90802
Work: (562) 590-8621
Fax: (562) 590-8181
email: mike@trainottilaw.com
website: www.trainottilaw.com