It’s late. You can’t
sleep. So, you turn on the TV thinking
you’ll watch some re-runs of MASH, or DRAGNET, right? While channel surfing, you see some guy
talking about how YOU, yeah, YOU!! Can make
some big money( or
dough, or moulah, or $$$$) in real estate without using any of your own
money! “Well,” you say to yourself,
“now you’re talking!” So, you reach for
a cold beverage (adult or otherwise), some chips to munch on, and you get all
nice and comfy because you are going to be driving a brand new Cadillac, and
living in a new house with a swimming pool before the night is over! At least, that’s what that guru on TV is
telling you, right?
And, honestly, you could be driving a new Caddy, and living
in a new house with a swimming pool by investing in real estate. But, it won’t be overnight! And, if you are not careful, you could also
end up in the poor house, divorced, and with a really bad credit rating to
boot! So, let’s back up a bit and look
at some tax angles first, shall we?
First, put down the remote, take out a sheet or two of
paper, and get ready to take some notes.
When you invest in rental property, you are going into the business of
being a landlord. You’ll own a
residential house, duplex, tri-plex, or quad, or a commercial building. You’ll be depreciating these properties using
either a 27.5 year schedule or a 39 year schedule for commercial property, both
with a “mid-month” convention. You may
have bought properties with appliances in them.
If your sales contract is written up in a certain way, you’ll be able to
depreciate those appliances over 5 years.
If your properties are sitting on a lot or a larger piece of land, you
must deduct that portion of land from the total cost to establish your basis
which you’ll depreciate. Land is never
That guru on TV probably told you that if you buy a run-down
piece of property, you can fix it up for just a few bucks and rent it out,
right? Or, flip it! Let’s talk about the rental aspects, first,
though. If you are doing just
cosmetic things, like, painting,
plastering, papering, we call that “repairs”.
You can write off repairs in the year you do those repairs. If you are replacing the roof, putting in new
flooring, a new bathroom, new cabinets, then those items will go toward the
basis of the property and will be depreciated over the 27.5 or 39 year life of
the property. Unfortunately, Sec. 179
depreciation (a one time write-off depending upon income) is not available for
Ok, you run out the very next day, see a property you like,
make an offer, and buy that “dream” property.
It needs a lot of work before you can even rent it out, so you better
get started. It’s December 15th
and you’re thinking you are going to get a big write-off this year for that
property. Sorry, bucko, not so fast! Until that property is ready to be rented
out, you can’t deduct or depreciate those costs. Another reason to stop fiddling around and
Up to this point, we’ve only been talking about the expenses
and saying that you must keep track of them.
But, what about the income? Well,
that’s pretty darned important, too!
“OK,” you say, “Just tell me how I can rake in some dough from
rents!” Now, obviously, if the tenant is
paying you rent each month, that is income to you. How about the rent deposit? Is that also income to you? Well, yes and no. If the rent deposit is just that a rent
“deposit” and will not be applied to the last month’s rent, then you do not
have to include it as rent at the time you receive it. If, however, you intend to use that “deposit”
as the last month’s rent, then you must show it as income at the time of
receipt. Of course, when your tenant
moves out and you return his deposit, after deducting for any damage (or
cleaning, if that is provided in your lease), then the amount you keep is
income to you. There are certain things
that a tenant might do for you that are still considered income to you, even
though, you don’t actually receive money.
For example, if you own a quad (4 units under one roof), and you give
one tenant a discount on their rent because they are going to be your “on-site”
manager, that discount is income to you.
While we are on the subject of rental income, many parents
will purchase a house for their college-bound child in the town where the child
will be attending school. Mom/Dad,
please make sure you have a lease and charge a fair-market rate of rent to your
child. If you don’t do this, the IRS could
disallow all expenses incurred, including depreciation. OUCH!
If you think the record-keeping requirements might be
overwhelming for you, I highly recommend you seek out the skills of a good
property management company. And, their
fee is also deductible to you.
Ok, that’s all the time we have for this edition of The
Greenhornet Blog. Next time, we’ll take
a look at the tax aspects of flipping a piece of property.
Before we go, let me remind you that there are less than 30
days left to file your taxes. April 15th
will be here before you know it. Please
get with your Liberty Tax Service advisor pronto and get those taxes
filed. If all else fails, you can fax me
your paperwork at 757-850-0842 or email me at firstname.lastname@example.org.
Finally, if you get a notice from the IRS that makes your
blood pressure rise and your heart-beat become irregular, call me without
Ray Nations, EA
If you find yourself in the lion’s den with the IRS,
Call Ray Nations, Enrolled Agent, to tame that mess!