Common Tax Deductions for Landlords

By Erin Eberlin

The federal government allows landlords and rental property owners to deduct certain expenses on their taxes which can offset their taxable income. Being able to take advantage of so many tax deductions is often what makes owning rental property a lucrative venture. The following are the most common tax deductions for landlords.

You may only deduct these expenses if they are considered ordinary and necessary in the line of business:

• An expense is considered ordinary if it is “common and accepted” within your industry. For example, an ordinary expense for a landlord could be paying a contractor to fix a roof leak.

• An expenses is considered necessary if it is “helpful and appropriate” to your business. For example, a necessary expense for a landlord could be buying Quicken Rental Property Manager, to more seamlessly keep track of all the numerous records a landlord must document.

What Are Business Tax Deductions?

Two Points of Caution

1. You must keep detailed and accurate records if you are going to claim any of the following as deductions on your taxes.
2. These are common tax deductions. They do not apply to every landlord, rental property owner or property investor.*
   
   For example, many of these deductions do not apply to those who rent out homes or condos which are also considered their residence. The property is considered a residence if you used it for personal use for greater than ‘X’ number of days in that year or ‘X’% of days that the property was rented out at fair market value. (These numbers will be listed on the current tax year's Schedule E or you may consult with your accountant).
   
   *You must consult your accountant or the IRS to determine the correct way to file your taxes and the proper deductions for your specific situation.

Common Tax Deductions

1. Depreciation

The 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 three rules:

1. Be expected to last for more than a year.
2. Be valuable to your business in some way.
3. Different assets, such as a refrigerator and a building, will have different useful lives and there are different types of depreciation that can be used, 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 you are trying to depreciate.

   2. 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:
   • If you are considered a real estate professional (certain rules apply such as working at least 750 hours a year on real estate related activities), any rental real estate activities you participate in are not considered passive activities.
   • or
   • If you are considered actively involved in your rental activity, you can deduct up to $25,000 in passive rental losses if you make under $100,000. Actively involved means you must have participated in making management decisions, such as finding tenants or deciding on the terms of your rentals, and your interest in the rental activity has never been less than 10% for the year. The amount you can deduct will decrease for every dollar your income is above $100,000. You will not be able to deduct any passive activity loss once your income reaches $150,000.

   3. Repairs

   You may deduct the expense of repairs incurred in a given tax year. 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 such as painting. It is important to understand that all maintenance you do on your property is not considered repairs. The IRS makes a distinction between improvement and repairs. Improvements are seen as adding value to the property. Improvements cannot be deducted in full in the year they incurred. Rather they must be capitalized and depreciated over their useful life.

   4. Travel Expenses

   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 automobile for local travel, you can take your deduction using either the standard mileage rate or using the actual expenses incurred, such as 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 your own vehicle, you can deduct your public transportation expenses for business purposes.

   5. Interest

   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 payments (but only the part used for business purposes), and the interest paid on credit cards used solely for business purposes.

   6. Home Office

   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.

   7. Entertainment Costs

   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 two tickets to the theater are entertainment expenses.

   8. Legal and Professional Fees

   If you hire a professional to do work for you, the fee you pay to them is deductible. This includes attorney fees, accountant fees, real estate agent fees or fees paid to other professional advisors.

   9. Employee Compensation

   If you hire someone to do work for you, you can deduct the wages you pay to them as business expenses. This includes the wages of both full time employees, such as a property manager or a live in superintendent and part time employees, such as a contractor you hire once to fix a roof leak.

   10. Taxes

   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. You cannot however 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.

   11. Insurance

   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.

   12. Casualty Losses

   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:

   • Advertising costs.
   • Rent you paid to others.
   • Telephone calls related to your rental property activities. However you cannot deduct the first line for local service coming into your home. That is considered a personal line.
   • You can credit or deduct expenses paid to make your property accessible to individuals with disabilities or the elderly.
   • If your property is considered a commercial building, you can deducts costs to make it energy efficient.
   *You should always consult the IRS or a certified accountant to decide what deductions are applicable to your specific situation.

What Is the Deduction Limit for a Home Office?

By Erin Eberlin

Even if you have qualified to take the home office deduction on your taxes, you may not be able to deduct all of your expenses in the year they were incurred. You may be subject to a deduction limit.*

Who Is Subject to a Deduction Limit?

Not everyone who takes the home office deduction is subject to a deduction limit. Those whose gross business income is equal to or greater than their expenses are able to deduct all of their home office business expenses for the year.

Those whose gross business income is less than their home office expenses will be limited in their ability to deduct certain expenses.

How Is the Home Office Deduction Limit Determined?

You begin with the gross income from your business.

You then subtract expenses you would deduct even if you didn’t have a home office (mortgage interest, real estate taxes, and casualty and theft losses), but only the percentage for your home office.

What Are Business Tax Deductions?

For example, if you have determined that your home office takes up 10% of your home, then you can only deduct 10% of each expense.

Now you subtract expenses related to your business activity (second phone line, office supplies, depreciation on equipment). You can subtract 100% of these expenses.

This will give you your deduction limit.

Once you have determined your deduction limit, you can then deduct your other applicable business expenses (maintenance, insurance, utilities and depreciation), deducting depreciation last. Again, you can only deduct the home office percentage of these expenses, such as 10% from our above example.

If your expenses are more than your deduction limit, you are able to carry over the remaining expenses to the next tax year.

Keep in mind, anything you carry over will be subject to next year’s deduction limit.

An Example of the Deduction Limit

Your Gross Business Income is $10,000.
Your total home office expenses are $12,000.
You are therefore subject to a deduction limit because your expenses are more than your income.

Gross Business Income........................................................................$10,000 

MinusHome Expenses (Real estate taxes, etc.) 10%.......................................$6,000 

MinusBusiness Activity Expenses (Second phone line, etc.) 100%...................$2,000 

EqualsDeduction Limit......................................................................................$2,000

Your deduction limit is $2000, but you have $4000 in home office expenses that you still want to deduct. You can therefore only deduct up to the $2000 deduction limit and will have to carry over $2000 ($4000-$2000) to the next tax year.

Deduction Limit.......................................................................................$2,000
MinusAdditional Home Office Business Expenses (Utilities, etc.) 10%................$1,800 

MinusDepreciation Allowed ($2200 allowable, but can only deduct $200 this tax year 
because of the deduction  limit)..........................................................................................$200Equals

............................................................................................$0
Depreciation Carryover to the Following Tax Year ($2200-$200)................$2000

*You should always consult the IRS or a certified accountant to decide what deductions are applicable to your specific situation.

Real Estate Wholesaling - A Viable Real Estate Investment Strategy

By James Kimmons

Real estate wholesaling in articles and books gets both good and bad coverage.  Let's look first at a general definition:  Real estate wholesaling is taking a position between a seller and a buyer and profiting from an immediate resale of a property without significant rehab or time of ownership.

That's my definition, but it fits my view considering my extensive freelance writing work as a ghost writer for real estate investment "gurus."  You could call it "flipping," but wholesaling seems to add a bit of professionalism.

 Contrasting it to other wholesalers in various industries, it's a really very low overhead and high profit margin business.  You don't have:

• • warehouse space rent and upkeep.
• • office space to manage and sell from.
• • employees to manage inventory.
• • trucks to transport inventory.
• • insurance to cover all of the above.
• • necessity to purchase from manufacturers in bulk before sale.
Those overhead costs are significant, and most wholesalers have profits in the very low single digits.  The real estate wholesaler on the other hand:
• • can work from their kitchen table.
• • doesn't need to warehouse anything.
• • doesn't need employees nor insurance for them or facilities.
• • can control a large value asset with relatively little money out of pocket.

Who is your customer in real estate wholesaling?

Before you ever investigate real estate for purchase or control, you need buyers-in-waiting.  It's called building a buyer list, and it's crucial to your success.  Your primary customers are other investors, either rental property buyers or fix & flip investors.
 You can sell at retail to consumers, but it's more risky and costly due to marketing and commission costs.
You need to build out a list of buyers through building relationships with other investors.  You can join real estate investment clubs to meet them.  You can advertise to them through running property for sale ads in newspapers and Craigslist.
Basically, you need to meet as many real estate investors as possible, and you need to keep a database or file with a minimum of this information about each:
• their neighborhoods of interest.
• their primary interest; are they going to fix & flip or are they buying rental properties?
• their price range and profit goals; in other words, what will they pay for a home?
Do not go out and search for properties or run marketing until you have at least a few active investors on your buyer list.  You'll not want to commit to a property without a reasonable prospect of selling it quickly.
What are your sources for properties for real estate wholesaling?
Once you have buyers on your list, it's time to go out and find properties that will make you a profit as a wholesaler.  They could be:
• foreclosures.
• owner occupied pre-foreclosures.
• owner occupied by distressed sellers.
• abandoned pre-foreclosures.
• government auctioned foreclosures.


Foreclosures are easy to find through foreclosure websites and other sources that publish foreclosure property lists.  Owner occupied properties normally require marketing.  Real estate wholesaling marketing methods include:


• bandit signs.


• newspaper classifieds.
• Craigslist ads.
• wholesaler website.
• wholesale investor blogging.
• social sites marketing.
• relationships with real estate agents and mortgage brokers


When you locate a property that could be right for one of your buyers, running the numbers and due diligence is next.  You'll need to be very cautious in getting all of your costs covered, as well as a pretty close idea of what your buyer will have for costs, especially in the fix & flip deal.  In other words, you need come up with what the property is worth in the current market, then subtract these items to see what you can pay for it:


• the rent that can be charged if your buyer is a rental property investor.
• the costs of rehab if your buyer is a fix & flip investor.
• your costs in getting it to the closing table.
• your desired profit.




If you run all of the numbers and you see that this property can be quickly re-sold to one of the buyers on your list, it's time to contract to buy it or lock up control through one of two methods:


1. Assignment Contract - You sign a deal with the seller that allows you to "assign" your purchase rights and responsibilities over to another (your buyer ultimately).  You'll need some earnest money, but you'll need no further financing with this method.  You go to your buyer and do an assignment of your rights for a price that includes your profit.  Your buyer takes over and takes it to closing.
2. You Contract to Buy - You actually sign a deal to buy the property.  This will require two closes, one for your purchase and another right after for your buyer to purchase from you.  You'll need earnest money, and you'll need transaction funding to pay for the home and collect their fee and reimbursement from the second closing.

How Long Does It Take To Start A Real Estate Business?

By Than Merrill

How long does it take to startup and kick off a new real estate business?

Is starting a real estate business something that should take just a few hours, or do you need to patiently invest years of hard work? What are the critical steps in getting to where you want to be? What barriers should more real estate entrepreneurs be breaking down?

Some never take the next step towards formalizing a real estate business. They just get into the game and start doing deals. Some add a few helpers, but don’t start an actual business. Others keep going at it solo. Then there are those that have no desire to engage in hands on real estate, but want to own businesses and start at the top, and work down instead. So do you really need a company?

For the select few that just want to do their own thing, running a company can become a distraction, and add to expenses. However, this doesn’t mean the benefits and protections of LLCs and other legal entities can be overlooked.

Many are missing out, big time. They are not focusing on building a business. This is especially true for those that want scale, and who want to just see the profits from real estate and being an owner versus having a job. That’s true, no matter how much better and higher paying that new job is.

Basic Steps in Starting a Real Estate Business

Technically, ‘starting a business’ is easy. Its maintaining a successful business that can be tricky. These simple steps should help:

• Research
• Business plan
• Choose a name
• Incorporate
• Get a tax ID number
• Open a business bank account

With the exception of comprehensive market research, most of the above can’t be done in a day. Some will take months to get there. While thorough planning is wise, many let the process drag on too long, while continually rethinking and second guessing themselves. Don’t fall into that trap.

Raising Capital

Some real estate entrepreneurs will also be keen on raising funds for their startups. Some will find it unnecessary, thanks to mortgage finances and other working capital options that this industry is privy to. Others just feel they need a big war chest to strike out and get going. There is nothing wrong with that, but there are two things to watch out for. The first is realizing that more money doesn’t always help. Normally a good business model can work with or without extra capital. More money just speeds up the pace and scale. If it isn’t working, $10M is just going to be burn money, and extend the decline. The second lesson is not to spend forever in fundraising mode without getting started. It can take anywhere between 0 to 40 weeks for startups to secure seed capital, according to research by DocuSend. But that doesn’t mean you just sit there and put life and business plans on hold in the hope of getting it.

Ensuring a Profitable Business Start

How can you ensure a profitable business start? This is crucial, especially for those taking a little longer to get going. Once the clock starts ticking, you’ve got expenses. That could simply be renewing your LLC, insurance or business checking account fees. No matter how small, you want income coming in as fast as possible. In reality, while it is entirely possible to generate income in real estate within 30 days, some closings can take 90 days to happen. Even if you hit the ground hard on day one, you might not see any cash coming back in for a couple months.

Don’t wait to start lining up deals and income. Most will find that they can begin lining up revenue and deals in advance. This may depend on your exact type of business and your organization, and maybe even the season, but most should be able to set up closings to happen in their first and second month of being in operation. Kicking off with six figures in income your first month will make a world of difference.

The earlier you get started, the better. The earlier you organize yourself as a business, the more tax breaks and legal protection you’ll have. If you can act faster than the competition, you’ll have the advantage. It can take anywhere from a few hours, to a year to get a real estate business going, but that doesn’t mean you have to put off activating revenue producing activities.

Finding The Right Lender For Your Smaller Loans

By Than Merrill

Where can real estate investors and home buyers find financing for small mortgage amounts?

Most don’t anticipate a smaller loan amount to be a much bigger issue when it comes to financing a property, but it often is. Many have been caught off guard after signing a contract or paying cash for a property with the intent of refinancing. This can also make it really difficult for sellers and real estate agents to move property.

Banks and other mortgage lenders love big loans. Big loans can mean big commissions for mortgage loan officers. After all, would you rather spend the same amount of time and energy to make 3% on a $1M million dollar loan or a $10k loan? This also impacts efficiency and profitability for lenders. Many simply won’t touch small balance loans, even if they can make them. They just don’t want the hassle. This can often apply to anything under $100k. Some lenders have lower minimum loan amounts around $75k, or a little lower, but rarely will they enjoy doing them. That can be a real pain as a home buyer or real estate investor when you are finding a ton of juicy looking deals under $100k. If that $7,000 property is more hassle and ties up more cash than a $170,000 property, most just skip to the higher end stuff. Still, there are lots of cheap house deals out there. So how do you finance them? Or how do you help clients finance them?

Credit Cards & Online Banking

In some cases, houses can just be put on a credit card, a prepaid card, or short term advance from an online banking or payment provider. PayPal and Amex might be two to check out. The interest may not be cheap, or you may not have long to pay it back, but you may be able to act fast, and avoid other typical mortgage borrowing costs. If you just need a little cash for a flipping houses fast, it might be worth exploring these as an option.

Owner Financing

Owner financing should be a pretty obvious option. If you are looking for an inexpensive property, try looking for sellers that will finance. If you are selling on the low end, consider maximizing your return, and the speed of sale by offering financing.

Personal Loans

Secured and unsecured personal loans may also be a less stressful and less time consuming choice. What you get may depend on how much you have on deposit, your credit score, and current eagerness of lenders to put money to work, as well as relationships, but you may be surprised at what you get. Fixed loans and personal lines of credit may be an option, and they may come with low costs.

Commercial Real Estate Lenders

The lines between types of lenders has really blurred, as new regulations have pushed more lenders to focus on business lending. However, that doesn’t mean they won’t lend on residential homes. Some offer blanket mortgages or lines of credit and short term loans to investors. This may help finance a whole portfolio of less expensive properties and repairs.

Private Money Lenders

Private lenders may be happier to make smaller mortgage loans. They don’t have the overhead and labor costs big companies do. They may even prefer starting out with small amounts while they build trust and a relationship with you. You may run into some at local real estate investment groups. Others may be organized as local hard money lenders. Then there are crowdfunding and peer to peer lending websites that can help both real estate investors and individual homebuyers finance a home from a variety of private individuals.

Credit Unions & Local Banks

If you haven’t tried them yet, and you have reasonable credit check out local banks or credit unions. They can be a lot more flexible in what they can loan, and are always looking to draw new deposit accounts and customers.

Summary

Obtaining small balance mortgage loans can be a lot harder than most anticipate, but there are a lot of options to explore. Cheap real estate isn’t always a deal, but it is often undervalued and overlooked due to the financing challenge. Those that can find good finance partners in this arena can find great profit margins, and also buy houses for a lot less than others. Will you give it a shot? Have you stumbled on a lender that loves making small balance mortgage loans?

15 Tips For Building The Best Real Estate Team Possible

By Than Merrill

Want to build a better, stronger real estate team? Check out these 15 tips:

1. Appreciate the Value of the Team: You can’t really build the best team until you really appreciate the value of a team. It doesn’t matter how great of a real estate sales person, deal maker, or organizer you are. You only have so much time. You never know when that time is going to be impacted by other factors and forces. If you want to go big, you have to have a team, there is no question about it. Your team is your income; your wealth building machine.

2. Focus on Building a Good Team: Recruiting, hiring, training, managing, and firing is far too expensive. It’s only going to get dramatically more expensive over the next few years. The quality of your team is your competitive edge, or lack of it.

3. Allow No Room for Bad Eggs: Don’t mistake hot shots for great team members, nor cheap ones either. At least if they are not also team players. All it takes is for one rotten player to spoil the rest. No hiring system is perfect. Some bad ones, or poor fits will skip through the cracks. Just make sure you spot them fast, and have a plan for getting rid of them swiftly and gracefully, without creating any bigger issues.

4. Reinforce Team Player Mentality: Not all of your hires will come from a team player environment. A little healthy competition can be good, but if it becomes too dog eat dog, team members won’t just be sabotaging themselves, but your real estate business too.

5. Prevent Burnout: It’s your job to ensure your team doesn’t suffer burnout. Don’t expect them to handle this by themselves. Lead by example, know when to recognize the symptoms, and create a system that prevents it. Working hard is expected, but there has to be proactive distressing too.

6. Create a Path for Growth: One of the worst things that can happen in a real estate company is for the very best talent to split and start a competing enterprise. Sometimes they’ll even take a crew of your best team members with them. So create a path for them to grow with you, and let them know about it before they make their own plans.

7. Unite Them behind the Mission: Unless the most important part of your real estate company mission, vision, and goals is visible daily, and is clearly important to their role with you, you can’t expect them to have that mentality. Most are too used to getting lost in their little tasks.

8. Empowered as Brand Ambassadors: Most won’t stay with your firm for long unless they love your company and what it is about. But even if they love the brand most are sorely underutilized as brand ambassadors. Are you getting them company branded t-shirts, encouraging them to support the venture on social, and rewarding them for bringing in leads?

9. Potential Customers: Your team should be some of your best lead generators and customers. Everyone. If you sell and rent houses you can bet every one of your team members is using some form of housing. If you aren’t serving them, then the competition is.

10. Get Their Families Engaged: The company isn’t just the corporate entity, or the executive team, or individual workers. Each employee’s family member is a part of the team, whether you like it or not. They impact how your workers perform, their loyalty, and perhaps have even more influence on public brand opinion.

11. Provide Coaching: None of us stays on top of the game forever without constant learning and improvement. The same goes for the whole team. You want them to stay as an elite force, and get even better. Help make that a possibility.

12. Share the Successes with Them: Does your team know how the company is doing? Do they know if their input is making a difference? Do they know they are bringing value, and that the company is on good footing? If they don’t what might be going through their heads?

13. Get Together: Team meetings can be a pain for everyone. Big corporate retreats can be a big investment. But the more community and bond you build the more productive the team will be, and the lower many of your other expenses will be.

14. Get Their Input: Real estate companies can spend thousands if not hundreds of thousands or millions, and plenty of hours on research. Yet, they mostly completely overlook all the front line intelligence and mental capital they have on staff. Recruit their input, and thank them for it.

15. Use Your Team to Recruit: Use your existing team to recruit. Have you been paying or spending time on job ads? Have you even asked if anyone wants to move up or knows someone? Some of your existing team might have more experience than you think, or they may know awesome additions that can be brought on easily.