Question for Landlords here

[Superstar Punani]

I want to ask you a bunch of questions.
And I want to have them answered immediately.



1) Who has landlording experience?

2) Did you do it yourself, or did you just hire a property management company to do it?

3) Landlords insurance is mandatory, or at the very least, a good idea given the lawsuit happy society that is the US and A, right? How much does this shit run?

4a) Assuming you manage it yourself and get paid cash in hand by the tennants- you declare this on your tax return right? Like an honor system? *cough cough*

4b) If you get a property manager to do it for you, do they report your earnings to, say someone who might be interested in how much you make in a year? *cough cough*

5) Can you still claim the mortgage deduction as part of your tax return for rental properties?

Thanks in advance.

[Krash]

I want to ask you a bunch of questions.
And I want to have them answered immediately.

well ok then

1) Who has landlording experience?

Me

2) Did you do it yourself, or did you just hire a property management company to do it?

Myself, a mgt. co. would take up to 40%

3) Landlords insurance is mandatory, or at the very least, a good idea given the lawsuit happy society that is the US and A, right? How much does this shit run?

Never had it, but did almost get sued. Thank god for friends in high places

4a) Assuming you manage it yourself and get paid cash in hand by the tennants- you declare this on your tax return right? Like an honor system? *cough cough*

Right, the honor system, I never claimed it, but then again I could never claim it as income when getting my home loan's so it has pros&cons

4b) If you get a property manager to do it for you, do they report your earnings to, say someone who might be interested in how much you make in a year? *cough cough*

They will have to report what they take and what you are paid

5) Can you still claim the mortgage deduction as part of your tax return for rental properties?

As far as I know you still can deduct you mortgage interest paid, but then you would(should) be claiming the rental income. So it would be a wash

Thanks in advance.

your welcome

[ski_adk]

Be careful of any older property. If it has any lead paint, or did at one time, you could have trouble. My dad rented out his second house to a distant family member who tried to sue us b/c his kids kept gnawing on the window sills. Even though the lead paint was covered over, they chewed right through, all the way to the bare wood. When his kids wound up with high lead levels, they thought they had hit the lawsuit lottery. Thankfully, the NYS gov't realized we did the best we could and helped us with the removal of all lead paint in the place. Compliance with their guidelines saved us big time.

[UTdave]

I would advise you to report the income. Tax evasion is not cool. One reason to report the income is frequently rentals generate a loss due to depreciation. Additionally, when you sell your rental you have to recapture depreciation you could have taken even if you didn't take it. The risk there is if you get audited and they find out you were renting they can include that depreciation recapture on depreciation you didn't ever deduct. You can deduct any expenses ordinary and necessary in conducting your rental (so yes mortgage interest among many others). Go to irs.gov and get a copy of Schedule E of the 1040 and its instructions for how to report rental income if you have questions.

[Woodsy]

Dark and lonely on a summer's night.
Kill my landlord. Kill my landlord.
Watchdog barking. Do he bite?
Kill my landlord. Kill my landlord.
Slip in his window. Break his neck.
Then his house I start to wreck.
Got no reason. What the heck?
Kill my landlord. Kill my landlord.
C-I-L my land lord!

[Big E]

Answers in red.

I want to ask you a bunch of questions.
And I want to have them answered immediately.

1) Who has landlording experience?

Me.

2) Did you do it yourself, or did you just hire a property management company to do it?

Myself. If I'm close enough to the property to do it myself, I wouldn't want a property mgmt company, not just the cost, but knowing what's going on at the property.

3) Landlords insurance is mandatory, or at the very least, a good idea given the lawsuit happy society that is the US and A, right? How much does this shit run?

Hmm. Don't have it.

4a) Assuming you manage it yourself and get paid cash in hand by the tennants- you declare this on your tax return right? Like an honor system? *cough cough*

Definitely declare it. There are a lot of tax advantages to owning property, and the drawbacks to not declaring it are huge. Aside from the potential for the IRS finding out, if you don't declare it, you won't be able to use any of that income when you apply for other mortgages, etc. Try explaining to a bank why you own X properties but don't have any income from them, yet there's this continual stream of money to pay the mortgages. Riiiight......

4b) If you get a property manager to do it for you, do they report your earnings to, say someone who might be interested in how much you make in a year? *cough cough*

5) Can you still claim the mortgage deduction as part of your tax return for rental properties?

Yep.

Thanks in advance.

[Ski Monkey]

And I want to have them answered immediately.

...

Thanks in advance.

No.

You're welcome.

[Greydon Clark]

Sell the house in LA, buy a house in Tahoe, let me stay there for free.

[Superstar Punani]

Thanks guys!

Krash- Holy shit 40%? I thought it was a nominal flat rate fee, like $80-$100.

ADK- good point. the place in question has asbestos, and the existing HOA routinely passes out flyers and continually reminds people along the lines of "THIS BUILDING WAS BUILT IN 1970s and it has ASBESTOS....so don't be a dumbass like install chandeliers or drill into the ceilings!!! Use one of our contractors for these"

UTDave- Oh absolutely. I was merely curious because in the past,I've had roommates who were also the homeowners. I doubt they reported the $$$ I paid in rent. Then again, if they all jumped off a bridge I wouldn't be jumping off a bridge.



Either way, my current decision is to either: a) rent it out fully or b) just rent it out partially, like get a roommate since I'm only at this place once/month. With (b) at least I can still claim it as my residence along with all the mortgage payment tax deductions and only claim the roommate's rental payment has extra income.

[steve]

1) Who has landlording experience?

I do! I do!

2) Did you do it yourself, or did you just hire a property management company to do it?

I do it myself.

3) Landlords insurance is mandatory, or at the very least, a good idea given the lawsuit happy society that is the US and A, right? How much does this shit run?

I pay normal property insurance. I think the insurer tags on another $30 a year because it's a rental property.

4a) Assuming you manage it yourself and get paid cash in hand by the tennants- you declare this on your tax return right? Like an honor system? *cough cough*

If you get audited, they'll want rent rolls and copies of the leases. If there are months during the lease without payments, or if there are inexplicable long periods of time without a lease, they're going to get suspicious. at the very least they'll subpeona bank statements, and you may get hit with back taxes, plus penalties and interest.
Yet, when you factor in depreciation, you usually end up with a loss on paper or a slight gain. It's not worth the risk.

4b) If you get a property manager to do it for you, do they report your earnings to, say someone who might be interested in how much you make in a year? *cough cough*

no, you report your own earnings, they report their own earnings. their earnings can be subpeona'd, too - and you're paying someone a hundred bucks a month without a tenant, you'll have a problem.

5) Can you still claim the mortgage deduction as part of your tax return for rental properties?

I think so.

[half-fast]

1) me- 11 years
2) do it myself
3) no additional insurance
4a) declare it
4b) don't know
5) yes

[UTdave]

b) just rent it out partially, like get a roommate since I'm only at this place once/month. With (b) at least I can still claim it as my residence along with all the mortgage payment tax deductions and only claim the roommate's rental payment has extra income.

not qute correct. You'll still need to report it as rental income and depreciate part of the property and some of the interest and utilities on your schedule e but you should have a loss which is nice.

[Superstar Punani]

Thanks for the great advice.

Q about the depreciation piece. How can I claim depreciation on it if the property value has been going up? I just zillow'd it and got the chart below.



Shit, on second thought, maybe I should just sell up before the rollercoaster comes crashing down.

[danhikeski]

i have a two family house that i live in, and rent out the other floor. i previously had a room mate and that wasn't considered income (not sure why) but the other unit was/is. since i live there it's a no brainer as far as management. for my mortgage i have to have insurance, mine is only about 500 bucks a year. depending on what you make, i had to declare my earnings/ rent to get the loan. not sure on the other tax questions, i give my accountant the paperwork they ask for and they take care of the rest.

fyi, my mortgage company said that 70-80% of my yearly income from my tenant was figured into my yearly earnings, to see how much i can borrow (meaning they think i will have a tenant 70-80% of the year, but i have been lucky and only not had a tenant for about 2 months of the 3 years i have owned)

[L7]

I have landlord experience (13years) but not sure how applicable to you it is from Canada.

Did it myself, not as worried about the fees (I think only in the order of 10% here) but more the calling a plumber everytime a tap drips and the tenant doesn't mention it until the fri. afternoon of a long weekend. That shit will add up fast and I can do it myself for way less.

Don't know what 'landlord insurance' is but we have a commercial policy that includes loss or revenue and reconstruction costs plus boiler insurance. There is also 3rd party liability that should cover lawsuits. I think it's back down to 2K a year ($70K/year income). It was higher in some post 9/11 years which really had more to do with insurers getting their capitalization slashed by the tech bubble bursting.

There are 3 partners and we do it through a company so everything (pretty much) is delared. Trick is to do a good job of having expenses offset revenues. We spent some money to set up something called an 'Employee Profit Sharing Plan' but that's only relevant with a corporate deal set up.

Any company handling your money may someday be in the position of having to hand the info over (audit or just regular reporting), if what they are saying doesn't jive with what you're reporting there's going to be trouble.

Up here and my guess would be there you can count all expenses against revenues and the trick is to keep them close. Eventually you will sell the property and if you have no revenues reported it's going to look pretty fishy how you carried the cost and paid down a mortgage and then scored a big equity gain at the end.

I would guess that like here it varies state to state but I could be wrong about that. A good tax accountant (and by good I mean slightly shifty) in your own state would be good to talk to.

[LeeLau]

Answer in CAPS

I want to ask you a bunch of questions.
And I want to have them answered immediately.

1) Who has landlording experience? ME

2) Did you do it yourself, or did you just hire a property management company to do it? MYSELF FOR ONE. PROP MANAGERS FOR ANOTHER

3) Landlords insurance is mandatory, or at the very least, a good idea given the lawsuit happy society that is the US and A, right? How much does this shit run?

IN CANADA SO DIDN"T BOTHER

4a) Assuming you manage it yourself and get paid cash in hand by the tennants- you declare this on your tax return right? Like an honor system? *cough cough*

YES. WILL GET BUSTED FOR SURE OTHERWISE. VERY COMMON THING FOR AUDITS

4b) If you get a property manager to do it for you, do they report your earnings to, say someone who might be interested in how much you make in a year? *cough cough*

YES ABSOLUTELY

5) Can you still claim the mortgage deduction as part of your tax return for rental properties?

YES FOR CANADA SINCE THIS IS PART OF CAPITAL INVESTMENT AND WHEN I SELL WILL HAVE CAPITAL GAIN. BELIEVE THIS IS TRUE IN US ALSO BUT MORESO DUE TO YOUR TAX CODE

Thanks in advance.

[L7]

Thanks for the great advice.

Q about the depreciation piece. How can I claim depreciation on it if the property value has been going up? I just zillow'd it and got the chart below.



Shit, on second thought, maybe I should just sell up before the rollercoaster comes crashing down.

We currently are claiming depreciation to help pair down taxable earnings. When we sell at an appreciated value we claim the gains as capital gains which are taxed at a lower rate, otherwise it wouldn't matter about depreciation as it would just be a sort of tax deferral. No idea how that relates to your tax laws.

[Nohillsnearby]

Good advice so far.

MrNohills & I have been doing the rental thing since 1998. We have fire policies on all our rentals, we require tenant to have renter's insurance and an umbrella policy for liability. For further protection, we need to become an LLC--if the Mr would ever do that....

Don't know any of the tax type questions, I do the managing and day to day books.

[DJSapp]

Hey D-

Just my .02, but I would report the taxes even if they pay you in cash. The reason? On CA state tax returns there is a renters credit (like $50 or so) if you are renting and provide the name and address of the landlord. Basically, it is a way the IRS can fuck you if you don't shown rental income during an audit.

Auditor: So Mr. Punani, do you have any rental income?

SuPu: No sir.

Auditor: So then Mr. McStoolpigeon of 1234 Hubba Hubba dr. (a propertity which you claimed as a deduction) incorrectly reported his landlord's name and address? Please bend over.

SuPu: Nien en der pooperhausen! NIEN!!!

[Superstar Punani]

IA good tax accountant (and by good I mean slightly shifty) in your own state would be good to talk to.

Best advice I've heard all day

I plan to do this eventually, right now in the early stages I'm checking up on the vast expertise of the collective. (Thanks again- this helps greatly)

In the end I much prefer to hire a "good" accountant and let them do the dirty work in case the taxman cometh...I'm sure the "Hey taxman, a bunch of internet people gave me this advice" isn't gonna float

[Ski Monkey]

Q about the depreciation piece. How can I claim depreciation on it if the property value has been going up? I just zillow'd it and got the chart below.

It's important to remember that depreciation is largely an accounting function. IE, when you depreciate a building for say $56k in a year, that number is treated as a noncash expense, but an expense non-the-less so it serves to reduce your income for that year. Of course, the flip side of that is the depreciated value that remains subtracted from your sales price when you sell is used to calculate your capital gains, not your purchase price which would be higher.

[UTdave]

Thanks for the great advice.

Q about the depreciation piece. How can I claim depreciation on it if the property value has been going up? I just zillow'd it and got the chart below.



Shit, on second thought, maybe I should just sell up before the rollercoaster comes crashing down.

Accounting and tax depreciation has nothing to do with market activity. It is a way of allocating the cost of purchasing an asset over its useful life (period you can make money on it). For tax the useful life of property is determined by the code as are the methods allowed for depreciation. Your residential rental will be depreciated straight line over 27.5 years. Meaning the cost will be allocated equally over that period. When you sell the building your gain is the sales price minus purchase price plus accumulated depreciation.

[Ski Monkey]

And also...

1) Who has landlording experience?

I do with a majority of it as nightly resort property rentals. Some month to month.

2) Did you do it yourself, or did you just hire a property management company to do it?

A small building I did by myself, a larger one with commercial utilities had property management company. They charge 40% but, they also handle all the reservations, billing, maintenance, etc for nightly guests.

3) Landlords insurance is mandatory, or at the very least, a good idea given the lawsuit happy society that is the US and A, right? How much does this shit run?

Definitely get insurance to cover yourself. Also consider placing the property in an LLC as it adds one more layer of protection and the profit and loss flows to your income statement anyhow.

4a) Assuming you manage it yourself and get paid cash in hand by the tennants- you declare this on your tax return right? Like an honor system? *cough cough*

Yes, declare it. The depreciation will probably be higher than your income anyhow.

4b) If you get a property manager to do it for you, do they report your earnings to, say someone who might be interested in how much you make in a year? *cough cough*

Our property management company reports our payouts by them to the IRS.

5) Can you still claim the mortgage deduction as part of your tax return for rental properties?

For me since all my stuff is held in llc's, the mortgage interest is treated as an expense.

[G]

Then again, if they all jumped off a bridge I wouldn't be jumping off a bridge.

Yes you would.

You'd stand on the top of that bridge and scream out "watch me rip the shit out of this" and then huck it with style.

Really, you would.

[steve]

depreciation is not based on the value, it's based on the basis.
the basis is the price you paid to purchase or build the property, plus the cost of upgrades.

you depreciate the basis over a 29 year schedule for residential properties, 39 for commercial (I think).

seems like a great deal. payback is when you sell the property, your capital gains is based on the difference between the selling price and the (basis minus depreciated amount).

So if you buy it for $100K, sell it 15 years later for $150K, but depreciated $50K over the 15 years, your capital gains is $100K.

The capital gains tax rate is typically less than the income tax rate that you were claiming the loss off of while depreciating, so you come out better anyway.

You can avoid the capital gains tax by living in the property for two years out of the five-year period before you sell it.