More Deductions for Landlords

I just read this in a Forbes e-newsletter that I receive. I'm often asked the question of what's deductible for investment properties, this is a question that is best left to the individual's financial experts, but unfortunately we try to save pennies when it comes time to hire our tax preparer, so we don't hire the best. In response to those questions, here's what Forbes has to say about how to maximize your income tax deductions for investment properties.

Rental real estate provides more tax benefits than almost any other investment. Often, these benefits make the difference between losing money and earning a profit on a rental property. But tax deductions are worthless if you don't take advantage of them.

Here are the top ten tax deductions for owners of small residential rental property:

1. Interest. Interest is often a landlord's single biggest deductible expense. Common examples of interest that landlords can deduct include mortgage interest payments on loans used to acquire or improve rental property and interest on credit cards for goods or services used in a rental activity.

2. Depreciation. The actual cost of a house, apartment building, or other rental property is not fully deductible in the year in which you pay for it. Instead, landlords get back the cost of real estate through depreciation. This involves deducting a portion of the cost of the property over several years. Residential rental property must be depreciated over 27.5 years.

3. Repairs. The cost of repairs to rental property (provided the repair costs are ordinary, necessary and reasonable) are fully deductible in the year in which they are incurred. Good examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks, plastering and replacing broken windows.

4. Local travel. Landlords are entitled to a tax deduction whenever they drive anywhere for their rental activity. For example, when you drive to your rental building to deal with a tenant complaint or go to the hardware store to purchase a part for a repair, you can deduct your travel expenses.
If you drive a car, SUV, van, pickup or panel truck for your rental activity (as most landlords do), you have two options for deducting your vehicle expenses: You can deduct your actual expenses (gasoline, upkeep, repairs) or you can use the standard mileage rate (44.5 cents per mile in 2006).

5. Long-distance travel. If you travel overnight for your rental activity, you can deduct your airfare, hotel bills, meals and other expenses. If you plan your trip carefully, you can even mix landlord business with pleasure and still take a deduction. However, IRS auditors closely scrutinize deductions for overnight travel--and many taxpayers get caught claiming these deductions without proper records to back them up. To stay within the law (and avoid unwanted attention from the IRS), you need to properly document your long-distance travel expenses.

6. Home office. Provided they meet certain minimal requirements, landlords may deduct their home office expenses from their taxable income. This deduction applies not only to space devoted to office work, but also to a workshop or any other home workspace you use for your rental business. This is true whether you own your home or apartment or are a renter.

7. Employees and independent contractors. Whenever you hire anyone to perform services for your rental activity, you can deduct their wages as a rental business expense. This is so whether the worker is an employee (for example, a resident manager) or an independent contractor (for example, a repair person).

8. Casualty and theft losses. If your rental property is damaged or destroyed from a sudden event like a fire or flood, you may be able to obtain a tax deduction for all or part of your loss. These types of losses are called "casualty" losses. You usually won't be able to deduct the entire cost of property damaged or destroyed by a casualty. How much you may deduct depends on how much of your property was destroyed and whether the loss was covered by insurance.

9. Insurance. You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft and flood insurance for rental property, as well as landlord liability insurance. And if you have employees, you can deduct the cost of their health and worker's compensation insurance.

10. Legal and professional services. Finally, you can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisers and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.

For the article, click here

Another Housing Price Play

I read this weekend in The Real Deal that the Chicago Mercantile Exchange has created a housing futures market. If making the investment in your home isn't nerve racking enough, now you can take short positions in your local housing market.
I don't know enough to even begin to explain this method of hedging against the real estate market here in New York, but according to investors that are purchasing the contracts, prices are down 4.2% overall, or they will be in the future. These contracts are pegging where housing prices will be 3 or 6 months in the future.
I'm going to try to learn something by going to the Chicago Mercantile Exchange and reading through the materials they have there. Of course, I'm not suggesting that consumers utilize this tool as a hedge against the value fluctuations of their home, it's just interesting how quickly the family manse has become a mature investment vehicle. Everything has changed it seems. The secondary mortgage market dictates the mortgage terms to the homebuyer, the media tells us what our home is worth, and now we can buy futures on a publicly traded exchange to hedge the increase or decrease of the value.
Hooray for the American Dream...I think.

Flipping

I've been reading a blog by an ex-banker here in New York City that just purchased a house in New Jersey and is trying to fix and flip it. The blog started out interesting, he posted the details of the financing, talked about the realtor, the mortgage broker and the attorneys involved in the closing. Now he's gotten into a quandry about what to fix, what to save and how much of the home's orginal "charm" should be saved. Many of the comments cheer him on to save as much as he can to the possible detriment of the project itself.

Flipping is a type of real estate investment strategy in which an investor purchases properties with the goal of reselling them for a profit. Profit is generated either through the price appreciation that occurs as a result of a hot housing market and/or from renovations and capital improvements. Investors that employ these strategies face the risk of price depreciation in bad housing markets.

Flipping is anyone's call most of the time. It's not home restoration, though that could be a part of it. It's not gentrification, though that also could be a byproduct. Flipping is buying a house for less than one thinks it can be sold.

I'm having a good time reading this blog, all the thoughts that can go through a person's head while spending a day sanding the floor, or scraping the walls are interesting, and of course not all of them are suited to be posted anywhere. The blog is www.fliperati.com.

Second Mortgages & Increasing Your Credit Score

I'm not going to discuss all of the benefits of taking out a Home Equity Line of Credit or another type of second mortgage to pay off revolving credit card debt. That decision depends on so many factors that the decision can only be made after some insight into the individual's specific situation. Some of the factors include: interest rates on credit cards, minimum payments on credit cards, income expectations, current credit scores, future spending plans, the reason for paying off the debt, among others, so it's obvious that I cannot go into all of that here.

What I do want to address is the issue of increasing one's credit score by taking out a second mortgage on their home, this can also be a cooperative or a condo. If you are going to take out a second mortgage and consolidate your credit card debt in one payment, I recommend it's a fixed rate second mortgage. One's credit score will go down if the percentage of the revolving debt owed is higher than 50% of the high balance. Note that I said the high balance, not the credit limit of the card. If you have a credit card in your wallet than has a limit of $10,000, but the most you've ever charged is $1000, then you need to stay below a $500 balance or your credit score may suffer.

Having said that, a borrower shouldn't take the effort to consolidate debt into a Home Equity Line of Credit only to have their credit drop as a result. Yep that's right, the borrower's credit score may go down. The reason for this is that the borrower right away has an enormous maxed out revolving credit line. The balance upon opening a Home Equity Line of Credit is as high as it's ever been, and unless you start paying down principal, that maxed out line of credit may bring your credit score lower instead of increasing it.

The alternative is to consolidate your debt by taking out a Fixed Rate Second Mortgage. This will appear on your credit report as a mortgage with a fixed balance and a fixed payment, your revolving debt will be $0, and your credit score will rise as a result.

Again, you must take a cold, hard look at your complete situation and your goals before consolidating debt. It takes discipline to make it work out favorably. But if you are trying to increase your credit score, take a look at a fixed rate second mortgage instead of the line of credit.

Building Booms while the Rental Market Tightens

The number of permits issued for new construction increased 25% over 2004 and 515% over a decade ago. That's alot of buildings going up here in the city. It appears as though the Chelsea/ Cliinton neighborhoods of Manhattan, Williamsburg/ Greenpoint areas of Brooklyn and The Rockaways in Queens are the biggest recipients of permits. Those are the areas with the most construction activity in the city. Here in the Chelsea area, I can say that there isn't a block around that doesn't have construction. It's literally everywhere. With the rental market so tight righ now, I can't help but wonder how many of these units will be rentals instead of condos. Especially in Manhattan

Freedom Tower Back to Being a Big Box

We all knew it was coming sooner or later, I mean, hey come on, even Penn and Teller got into the act with their show Bullshit on Showtime about the failures of the WTC Memorial construction. But now it's official, The Freedom Tower is a skyscaper just like any other in the land. No big surprise here, of course they state security reasons, and the dictates of the marketplace as just a few of the justifications.It's not that I don't like big bastions of commerce rising into the sky, I do, I like them very much. I live in Manhattan don't I? It's just that there was so much press, competitions, and hub-bub about the design and scope of the building that it tended to raise everyone's expectations very high. I was thinking along the liines of THE GLORIOUS TOWER IN THE SKY. But it's not a total loss, they are going to give us a lightshow.

Homeowner's Property Tax Lottery

It seems that once again, Mayor Bloomberg is going to give New York City property owners a rebate of $400 in the upcoming budget along with over $20 million for affordable housing. These property tax rebates are starting to beg the question: Why don't the just lower the property taxes here in the city? Of course, politically, that's not a bright move since it's harder to raise them again. It would, however, be a great thing for homeowners to see their property taxes lowered while their schools get better. Too idealistic for this world?