AAOA Blog

Tip #71: Pay it Forward

by Thomas F. Scanlon, CPA, CFP®

The first half of the year is in the books. It’s time to take a look at your withholding and estimated tax payments.

Why is this important?

To avoid any potential penalty for underpayment of estimated taxes.

How do you calculate this?

Taxpayers with adjusted gross income (”AGI”) under $150,000 needed to have paid in 100% of the prior year tax. For example, if someone’s AGI was under $150,000 and their tax was $20,000, they would need to have paid in $5,000 per quarter or have this withheld.

 

Someone with AGI over $150,000 needed to have paid in 110% of the prior year tax.

Here are four reasons to review this now:

 

All taxpayers need to be aware of the Alternative Minimum Tax (”AMT”). This is a nasty back door tax that may affect many more taxpayers this year. Congress created a “patch” the past few years to keep a lot of taxpayers out of paying AMT. If the “patch” is not approved again this year, many more taxpayers will be in for an unpleasant surprise and a tax increase. The AMT is not really titled very well—there is nothing “alternative” about it. Taxpayers don’t get to choose if they pay this or not. Taxpayers need to calculate their taxes two ways. First, calculate the tax under the regular method, second under the AMT method. Pay the higher of the two taxes. The AMT starts with regular income and then makes adjustments to it. The biggest add back is typically for state, local, and property taxes.

 

 

Taxpayers that started collecting social security benefits in 2010 will also have higher taxable income.

 

Tax rates may rise in 2011. By reviewing your withholding and estimated tax payments now, you will be in a better position to handle potential changes that may be made in 2011.

ACTION ITEM: Review your withholding and estimated tax payments to assure you will not have to pay a penalty for underpayment of taxes.

Thomas F. Scanlon, CPA, CFP®.  is with Borgida & Company, P.C.,  Certified Public Accountants in Manchester, Connecticut, celebrating 44 years of tax, advisory and accounting services.  Call 860.646.2465 for more.  

See last week’s Landlord Quick Tip.

Do you have a quick tip to share with other landlords? If so, please email our editor at kim@joinaaoa.org.

 

 

 

by Wallace Gibson, CPM, GRI 

 

Millions of rental property owners pay more state and federal taxes on their rental income than they should. Why?

 

Many fail to take advantage of ALL of the tax deductions available to them because they do not know and can not get good counsel on this issue.

 

Millions of rental property owners fail to take advantage of all the tax deductions available to them and they miss one of the JOY$ of owning rental property. Often, these benefits make the difference between losing money and earning a profit on a rental property.

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.

See Wallace Gibson’s feature, Avoiding a Common Landlord Pitfall.

 

American Apartment Owners Association offers discounts on products and services for landlords related to your rental housing investment, including rental forms, tenant debt collection, tenant background checks, insurance and financing.
Find out more at www.joinaaoa.org.

by Robert Cain

 

The trick is to stop thinking of it as “your” money.
— IRS auditor

 

A real estate broker I know was complaining a few years ago about how much he had to pay in taxes. Considering his personality, his complaint was part complaint and part bragging. Because, of course, the more money you make, the more you have to pay in taxes. On the other hand, a good friend of mine, when he heard the complaint replied “I wish I had to pay a million dollars in taxes.” If you had to pay that much, you’d have a pretty hefty Adjusted Gross Income.

Still, there is no reason to over pay your income taxes. All we need do is play the game skillfully to get our taxes lower.

Recordkeeping
The better your records, the bigger the deductions you can write off on your taxes. And if you are audited, the more likely you are to be able to keep your deductions.

First, pay your bills by check, debit or credit card. That’s pretty basic, and you probably do that already. However, the problem arises when you pay for something for a property repair with cash from your pocket. There’s that $20 bill burning a hole in your wallet. After all, that $19.95 isn’t worth writing a check or using a debit card for, you say to yourself. One time won’t hurt much, but once you say “just this time,” you set yourself a precedent.

The reason for the check, debit or credit card is that you have both the receipt and the canceled check or credit card statement. First, always write on the check what it’s for. Likewise, always write the check number on the receipt. If possible, use one credit card only for rental purchases. Create a system for keeping track of your receipts. It doesn’t have to be complicated: an envelope for every month will work fine.

If you can’t resist, and pay by cash anyway, always, always, always write the following on the receipt: the purpose, the date, the amount, the receiver.

At one seminar I attended, the seminar leader suggested a shoe box with a slot cut in the lid under the front seat of your car to stuff receipts into. That way you always know where the receipts are, and when you get the time you can go through the receipts and match them up with the cancelled checks and credit card statements.

Just as important is to create a receipt and deposit system for your rents. The IRS will retrace all your deposits if they do an audit of your return. That means they will want to know where all the money came from and will want to know what happened to all the rents you received or they think you should have received.

For example, they will look at the duplex at 1234 Main St., where the rent is $750 a month. You show that one side was rented for 12 months and the other side for 11 months. The IRS will track the deposits to see if you deposited 23 sets of rents, or $17,250. Any perceived deviation (real or imagined on their part) will get them digging deeper. So the better your records, the less intrusive the IRS might be.

In fact, if an auditor sees that you have all your records in apple-pie order and easily accounted for, he or she might just do a cursory check and then try to find someone to really pick on. It’s more fun for an auditor if he or she can make someone’s life truly miserable. Good records by a taxpayer make that more difficult and thus less fun for the IRS persecutor.

Car Expenses
The IRS is allowing us 50¢ a mile for business driving. That’s if you decide to use the mileage method for accounting for your vehicle.

“By contrast, if you deduct actual business-connected costs for your leased auto, you also must keep records of all of your actual expenses (e.g., gas, maintenance and repairs, lease expenses) and allocate expenses between (deductible) business costs and (nondeductible) personal driving costs based on mileage,” explains Portland, Oregon CPA Tom Napier. “You should be aware, however, that the mileage allowance method may yield a smaller deduction than you’d get by writing off the business-connected portion of your actual auto costs.”

Other Ways to Save with an Automobile
Here are three strategies for increasing deductions on your vehicles.

Strategy One– Use two cars for business to get maximum deductions. If you drive only one car for business, the maximum business-use percentage you can achieve is 100 percent, isn’t it? If you drive two cars for business, you could drive one car 100 percent of the time for business and the other 100 percent for business. Not very likely, but could you manage 90 percent on one car and 20 percent on another? That would mean a deduction of more than you could get from just one car.

Remember, it’s not the amount of time you drove, which is always 100 percent, that matters, but the amount of mileage or usage of each vehicle for business that matters. For example, if you drove vehicle one 10,000 miles during 2009 and 9,000 of those miles were for business, that would mean you could deduct 90 percent of the mileage or costs. Also suppose you drove vehicle two for 10,000 miles, but only 2,000 of those miles was for business. You could deduct 20 percent of the mileage or costs.

Figure it out for yourself. Add up all the car expenses and compare 11,000 miles on one car to 11,000 miles on two cars. Make sure to include gas and oil, insurance, repairs and maintenance, licenses, and depreciation. You’ll be amazed.

Strategy Two– Deduct the larger of the actual expense deduction or the IRS optional mileage rate deduction. Figure it both ways and take the one that allows you to deduct the most money.

Strategy Three– Identify supplies and equipment used to maintain your business car. Take a trip through you garage and basement (or wherever you store tools and cleaning supplies). Make a list of the items you use on your car. You will probably find a battery charger, battery cables, and maybe even a battery tester. Look some more, how about a tire pump, a vise, a buffer, and a sander. Looking even farther, you get to the tools such as screwdrivers, pliers, and wrenches.

If an item has an original cost of over $100, capitalize and depreciate it according to the schedule (many times five years) the IRS has set up. If it is less than $100, it is normal to expense the item in the year you purchased it.

Chances are you won’t have receipts for all this, but you can take pictures of them as a reasonable substitute evidence. Incidentally, what you don’t use on your car, you may use for your rental property business, deduct them using the same plan. Some items you will use both on your business vehicles and on your rental properties, adding the potential for even more deductions.

Records You Need to Keep
1. All papers relating to the purchase of the property including closing statements and contracts.

2. Any improvements you make after you buy the property.

3. Property tax statements before and after you bought the property. In addition, make sure, if the tax statement doesn’t already, that you break out the land value from the structure value.

4. Any amortization statements relating to the purchase.

5. A list of tools and equipment you buy to maintain your properties.

6. Any blueprints a previous owner can give you.

If You Are Audited
The IRS will verify income and expense. As mentioned above, have a rent schedule and a receipt book showing who paid, when and how much.

The IRS will ask the following questions:
1. Did you rent to a relative? If you did, did you collect close to fair market rent? If the rent was too low, the IRS could limit your losses. (See a tax advisor.)

2. If you bought rentals during a year the IRS is auditing, they will want purchase papers and will ask if you made it available for rent immediately after you bought it.

3. If you made repairs before you put the house up for rent, the IRS will not let you deduct any of the costs of repairs. To immediately qualify for deductions, run an ad the day you buy the property. Try to get a renter for it while you are making repairs. They don’t have to move in, they just have to agree to move in.

4. The IRS will see if you expensed rather than capitalized major repairs. For example, if you completely re-roofed the property, you might have expensed it when the rules say you have to depreciate it over 27 ½ years for residential property. If you just patched, or put on half a roof, though, you can expense it.

Copyright 2009 Cain Publications, Inc., used by permission. 

From the December 2009 Rental Property Reporter (paid subscription newsletter)

Robert Cain is a nationally-recognized speaker and writer on property management and real estate issues. For a free sample copy of the Rental Property Reporter call 800-654-5456 or visit their web site at www.rentalprop.com.

 

DEAR BENNY: My wife  and I are considering a move to Arizona.  As we have lived in our current townhome for six years, I am sure we would be  eligible for the homebuyer credit of $6,500.

What I cannot find is any  reference about if and when we must sell our current home.

Can we buy a  replacement home by the cutoff date of April 30, 2010, then sell our current  residence later in the year? Or if we make the new house our principal  residence, are we required to sell our current residence at all? –John
 

DEAR JOHN: According to the Internal Revenue Service, you do  not have to sell your current house — which must have been owned and used as a  principal or primary residence for at least five consecutive years of the  eight-year period ending on the date of purchase of a new home as a primary  residence — in order to take advantage of the new $6,500 tax credit for repeat  homebuyers so long as the new house becomes your primary house. 

There are, however, some additional limitations. While you do not have to purchase a home that is more expensive than your current home to  qualify for the credit, if your new home costs more than $800,000, you are not eligible for that credit. 

There are also income limitations. For single taxpayers, you  cannot make more than $125,000 annually; for married folks, you cannot earn more  than $225,000 if you file a joint tax return. There is a phase-out until your  income reaches $145,000 for a single taxpayer or $245,000 for joint tax filers.  This means that the credit is reduced proportionately until you reach the  ceiling cap. 

You cannot purchase the new home from family members, which  includes parents, grandparents or children. 

And finally, the purchase must take place by April 30, 2010.  However, if you have entered into a binding contract before that date, you must  settle (go to escrow) by June 30, 2010, or you will lose this credit. 

This is my opinion; I suggest you consult your own tax  advisors for specific advice. 

Benny L. Kass is a  practicing attorney in Washington, D.C., and Maryland. No legal relationship is created  by this column. Questions for this column can be submitted to benny@inman.com. 
Copyright 2010 Benny L. Kass

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Landlords, Property Managers and Property Management Companies can save on 2009 taxes by taking action before the end of the year.

 

As always you should always consult with your accountant or tax consultant on how these tax strategies apply to your personal situation.

 

Also the tax tail should never wag the business dog.

 

So take action on these tax strategies if they put more money in your pocket.

1. Buy a heavy SUV to haul your tools around and deduct up to $25,000 in depreciation expense. Read More

2. Buy other business equipment including software, computers, office furniture and you can write-off as much as $250,000 in depreciation expense.

3. Take full advantage of 50% first year bonus depreciation for qualifying new equipment placed in service by December 31, 2009.

4. Accelerate expenses by paying vendors and others before end of the year and delay receiving income payments until Jan 1 of 2010. Read More

5. Create a Net Operating Loss by taking the above steps and then use take the 2009 Net Operating Loss, carry it back for up to five years, and recover taxes paid in those years.

Read more detail about the 5 year end strategies for saving on 2009 taxes by CLICKING HERE

 

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by Bill Gray

 

All too often, landlords simply file them away and forget them. By storing these files without taking any action, you are literally throwing money away.

 

You may think it’s impossible—that you’ll never see a dime of the monies owed, but some percentage of the debt you are owed is collectible.

 

It may not be collectible today, but over the next seven years, some of that money most likely will be paid.

 

Go to court and sue the previous tenant for the balance owed. This option can be expensive and time consuming, but with the proper outcome, it can be an effective way to collect tenant debt.

 

Hire a collection agency that specializes in collecting tenant debt. If you do not have an agency, spend an hour online and find one. If you don’t know what to look for in an agency, read my blog article on how to hire a collection agency to collect tenant debt. “How do I Hire a Collection Agency to Collect my Tenant Debt?”

Report the debt to the three major credit bureaus, Experian, Equifax and TransUnion, as a collection account. The ding on your previous tenant’s credit report should remain there for seven years after they move out. There are several online resources for reporting tenant debt to the credit bureaus. It’s worth your time and effort to research them.

See How to Screen a Tenant Who Doesn’t Have a Social Security Number

 

See our seven part series, Vital Tips to Increase Your Debt Collection.

 

American Apartment Owners Association offers discounts on products and services for landlords related to your real estate investment including REAL ESTATE FORMS, tenant debt collection, tenant background checks, insurance and financing. Find out more at joinaaoa.

 

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The Internal Revenue Service has just issued the 2010 optional standard mileage rates used to calculate the deductible costs of operating an automobile for managing properties by landlords, property managers and property management companies.

Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

50 cents per mile for business miles driven

16.5 cents per mile driven for medical or moving purposes

14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than last year’s. The mileage rates for 2010 reflect generally lower transportation costs compared to a year ago.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. Landlords, Property Managers or Property Management Companies may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. hire or for more than four vehicles used simultaneously.

Landlords, Property Managers or Property Management Companies always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Revenue Procedure 2009-54 contains additional details regarding the standard mileage rates.

 

 

See Crucial Tax Tips for Landlords.

 

Find out more at www.joinaaoa.org.