Carey Chesney


Rental Property Tax Deductions

Rental Property Tax Deductions: a Comprehensive Guide

One of the best ways to get the most out of your rental property is to deduct everything you can during tax season. Successful rental property ownership comes down to return on investment (ROI), and the more you can deduct from your taxes, the bigger your ROI will be. Here, we will cover some of the rental property deductions you should consider including on your tax return to ensure you’re getting the most out of your rental property.   What Rental Property Expenses Are Tax Deductible? It’s always a good idea to talk to your accountant or tax professional about what deductions make sense for your specific situation, but here are a few standard rental property tax deductions to consider.  Office Space Owning a rental property means spending a lot of time in the office following up on tenant requests, managing your books, and directing employees. Luckily, your office space ownership or rental costs as well as utilities and internet fees are tax deductible. Work from home? No problem. The portion of your home you are using for rental property related work can be deducted from your taxes. Calculate the square footage of your home office compared to the overall square footage of your entire home. That percentage of your mortgage payments is deductible.  Travel When you own multiple rental properties in various geographical locations, traveling between them can result in significant expenses. Fortunately, these expenses can be deducted from your tax returns. In addition, any traveling expenses related to rental properties, even if you only own one, can be deducted. From trips to the hardware store to a flight across the country, if travel is related to your rental property business, you can include that to your deductions during tax time. Advertising Getting the most money out of your rental property means reducing the vacancy rate as much as you can. Vacancy rate refers to the amount of time a rental unit sits vacant, with no one living there or paying rent. To make sure your rental is full of renters paying rent, you will likely need to invest in some advertising. From listing your rental property on websites to digital advertising, all of these costs can be deducted from your taxes. Supplies Mulch, printer paper, nails, tools, and other supplies you need to run your rental business are tax deductible. Keep track of everything you buy for your business or use a specific credit card or checking account for easier bookkeeping. Utilities Sometimes your tenants pay for their own utilities, sometimes you pay them, and sometimes the cost is split. Anything you pay for as the owner when it comes to utilities like gas, water, and electricity is tax deductible.  Insurance If you own a rental property, you probably pay an insurance premium monthly that is tied into your mortgage payment. You may also pay for employee insurance if you have a team that helps you manage your rental property. Both of these insurances can be deducted at tax time.  Maintenance Part of owning a rental property means dealing with a litany of maintenance issues that arise from time to time. Plumbing issues, heating and cooling problems, and other repairs need to be done to keep your tenants happy. If a cost is related to maintenance, like hiring a plumber, it is tax deductible. If a project adds value to the property, like constructing an addition to add a rental unit, it’s not deductible. Income If you are a limited liability company (LLC), then you can deduct your business income from your taxes. This rule ensures that you are not taxed on the income twice. Once for your business and once on your personal tax return.  Attorneys Attorneys often play a critical role in acquiring rental properties. In fact, in some states, they are required to be involved in any real estate transaction. From reviewing documents to advising in negotiations, the attorney hours (and subsequent fees) can add up. Luckily, you can deduct these from your taxes. Tax Preparation A good tax professional has a wealth of knowledge that can help you get the most from your rental property when you pay taxes each year. It’s a good idea to consult one, no matter how well versed in tax law you may be. The fees you pay them for advice and tax preparation are deductible.  Accountants Tax professionals are the only number crunchers who can be a great asset to your rental property business. Accountants can assist year-round with profit and loss statements and a slew of other calculations and forms that help your business operate efficiently. Their fees can be deducted from your taxes.  Property Management Managing a rental property can be a lot of work (fielding tenant requests, coordinating maintenance and repairs, etc.). Managing multiple rental properties can be more than one person can handle. Hiring a property management company will cost you some profits each month, but it may be worth it. To take some of the stings out of the monthly fees, you can deduct what you pay them during tax time.  Mortgage Interest Unless you purchased your rental property with cash, you likely used a loan to get the deal done. Whether you used a conventional loan, a seller-financed loan, or a government loan, you likely have to pay mortgage interest each month. That adds up over the year, making mortgage interest one of the largest deductions you can take for a rental property. Depreciation As with all physical things, rental property buildings depreciate over time. The IRS decided that, for tax purposes, a residential rental property (one to four units) takes 27.5 years to depreciate completely. A commercial rental property (5 units or more) takes 39 years.  Once you start renting your property, you can begin the depreciation clock, so to speak. Each year, you can claim depreciation of your rental property on your tax return. The amount varies based on how long you have owned the property or, in the first year

Rental Property Depreciation

What is Rental Property Depreciation and How Does it Work?

If you own a rental property, your mind should be constantly geared toward getting the most money possible out of your investment. The monthly cash flow you enjoy from rental income, the increasing value of your property as it appreciates, and the continual reduction of operating expenses are just a few of the ways you can make sure your investment is as profitable as it can be. Tax deductions are also a key way landlords get the most out of their rental property investments. Everything from insurance, repairs, maintenance, marketing, office expenses and more can be deducted to create considerable savings when tax time rolls around. In addition, rental property owners can take a rental property depreciation deduction each year.  What Is Rental Property Depreciation? The accounting term “depreciation” refers to the way an asset loses value over time. If a business owns the asset, depreciation can be used to pay for it over time instead of covering the entire cost the moment they acquire it.  The company can reduce its taxable income when taxes are due by taking a deduction for the purchase price of the asset. Their income statement will reflect this depreciation expense as a debt. The company’s balance sheet will record the accumulated depreciation as a credit. Owners of rental properties can use this strategy to improve balance sheets and tax deduction calculations. However, they have to show the IRS that their property’s useful life can be calculated. So, how do you determine the useful life of a rental property? This might seem difficult given the varying types of rental properties that exist. “How can a 75-year-old property compare to a brand new building?” you may ask. The answer is actually quite simple. The IRS has created guidelines to help you determine the useful life of a rental property, and thus, the depreciation you can claim on your taxes. According to the guidelines, the useful life of a residential property is 27.5 years. For commercial properties, the useful life of a property is 39 years. For rental property purposes, it’s important to note that a 1 to 4 unit building is considered residential property and a 5 or more unit building is considered a commercial property. How To Calculate Depreciation On A Rental Property The rental property depreciation process has four basic steps that include determining the cost basis of your property, adjusting your cost basis, dividing the cost basis by your property’s useful life, and calculating a depreciation schedule. Let’s dive deeper into each of these terms and how to calculate rental property depreciation.  Cost Basis Calculating your cost basis involves determining the monetary value of your rental property as well as some of the closing costs associated with completing the sale when you purchased it. If you purchased your rental property as an investment property, the value is simply what you paid for it. If you converted your primary residence into a rental property, you will need an appraisal to determine the monetary value.  The closing costs that can be added to the value of your rental property to determine the cost basis include: Utility Installation: The costs of installing gas, electric, water and other utilities.  Title Abstract Fees: The fee the title company charges you at the closing for a written description of the rental property you are purchasing. /  Recording Fees: All real estate transactions must be recorded by your local municipality and they charge a fee.  Legal Fees: If you used an attorney to buy your rental property, they likely charged you a fee.  Property Taxes: If you paid for the seller’s real estate taxes when you bought your rental property it can be added to your cost basis.  Back Interest Payments: If you paid for the seller’s back interest payments when you bought your rental property it can be added to your cost basis.  Agent Commissions: If you paid for any real estate agent commissions during the purchase process, you can add them to your cost basis.  Survey: If you had a survey done when you purchased your rental property to determine the property boundary, you can add the cost to your cost basis. Once you add all the applicable costs outlined here to your property’s monetary value, you have determined your cost basis.   Buildings and Land It’s important to note that buildings can depreciate but land cannot. As a result, you need to separate the value of the land you own from the value of the rental building you own to find your cost basis. If you know the fair market value of the building and the land when you bought the rental property, simply use the value of the building for your cost basis. If you don’t know what was the fair market value of each when you bought the property, you can use the amount assessed in the tax records.  As an example, let’s say you purchased a rental property for $300,000 and you find out from the tax assessment that the value of the property is $280,000 ($250,000 for the building and $30,000) for the land.  So, 89 percent ($250,000 divided by $280,000) of your sale cost ($300,000) would be your cost basis for the building. This would come out to $267,000 (89 percent of $300,00). Adjusted Cost Basis Once you have figured out the initial cost basis, you need to adjust it. Depending on a variety of factors, your cost basis may increase or decrease once the necessary adjustments are made. Renovations, repairs, or additions you paid for before renting the property can be added to your cost basis. Legal fees can be added as well.  If you received insurance payments for loss, theft, or damage to the property, those need to be subtracted from your cost basis. If you got paid to grant an easement (letting a neighbor use your property for a driveway to their land, for example), that needs to be subtracted as well. Example Of Rental Property Depreciation Let’s use

LLC For Your Rental Property

Should You Create an LLC For Your Rental Property?

Creating a limited liability company ( LLC) for your rental property business can provide you with many benefits, including saving some money during tax time.

Here, we will cover what an LLC is, why you might need one, how to set it up, what the tax benefits are, and some of the pros and cons of creating an LLC for your rental property. Read on to get informed about LLCs for rental properties so you can decide if creating one is right for you.

The rise of build-to-rent homes and good news for industrial real estate investors.

Build-to-rent single-family homes gaining popularity. Millions of Americans, especially younger generations, are unable or unwilling to purchase their own homes. Reasons may include a lack of downpayment or poor credit, while other potential buyers are waiting for the market to soften and interest rates to go down. Even though these people may not be ready to purchase, they still want the benefits of owning a single-family home: a yard for pets and kids, more privacy, and a sense of community. And that’s where savvy real estate investors are stepping in. Large real estate investment firms like DR Horton, Lenner, and Invitation Homes are getting into the single-family build-to-rent business. This activity includes building single-family homes on empty lots in existing neighborhoods or, in some cases, building entire communities of rental houses with workout facilities, pools, and playgrounds. The investment in new-build, single-family rentals seems to be picking up steam. In 2020, $3 billion was invested in this sector. Those investments rose 10-fold in 2021 to 30 billion dollars, and are anticipated to reach $50 billion in 2022. Even though build-to-rent homes currently represent only 5% of the building market, that’s nearly double its average. With vacancies of single-family rentals low, and rents rising by 13% over last year, the new-build single-family rental market looks like a pretty solid long-term investment strategy.   Despite the work-from-home trend, office space is still in high demand. Finally, there is good news for real estate investors with office space in their portfolios. Numerous indicators point in a more optimistic direction regarding workers returning to the office. New office tours, a leading indicator for new leases, rose 20% from February to March of this year. While these numbers are still lower than pre-pandemic levels, they’re up nearly 10% over March 2021. In addition, CBRE Group, a leader in commercial real estate services, conducted a survey of office-based companies that was even more encouraging.  Of the 185 companies surveyed by CBRE, 36% said that a return to the office was already underway. Another 41% said they anticipate employees returning to the office by the end of 2022. These businesses expect 19% of returning workers to be in the office full-time, with another 61% working a mix of hours from home and in the office. While returning to the office looks imminent for most, many companies are revamping the office experience. Nearly 45% of companies surveyed report that, as opposed to numerous satellite offices spread around the city or state, they are moving to larger, more centralized office space. In addition, they prefer for this space to be located in or near their city’s central business district. This demand for new office space drives rents in the right direction for investors. According to Moody’s, asking and effective rents rose by an average of 2.5% during the first quarter of 2022. This was the largest increase in rents since the beginning of the pandemic.   Private investors are snatching up high-value retail space. Real estate investment trusts (REITs) and institutional investors have long been the major players in the commercial retail sector. This was especially true regarding high-value retail space acquisitions of $50 million or more. In 2021, private investors decided they’d like a larger piece of that pie. Last year, private investors took over 45.5% of the retail market share, investing more than $6.5 billion in high-value retail space. Recent reports show that private lenders will continue to outspend institutional investors to acquire high-value retail investments. According to Real Capital Analytics, 47 high-value retail transactions, defined as worth at least 50 million dollars, were completed in the first quarter of 2022. Private investors closed 32 of those deals, often out-bidding larger corporate investors.  Of particular interest to private investors are grocery-stored-anchored shopping centers, which account for 31% of all retail purchases made by private investors. In an interview with the WSJ, Jim Michalak of Plaza advisors says, “Private investors have migrated to acquiring shopping centers because of better yields, compared with other real estate.”    Hoping to curb inflation, Feds raise rates again. To slow inflation, the Federal Reserve has raised its benchmark interest rates by ¾ of a percentage point. This is the largest one-time rate hike since 1994. The goal of this rate hike is to bring inflation down to 2%, without increasing unemployment above 4%. This increase in rates is sure to affect an already softening real estate market. After the announcement, the 30-year, fixed mortgage rate climbed to 6%. Nearly double the interest rates at the beginning of the year. Real estate buyers and sellers aren’t going to be the only ones hit by this increase. Small businesses that rely on bridge loans or a revolving line of credit to keep afloat will have some difficult decisions to make. Namely, is expanding operations right now worth the increased monthly interest payments? There is a small silver lining concerning this rate hike: savings. Interest rate hikes mean a higher annual percentage yield (APY) on money sitting in savings accounts, certificates of deposit (CDs), and money market accounts. The Federal Reserve is set to discuss interest rates again this July. According to Powell, they expect to raise the rates again, possibly up another 75 basis points.   Good news for industrial real estate investors – vacancies are down and rents are up. The industrial real estate sector has remained relatively strong over the past couple of years and shows no signs of slowing. In the first quarter of 2022, industrial vacancy rates fell to 3.4%. This was the sixth quarter in a row industrial vacancy rates fell. Vacancies remain low, despite the fact that developers built over 90 million square feet of industrial floor space in the first quarter of 2022. There are another 531 million square feet of industrial space currently under construction. None of this new inventory is expected to have much of an impact on vacancy rates.  Based on the high demand for new industrial space, rents keep climbing. In the

How to Find Fix and Flips?

How to Find Fix and Flips?

If you’ve watched any HGTV lately, you’ve probably heard the term fix and flip more than a few times. Watching people purchase, improve, and then sell homes has become a pastime for many Americans. And for good reason: fixing and flipping is a great way for a new real estate investor to grow their cash position quickly. Holding onto an investment like an apartment building or retail location can take a long time to pay off. Fix and flips can generate cash much faster. This lower barrier to entry is attractive to many investors as they start their careers in real estate. But how do you find the right house to flip? And once you’ve found it, how do you purchase it, fix it up, and sell it? What is a Fix and Flip? A fix and flip is the process where an investor buys a property, fixes it up, and then sells it at a profit. This strategy has been popular for many years, especially in years when the housing market offered low property sale prices.  The principle is pretty simple: Find a home that needs some work, do the work that needs to be done to increase the value, and sell it for a much higher price than you bought it for. This is pretty simple to understand, but the execution requires a complete understanding of the process, especially how to find houses that are good fix and flip candidates.  Why Fix and Flip? When done correctly, a fix and flip can result in large financial gains. For example, let’s say you purchase a property for $200,000 and make renovations that cost you $50,000. If your cost to sell (real estate agent commissions and closing costs) is $30,000 and you sell it at a price of $350,000 that’s a profit of $70,000. Not bad for 6 or so months of work.   Beyond the financial gains, many people enjoy the process of fixing and flipping as well. Searching for that “diamond in the rough” and turning it into one of the nicer homes in the neighborhood can be very rewarding.  How to Fix and Flip? Start by creating a fix and flip business plan. This includes analyzing the market where you are looking at property, creating a timeline for the flip, crunching the numbers to create a financial plan, securing financing, and trying to foresee any obstacles that might arise.  Learning how to fix and flip also means learning how NOT to do it. There are quite a few pitfalls to avoid (more on those later) so learning about them upfront will set you up for success. Find the Right Property As you might imagine, the most critical part of the fix and flip process is finding the right property, to begin with. The key is finding a property that needs enough work that you can increase the value but not so much work that you are going to sink too much money into and not make enough profit when you sell.  Beyond the house, the location is just as important, maybe even more. Flipping in a desirable neighborhood is a great way to ensure that a large swath of potential buyers will be interested in the home once you fix it up and list it for sale.  Foreclosures When a homeowner can’t afford to pay their mortgage, sometimes they go into foreclosure. This means the bank puts the home up for auction to try and recoup the money they lent the borrower to buy it.  The auction is offered at your local county courthouse. This is a good place to find potential flip properties because they are often priced well below their market value. Before you attend a courthouse auction, check the local papers for the properties that will be auctioned off. This way, you can research the properties ahead of time. Tax Sales When a homeowner stops paying their property taxes, eventually the county tax collector will sell the property at auction to recuperate what the county is owed in delinquent taxes. These auctions are published online and in local newspapers. Often times houses sold at tax auctions need a lot of work and are good candidates for a fix and flip. MLS Sites like Zillow and take listings from the multiple listings service (MLS) and feed them into their sites for consumers to peruse. The MLS is the real estate agent online system where agents list properties for sale.  For sale by owners (FSBOs) can list their properties on the consumer-facing websites as well. In addition, listing agents and homeowners can promote their listing on these sites up to 30 days before they officially go on the market.  Expired Listings When a home listed for sale sits on the market too long without an accepted offer it can sometimes expire. Searching for these on the MLS can result in great possible fix and flip properties. When a listing expires, sellers often become anxious and more motivated to sell. This means they may accept an offer at a reduced price. If you go this route, make sure you research why the home didn’t sell when it was originally listed. If the house needs to be fixed up to sell, that’s a great flip opportunity. If the lack of selling had to do more with the location, not so much. Leverage Your Network For any success in the real estate industry, networking is critical. The grocery store, golf course, community groups, and any other places people gather are full of potential property buyers and sellers.  For flips, network with the types of professionals likely to have the inside track on a possible deal. This includes attorneys, lenders, and real estate agents, among others.  Public Records Local government records indicate when houses were sold, the price, and any foreclosures or distressed properties that might be available. In addition to foreclosures, these records will have a list of short sales and pre-foreclosures as well.  Location is Everything You

Refinance a Hard Money Loan to a Conventional Loan

How to Refinance a Hard Money Loan to a Conventional Loan?

If you have a hard money loan on your investment property, you are most likely paying a higher interest rate than you planned for in the long term. You might also be facing a looming payoff date with a large balloon payment. One way out of this situation is to sell your property. But what if you want to hold onto it for a longer period of time? You can do this by refinancing your hard money loan into a conventional loan. Hard money loans can help you move quickly when you are purchasing a property. However, conventional loans are usually better for your long-term investment property ownership plans. Let’s dive into what these types of loans entail and how to switch from one to the other. What Are Hard Money Loans? A hard money loan, also known as a private money loan, is issued by private investors as opposed to traditional lending institutions like banks and mortgage companies. Since private lenders don’t have government oversight, they don’t have the same legal restrictions working against them. This allows them to be more creative with the loan terms they offer. Hard money loans offer a few advantages over conventional loans, but there are some drawbacks as well. Hard money loans usually require less upfront money compared to traditional loans. This includes smaller down payments and lower closing costs. This allows income property real estate investors to enjoy higher returns on their investment. Hard money loans don’t require extensive loan approval processes like the underwriting that accompany conventional loans. While conventional loans can take 30 days or more to approve, hard money loans can be done in a matter of days.  The requirements for the borrower are much more lenient for hard money loans compared to conventional loans. Credit score, debt to income ratio, savings, and income requirements are all at the discretion of the private money lender. This can increase the likelihood of approval and also speed up the process.  The terms for a hard money loan usually differ greatly from conventional loans. In most cases, the loan term is on the short end (6 to 12 months). In addition, the mortgage interest rate is usually higher. The speed, lack of borrower requirements, and lack of regulatory oversight allow hard money lenders to charge a higher interest rate than conventional lenders.  What Are Conventional Loans? Conventional loans are mortgages that meet the requirements of government-sponsored organizations called Freddie Mac and Fannie Mae. These companies purchase mortgages from lending companies and then sell them to mortgage investors. Conventional loans are sometimes called conforming loans because they conform to the standards set by Fannie Mae and Freddie Mac.  Conventional loans can vary, but there are a number of minimum requirements they must adhere to. These include minimum down payment amounts, the need for private mortgage insurance in some cases, credit score requirements, and debt-to-income ratio (DTI) requirements. Down Payment Requirements for Conventional Loans Some borrowers can get a conventional loan and only put down 3 percent of the sales price as a down payment. This is usually only for first-time home buyers who purchase a single-family residence. The interest rate is higher for other types of borrowers. If you are not purchasing your first home and your income is more than 80 percent of the median income where you live, you will be required to put 5 percent of the sales price as a down payment. This is the same amount required if you are purchasing a second home, like a vacation house.  If you are buying a multi-family investment property the down payment requirement will usually be higher than loans used to purchase a single-family home. You may have to put down 15 percent. Credit Score Requirements for Conventional Loans Usually, but not always, a credit score of 620 or higher is required for conventional loan approval. A credit check performed by your lender will occur at the beginning of your loan application process. If your score is too low and your loan isn’t approved, you may need to consider a hard money loan where credit score requirements are flexible.  Private Mortgage Insurance (PMI) for Conventional Loans  For conventional loans that have a down payment amount that is under 20 percent of the purchase price, private mortgage insurance (PMI) will be required. This insurance protects the people investing in your mortgage in case you default. The amount varies based on loan type and your borrower’s creditworthiness. PMI is usually rolled into your monthly mortgage payment.  Debt-to-Income Ratio Requirements for Conventional Loans Your debt-to-income ratio is a measurement of how much debt you have compared to how much income you have coming in each month. Add up all of your monthly minimum loan payments (credit cards, car loans, etc.) and divide that by your gross monthly income and you have your DTI. Most conventional loans require a DTI under 50 percent.    Why Switch From a Hard Money Loan to a Conventional Loan? Hard money loans provide funds to purchase properties for borrowers that might not otherwise be approved for a loan. They allow you to close on a loan on a property quickly without the requirements and red tape of a conventional loan. However, hard money loans are rarely a long-term solution. Their term length is usually only 6 to 12 months, so when that timeline is nearing its end you are going to need to pay off the loan or explore other options.  Hard money loans also tend to have higher interest rates than conventional loans, so switching can help you save money each month.  For the first few months (or even a year) of owning an investment property, a hard money loan can work, but eventually, you will need to sell the property or pay off the loan. If you want to keep the property and continue enjoying rental income, but don’t have the funds to buy it outright, switching to a conventional loan is usually your best option.