All Forum Posts by: Matt R.

If I might add to Ebere's comments...
Anything that you pay for BEFORE you start in business (eg books or classes) would be a start up cost. Once your business is started then it's an opperating cost - as long as it's necessary and reasonable.

Caveat : If you don't actually start the business - no right offs on anything.

Example :
In 2009 I spent $10k on Rich Dad's course to learn all about real estate (Ha ! Look, this is just for sake of the example) But I did not do anything, so I'm not in business so no deductions for the course.
In 2010 I bought a house and flippped it for a profit of $5k
OK, now I'm in business and had a profit of $5k
But I also had start up costs of $10k, whiich I can amortize over the next 150 months (I think, I might be wrong on exact number of months)

Actually, I wouldn't hire a CPA to do this. I'd just do my taxes myself.
Through the year put all your expenses into a simple spreadsheet, grouped by category (use the Schedule E categories). Don't forget to keep those receipts.
Then at the end of the tax year, add up each category and fill in Schedule E.

Remember that the loss is a paper loss. So when looking at a loan lenders will probably want to see your income and debt numbers. In this environment, they might even want to see a copy of your tax returns to prove the numbers !
But the key will be whether you can sustain the payments on the loan - so they'll look at the cash coming in each month and what goes out. The depreciation aspect won't affect your prospects for getting a loan.

I recall the question about an LLC coming up in a separate thread. That's always the trickiest question.
Note that none of the above discussion involves an LLC.
For asset protection, landlord and an umbrella policy is probably your best bet. But this is where I weasel out - I'd pay a knowledgable CPA or a lawyer for this.
They will know your specific situation and can make recommendations tailored for you.

You don't need fancy tax software, but I would defintely suggest "Taxes for Landlords" (can't remember the exact title) from NOLO. It was a huge help and definitely worth it.

Here's how it will work for you.
Get a copy of a schedule E tax form so you can follow along.
line 3 : You have all that lovely income from your rental.
lines 5 - 18 : You deduct ALL your business expenses - including buying books to help you run your business. Think of EVERYTHING that is necessary and reasonable for a business operation.
line 20 : This is your depreciation on your property - (the price of the property minus the cost of the land) spread out over 27.5 years.

Hopefully after subtracting all those costs, you have a net negative value. note that this is paper loss due to the large effect of the depreciation. Great, now you put this 'loss' into your main 1040 tax form, reducing your overall net income.

Example
rental income = 6k
business expenses = 4k
sub total = (6 - 4) = 2k
This is the net cash in your pocket at the end of the year

property cost was (100k - land cost of 10k) = 90k
property depreciation is 90/27.5 = 3.3k

2k - 3.3k = net loss of -1.3k

So, instead of paying tax on your income of 25k (ignoring all the other tax calculations) you pay tax on 25k - 1.3k = 23.7k
OK, it's not a lot but it's better than giving the $$ to Uncle Sam.

I think Paul's solution makes sense but really - you find termite damage in the kitchen (for example)...wouldn't you have to assume that the whole house is potentially affected.

(Still not clear on where the buyer's head is)

So, if despite their own report showing termite damage they went ahead and bought the property - what's their complaint ?
Why are they complaining now (6 months later) and not 6 days after the sale ?
I'm just plain confused

Hi Ebere,
yeah, I know what you mean.
But when I went through the exercise, I really do work a lot of hours (I'm not trying to boast - I wish I could work a lot less).

Once I started to actually track how many work hours vs real estate hours it became clear that work was going to be the clear winner by a mile - so there's no way I could ever qualify.

Oh well - no worries. I just have to save up the depreciation for when I sell. That should see me sailing into retirement with a bucketload of tax free $$$

True, I typically put in about 50 hours a week :cry:

Hi Jeff,
the basics are
- separate bank account(s) to show that your business is run separately from your personal financial dealings
- adequate insurance for your rentals; landlord insurance and umbrella coverage

Optional
- LLC for asset protection; if your business entity goes under then your personal assets are separate and not affected.
BUT, all your business dealings need to be transferred to the LLC so that it's the LLC that's doing the business not Jeff.
Having an LLC isn't like a lucky rabbit's foot, merely having it doesn't do anything for you. It has to be actively used for your business.
Different states have different rules but the basics are
- good setup documents (worth getting a reall attorney to do this since skimping on this isn't worth it IMHO). This defines what the LLC does and who does what. Not too complicated and most of it is standard boiler plate but I sleep better knowing that mine was reviewed by my attorney.
- 'regular' meetings with minutes (how else do you prove that the meetings took place ?). This is easy to do.
Have a separate notebook or document of some kind for your minutes. I just have a directory on my computer with individual Word documents for each month following a standard template. Every X days/months/whatever update with what happened and note any decisions made. It doesn't have to be pages and pages of notes, I barely have 5 lines of text for updating what happened per month. Don't worry about having to capture every day to day choice you needed to make, that's not the point. It really just proves that you're treating it as a separate, business entity instead of Jeff's piggy bank. Maybe half an hour every week (at a max) is all you need to do for documentation purposes.
It's unlikely someone's going to go through line by line and argue with every little detail. What it shows is you're running your business in a professional manner.

Of course, if you're lucky enough to be one of the Big Boys, then you'll have much, much more documentation to deal with.

I was sold a bill of goods on this whole 'passive income' thing.

I thought it meant I could be passive - boy, was I suckered 8^)

The Machine

The additional gotcha here is the requirement that your real estate activities is the largest portion of your work hours in a year AND it needs to be at least 750 hours.

I was thinking of getting myself qualified to be a RE professional but...
So, for me with a 'real' job - I'd have to spend 40 hours a week doing real estate activities in addition to my normal job.

Egad !