All Forum Posts by: Charles D. Smith

At the Innovative CPA Group, we have created a Free Multi-Property Cash Flow Excel Tool for Download. This tool is great for those looking to keep track of their property cash flows, but do not want to spend the money on a cash flow software. It helps property owners and managers keep track of their monthly income and expenses giving them a better insight into their overall gross income! Keep track of up to 12 different property finances, as well as your current overview of all your properties for the entire year!

1. In today’s environment where prices are high and achieving targeted returns has become increasingly more difficult, every dollar saved is important. Investors should put a heavy emphasis on understanding all operating and capital expenses. This can best be done by requesting historical income and expense statements along with itemized (general ledger) detail showing every line-item expense the property has incurred for the time period requested. This type of examination may bring to light certain issues that an investor may not have been aware of. For example, the historical expenses may show lots of roof repair expenses, while it was thought that the roofs were in great shape. Or maybe you are buying an apartment building and see no charges for pest control only to find out it has not been done and needs to be budgeted going forward. Always ask for details on any capitalized expenses. Often there can be expensive repairs that aren’t easily detected in the income and expenses statements because they are being capitalized. This can make property operating expenses appear to be less than they really are.

1. Whether you’re buying an apartment building, shopping center, or commercial office building, it’s wise to make sure you know what is in your leases. Details can get missed in a seller or broker’s offering materials. Through a review of the tenant leases, you may learn that certain tenants have lease termination options Maybe it was your impression that any HVAC repairs were handled by the tenant only to learn that the Landlord is in fact responsible. On the flip side, you may learn that tenants should be reimbursed for more expenses than the current landlord is collecting which when corrected could allow a new owner to instantly increase the property’s net operating income and value.

While many CRE investors rightfully rely on their attorneys for reviewing Titles, it's never a bad idea for investors to lay their eyes on any Title Policy exceptions to ensure there is nothing in the title that could negatively affect their future plans for the property. For example, your attorney may not be aware that you have aspirations of someday converting the office property you are buying into a retail shopping center. Therefore, they may not be too concerned when they come across certain use restrictions which would restrict anyone from ever operating a grocery store or fitness center on the property. At a minimum, investors should talk through all exceptions with their attorneys to ensure they understand what is in there.

Quote from @Alyssa Magyar:

Thank you Charles! What line would this go on Schedule 1? 8i: Activity not engaged in for profit income? 

 Yes that would be appropriate!

Hi Alyssa!

Below market rentals are reported on Schedule 1 which then carries to Line 8 of the 1040. Unfortunately, Real estate taxes and Mortgage interest are only allowed on Schedule A as itemized deduction as you have mentioned. Since income is not related to rental of personal property for a profit, no other rental expenses are available as a deduction.

It is important for a landlord to keep organized and concise records of all income and expenses related to their rental properties. Good records will help the landlord monitor the progress of their rental property, prepare financial statements, identify the source of receipts, track deductible expenses, prepare their tax returns, and support items reported on tax returns. Landlords must be able to substantiate certain elements of expenses to deduct them. Generally, the landlord must have documentary evidence, such as receipts, canceled checks or bills, to support their expenses. Keep track of any travel expenses that are incurred for the rental property.

@David R. Normally residential rental property is depreciated using the straight line method over 27.5 years. While a cost segregation study may be beneficial, if it can be done cost effectively , I agree with the other opinions expressed here that it has to be done before the 2021 tax return is filed.

And since a cost seg study could accelerate the depreciation in the first year, it would be in your best interest to make sure the owners in this property would be able to take advantage of these losses on their personal tax return. As rental losses are generally subject to the passive loss limitations for tax purposes. One of the exceptions to this rule would be if the owner is a real estate professional.

Hi Connor!
There are many CPAs and tax advisors on BiggerPockets that have an extensive knowledge of REI. Try messaging some and get a better understanding of if they are a good fit for you! Most CPAs will be able to service all 50 States so no matter where you are you can find someone in the forums who could help. 

If a landlord is receiving income from the rental of a dwelling unit, there are rental expenses they may deduct on their tax return. These deductions apply to mortgage interest, property taxes, operating expenses, depreciation, and/or repairs.
Landlords can deduct the ordinary and necessary expenses for managing, conserving, and maintaining their rental property. Ordinary expenses are those that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, repairs, property management, utilities, and insurance.