All Forum Posts by: Costin I.

Thanks @Michael Plaks, I thought it was too good to be true, hence this post, to verify with experts. BP is a great source of information, and at times, of misinformation.

@David M. Thanks, but my question was from the perspective of having these reserves counted as deductible expenses (since is prudent to keep them available) and lowering the tax footprint, as mentioned by @John Clark.

But since you mentioned how to calculate them, this how we do it - I have a google spreadsheet that tracks all the times, with their considered lifetime expectancy and the date the item was placed in service. It's "live" as it updates behind the scene everytime you look at it, since various items might reach their lifetime expectancy and, based on that, should be replaced (obviously, they can fail much sooner, or last much longer than that).

Using that spreadsheet I know what how much I should save in capital expense for each property every month, per year, which ones are past their lifetime and due for replacement, and a total for all properties (if all was to fail at the same time). Obviously, I'm not keeping that large of amounts, but it can add up pretty quick to large amounts. Even if you keep just 20% of expected amount and it's still a good chunk of money to hold in reserves.

@John Clark @David M. - what would you consider "excessive" (or how would you calculate allowed reserves) and how would you set up such a trust or escrow account?

In a recent post about how to minimize the taxes on rental income it was mentioned that: 

Setting aside reserves is an expense, so long as they are not excessive. When you draw down the reserve you count it as income but offset it with the expense causing the draw. Best to put the money into a trust account (or escrow account) for that purpose. The loss of control justifies the expensing of the reserve on your taxes.

As a landlord, I do have to set aside a quite substantial reserve amount for capital expenditures, and it would be great if there is a way to have those funds counted as a deductible expense.  Is the above statement true, and what is the correct way to set up such a trust account?

@Brian Hunsaker - get the Nolo's "Every Landlord's Tax Deduction Guide" book and learn how to track and take advantage of every deduction available to you.

Even if you self-manage and TurboTax, you should have enough deductions and depreciation to minimize your footprint. That is the main goal - to get enough real cash flow in your pocket, after all expenses, and to offset it with deductions and depreciations down to a zero-taxable amount. And to maintain that balance throughout your REI quest.

If not, 1. Congratulations, you have a "good" problem on your hands and are one of the very few to make it to that point of "my rentals are making too much money". 2. Buy more (financed or not) and do a DIY CSS to accelerate depreciation + bonus depreciation to bring down your taxable amount 3. Since you self-manage, create a shell property management LLC and run your rentals management through it, charge yourself pm fees, thus generating self-income, thus being able to open Solo-401K where you can contribute 56K+/year tax deferred (you will have to pay self-income tax, but might end up better than paying full tax on rental income...check with your CPA as this requires planning).

@Max Bellino - it's good you are doing your due diligence before ponying up the money, but do you have assets to protect? major income and/or cash flow? Concentrate on making first the hundreds of thousands in equity (owned equity, not financed property!) and substantial cash flow worth spending thousands of dollars per year on Anderson services and asset protection structures. You are "New to Real Estate" and overcomplicating things, likely years away from dealing with these questions. Become first "seasoned to real estate" and by that time, you'll have enough experience to judge better the asset protection question.

Here are two more bits of advice: 1. stay away from ChatGPT (it might sound authoritative and knowledgeable, but you need to have enough information/experience to critically judge the validity of its "answers"). 2. Don't ask an insurance salesman if you need to buy insurance.

@Don Konipol, correct me if I'm wrong, but IRA's and 401K money are not 100% protected from, or fully for 1. divorce, 2. individual contributions made directly into the funds (vs. as deducted from your salary during your employment), 3. bankruptcy (like, if you move funds into IRA right before declaring bankruptcy) 4. IRS liens and a couple of other exceptions. Just thought might be good for all to know.

Thank you @Michael Plaks. I will use the county ratio applied to the total acquisition cost ($80k building basis and $20k land basis in my example).

Thanks @Michael Plaks. My inquiry is primarily regarding the cost basis - can you elaborate on 
"the different methods of allocating land for CSS purposes" (I don't know how would you use insurance, cause they don't insure the land, nor Zillow does show land/house allocation).

Just to double-check to make sure I get this correctly:

Let's say I get a property for 100K, well below market value.

The county tax assessment for the property is 250K, with 50K land and 200K improvement (or a 20% / 80% ratio).

Which one do I use as the cost basis for the CSS?
a. do I use 50K (my 100K acquisition cost minus the 50K from the county land assessment), 

b. the county assessed 200K for the home/improvement (after all that's what is used to calculate the property tax and I have to pay them) 

c. or 80K, the county improvement percentage applied to acquisition cost (80% of 100K = 80K) 

My understanding in this matter, there are several options for selecting the home basis for a cost segregation study:

A. Property appraisal (if you have one).

B. Tax Assessment – tax assessment for the property in question shows Land @ $48,920 and Improvement @ $174,300 (or a 22%/78% distribution from the total tax assessed value of $223,220).

Wouldn’t be fair to use the $174,300 valuation as the basis for the CSS? After all, I paid county taxes based on that.

Or, if we were mandated to use the acquisition cost (195K), shouldn’t we apply the same percentage to it (as in 78% of the purchase price)? 

C. Replacement/construction cost estimation as per insurance policy, $236K - can we use this one?

Whenever I tell the insurance the tax-assessed value of a property is X, they tell me is irrelevant, as they need to consider the replacement/construction cost for the policy premium.

D. Comparable sales

E. Engineering study

Can I use the one with the biggest value, and gives me the biggest basis?

CSS experts and Tax experts, what do you say?

@Colleen F. If you don't have true net metering agreements available to you in your location, you'll likely be on the losing end of the deal with a system "designed" to cover 100% of your annual consumption. 

Why? Because while the system might produce the same kWh amount you are consuming on an annual basis, when you are producing it is not going to match when you are consuming it. The excess production gets placed on the grid, benefiting your utility (basically you become a free energy producer for them). You'll get a very low rate for what you produce (excess you put in the grid), while you'll be charged a much higher rate for what you consume (get from the grid, likely at night).

There are other "payback" schemes that offer higher rates, but they are limited (basically efficient only for very small systems), or have charges that offset the higher rate. And presented in very complicated way, hard to bring them to an apple to apple comparisson.

One way to mitigate the lack of a net metering agreement is with a battery system (see Tesla Powerwall) - a very expensive way to become a truly self-sufficient energy producer (basically you become your own power plant), which rarely makes financial sense unless in a region with frequent power loss or in an off-grid scenario.