All Forum Posts by: Dan Denton

Originally posted by @Justin Tahilramani:

@Babu Ramadoss - that is a great point. On VA IRRRL you have to reset to 30 years from my understanding. My plan is to take the $275 that I am saving in P and I each month and re-invest it into my new loan payments. That will effectively reduce the term of the loan from 30 years to around 23 years. That will give me the largest $$$ savings over the life of the loan.

Please - someone jump in if this approach is somehow flawed. I'm not a mortgage expert by any means

Compare what that extra $275 is saving you with what it could be earning you if you put it towards an investment. You'll likely see that that money is much more valuable working for you. Your investments are probably earning you far more than your mortgage interest is costing you, right? Most real estate investors are not happy unless they are earning WELL over 10% on their money. Borrowing at less than 3% to earn 10%, 20% or more sounds pretty good to me. 

@Russ B. The tax payers should be afforded the opportunity to spend the money they earn themselves.

Their money would still go through the process you described; albeit via those who earned it.

The notion that communities need people who produce very little to spend the money of people who earn it is baffling.

Consider your return on equity. Could you get a better return if that equity was deployed in another investment?

Or maybe you could spread that equity out over multiple properties elsewhere to reduce your risk (vacancy, markets, etc).

I am requesting inside regarding my filing requirement in California.

Background-

I am a California resident on active duty stationed in Washington. I am considered a nonresident for California tax purposes and as long as I am not stationed in California (and never have been), my military income is not taxed in California and no income is withheld. 

I have a rental house in California (purchased 2003). It has always shown a loss. I discussed filing requirements with the Franchise Tax Board (FTB) when I bought the house. Their guidance was that I had no requirement to file as long as it showed a loss. 

In 2013 and 2014 I rented to a tenant that received assistance from the county which produced a 1099 (no withholdings). This spring I received a notice from the FTB asking for a return for those years. I called to inquire about the notice and was asked to send in my orders that stationed me outside of California, my federal 1040 and Schedule E for those years to verify the nonresident status and rental loss. After completing that, I received a call telling me I still had to file and was referred to the CA 540NR (and associated instructions), and FTB publication 1032. There is are instructions to determine filing requirements that read:

• Steps to Determine Filing Requirement
  • If you are a nonresident of California and received income in 2013 with sources in California, go to Step 1. 
  • Step 1: Is your gross income (gross income is computed under California law and consists of all income you received from all sources in the form of money, goods, property, and services, that is not exempt from tax) more than the amount shown in the California Gross Income chart below for your filing status, age, and number of dependents? If yes, you have a filing requirement. If no, go to Step 2.
  • Step 2: Is your adjusted gross income (adjusted gross income is computed under California law and consists of your federal adjusted gross income from all sources, reduced or increased by all California income adjustments) more than the amount shown in the California Adjusted Gross Income chart below for your filing status, age, and number of dependents? If yes, you have a filing requirement. If no, go to Step 3. 
  • Step 3: If your income is less than the amounts on the chart you may still have a filing requirement. See “Requirements for Children with Investment Income” and “Other Situations When You Must File” on this page. Do those instructions apply to you? If yes, you have a filing requirement. If no, go to step 4.
  • Step 4: Are you married/registered domestic partner (RDP) filing separately with separate property income? If no, you do not have a filing requirement. If yes, prepare a tax return. If you owe tax, you have a filing requirement.
• Active duty military personnel, get FTB Pub. 1032, Tax Information for Military Personnel. 

Answers

• Step 1: My gross income is over the filing requirement IF you include the military income, which is exempt from tax. If the military income is excluded I am well under the filing requirement. So I believe the answer to step one is, "no". 
• Step 2: My federal AGI reduced by my military income is simply the rental loss. Even the 1099 amount is less than the filing requirement before any expenses are applied (tax, mortgage interest, insurance, etc..). So my answer that filing requirement is, "no"
• Step 3: Nothing listed in that section applied (omitted for brevity), so my answer there is "no" as well. 
• Step 4: My status was "married filing jointly" in a common law state, so my answer here is no as well. 

The representative acknowledged that despite a loss in California, and no tax due, I still need to file to establish a tax rate based on my world wide income. Military income is explicitly omitted from the computation of this rate. This is effectively a rate on a loss and has no other value. 

The easy answer is to do the return for the years in question. I use a property manager now so the 1099s will continue to be produced and this will continue to be an issue. Preparing a return to establish a tax rate on a loss is a frustrating waste of time and money. So If I can confirm there is no filing requirement, I can bypass the hassle and expense.

My question is, am I misinterpreting the filing requirement? 

Thanks in advance.  

I agree with the others. Even a non owner occupied residential loan should be more competitive than the commercial loan. Have you shopped lenders?

Thank you all for your comments. Your insight and experience has been valuable. @Mike Dymski @Michael Liss @Marc C.@David Thompson

I am curious to know how those with multi-family/apartment investing experience factor rising interest rates into their exit strategies. 

Since most commercial financing is short term (compared to residential) a sale or refinance is never far away. A jump in rates over the next couple years might squeeze cash flow for the current owner (by refinancing into a higher rate) or prospective buyer (making the deal less appealing). 

Considering rates can't get much lower, and will only go up, what are some thoughts on ways to approach deals today with the end in mind?

Thank you in advance for any input. 

Do some home work on the "self directed IRA" like @William Allen mentioned (and it sounds like it was what @Mark Nolan was suggesting). The range of possible investments is far greater than the "traditional" investments (in fact there are only a few things you can't invest in). 

You are not able to benefit directly from the investment. So for example if you were to buy a beach house to rent out, you would not be able to utilize that beach house. The rent earned from rentals has to go back into the IRA, but it grows tax free (with a Roth). You have to go through a "custodian" who will manage the investment for you.

I'm learning about them myself, but they seem to work well for syndications, contributing money to a partner's project, lending money out, etc...

You will have a greater responsibility in the success/failure of the investment than a normal IRA, but that is why the opportunity is better.

The Real Estate Guys Radio show just did a podcast on it on October 16th, 2016. If you're into podcasts, and it sounds like you are, it is worth a listen. 

I am also curious what property managers people recommend or have had success with in Olympia.

If you are playing the game in person (not online) you can create or take advantage of opportunities by interfacing with other players. You can buy or sell deals to each other, borrow/loan to each other, partner up, trade, etc. Be creative like you would in real life.