All Forum Posts by: John K.

Thanks @Steven Hamilton II , great advice!  Are there any creative ways to give mileage tax advantage to the partner without effecting capital accounts or actually paying it out?  With my limited accounting knowledge I think the answer is probably no.

Basically, some partners in our company drive a ton (5000+ miles/year), others do not - but we all agree it's not something we want to pay out or want to have effect capital accounts since everyone has equal contributions - but the partners that drive just want the tax break (and to actually get it).  Last year we did the Schedule A with 2% which gave us nothing.  Is there any way on the K-1 or any other creative (but acceptable) accounting ways to do this?  

Quick question for a tax professional, I've read extensively and started to draft a modification for our partnership operating agreement - but want to verify that this method works.  

Since we use our personal vehicles for doing rental activities, and have racked up quite a bit of mileage - there is a section in Schedule E instructions about unreimbursed partnership expense (https://www.irs.gov/pub/irs-pdf/i1040se.pdf).  Is there any issue with just doing standard mileage deduction ($0.575/mile) as unreimbursed partnership expense?  We have extremely detailed mileage logs (we keep booklets in our car).

I should also note that we do not want to do actual cash reimbursements or have mileage credited towards capital accounts, etc.  We want to do mileage this way if we can.

I'm planning on telling my accountant on doing it this year - but if there is an issue I hate to spend a bunch of money having him research it if not familiar.  

 If you purchased on January 1st of year 1, and Sold December 31st, with your $3000 you would be taxed at a higher rate since it was depreciation (again, IRS tables are used for actual amounts so it would vary depending on months you purchased/sold it).  Then your $13,000 would be a capital gain. Again, consult a CPA. 

Regarding your other question, your interest seems low - you must have done a shorter term mortgage.  Typically with a 30 year (or 25 year), the numbers work out better.  Everyone has their opinion on financing and leverage and it's different in every situation.  

I personally would never buy a property that I was taxed on $336 a month and only pocked $100.  My criteria is targeting net (taxable) income of ~$200-$300, and then cash flow of $700-900/month.  It's all just a big numbers game.

First of all, you probably want to consult an accountant, also the 27.5 is a rough number - but there are actually IRS tables you should reference to get the exact amount.

Depreciation - the initial $25,000.  You need to first figure out what the land value is vs. improvements value.  Look up your property on the local tax records database for assessment values.  In 2012, lets say that when you purchased it it was assessed at $32,000, $5,000 for land, $27,000 for the building.  You would take the $27,000 / $32,000 =   .84375 (ratio of improvements to total value), then .84375 x $25,000 (purchase price) to get a depreciate basis of $21,093.75.  The $21,093.75 would be what you divide by 27.5 to get your annual depreciation amount, ie: $767.04 annually or  $63.92 a month.  You can never depreciate the land, only improvements.

Using your numbers, the $22,273 is just the adjusted basis - so you basically have a gain of the $2,727 since you sold it for greater than purchase price.  

Most people explain that depreciation is an awesome tax benefit. I feel like I got shafted on my taxes for 2012. I was charging $700/ month for rent, paying $500/ month for the loan, and $100/ month for insurance and property taxes. I put $100/ month in my pocket and handed out the other $600, but was taxed on $700/ month income. I got deductions for property taxes, insurance, and interest paid as well as 1/12th of the $909 depreciation. All told, I profited $100/ month, and owed taxes on approximately $400/ month. I paid more in taxes that I made. How is this a good thing for taxes in the short term?

Your numbers (in a nutshell) 
cash flow:
Revenue: $700
Mortgage: ($500)
Insurance & Taxes: ($100)
Cash Flow: $100.00

net income (taxable)
Revenue: $700
Mortgage interest ($400) (I guessed)
Insurance & taxes: ($100)
Depreciation: ($63.92) (I used my rough number)
Taxable Income: $136.08

Using my numbers above, you should have only been taxed on $136ish, not the $400.  

disclaimer: not a CPA, so you probably want to consult with one.  Might be worth re-filing your old tax returns to get the tax benefits.  

@Brie Schmidt - I'm talking about the portion of the taxes that you can not deduct, since when you purchase a new property the portion at closing from the seller they deduct (using the HUD-1 statement as their tax source document), but the new owners are responsible for paying it since it's credited to them and discounted from funds due at closing. So year 1 on the Schedule E (or if business on Form 8825 I believe, don't quote me on tax form numbers) - I'm wondering if that payable can be paid later, but the portion that the new owner has can be paid same calendar year since the property taxes are tax deductible when paid if the business is operating on a cash basis - which most people with rentals do.

I'd suggest consulting your attorney, so any communication you use is "attorney approved" - there are lots of laws surrounding bankruptcy.

I'd suggest creating a spreadsheet, put columns such as:

-Address
-Rent Amount
-Sq Footage
Features:
-Bedrooms
-Bathrooms
-1/2 Bathrooms
-Kitchen Size
-Garage Stalls
-Any other factors that are material in your area (ie: Pool, parking,yard,fence)

Next go look for comparable properties on craigslist, or any large property management companies in your area.  Start plugging in the numbers and fill in your spreadsheet, you can then start to do basic math at the end on certain items like price per square footage, price per bedroom, etc.  Make adjustments based on extra features like garage stalls. 

Finally, there are templates out there - but I'd suggest making your own spreadsheet so you fully understand it.  When you use someones you may not understand the logic they were thinking - but when you use your own thought process you can explain it to others (ie: Bankers).

If it was professionally removed, I would just get a one-pager from the company that removed it to include a in a lease packet with the lead based paint brochure.  There should be no worries on behalf of any tenant if it was professionally removed, especially if it's a well managed rental that is in good shape.

Tax question - Closed on a property mid-year in 2015 (buy and hold), HUD-1 gives the credit for property taxes payable for mid-year tax estimate from seller.

Example:
HUD-1 Property Tax Credit: $3000
Taxes during my ownership last 4.5 months: $2000
Total Property Taxes Due: $5000 

Since the city this unit is located in allows payments split into 4 periods throughout the year, can I pay the $2000 property tax expense in 2015, get the tax deduction, and then since the $3000 is a payable pay it spread out over the remaining payments to clear it out in 2016?  I see no reason to pay the $3000 property tax payable now as a interest free loan to the city/county/schools/state since it can wait and there is no tax benefit.

@Matt Lea I'd suggest avoiding the REIAs.  http://www.madisonreia.com/MembershipInfo.aspx note the $20,991 education package.  Any organization that sells a $20,991 education package... enough said.

For education (buy and hold), your best bet:
1) Understand the numbers.  Lots of people think they do - but if you don't understand accounting in depth go find a small business one day or evenings accounting course.  You need to understand how to read a P&L, Balance Sheet and CF Statement - even if you hire an accountant if you don't understand the numbers you may struggle since your P&L could show $20,000 in profit but your bank account is empty.  You need a firm grasp on depreciation, the methods, building vs. land, etc.  Message me and I can give you some suggestions in the Madison area.
2) Use bigger pockets - use BP to learn the in and out of buy and hold, listen to the all podcasts, etc.  This is the cheapest and best education you will get overall.
3) Best dollars spend on local networking - Apartment Associations meetings/tradeshows/social events.  These are not tire-kickers or newbies - but mostly veterans that have properties, and everyone knows people that have more properties - and many people are looking to sell off properties.  Regular meetings aren't about investing, but more drilled down practical things like property management, bed bugs, section 8, evictions, landlord tenant laws.
4) Invest your "education money" in landlord / tenant law classes - (direct message me for the good ones in WI), they cost from $100-$250, worth every penny.  Don't bother taking classes put on by tenant associations or tenant friendly organizations - you want the good classes that show practical ways to evict and get landlord tasks done.  Not many people in Wisconsin know if you go buy the landlord forms from Office Depot (http://www.officedepot.com/a/products/677983/Adams...) and have to evict many of your forms will be thrown out in court and your lease will be treated as month to month.   Residential rental agreements in Wisconsin have special required provisions that don't show up in many template leases.  The tenants know this and the legal assistance they get does as well ( http://www.tenantresourcecenter.org/tags/domestic_abuse_break_lease ) - so if you aren't prepared as a landlord legally you can easily have a pile of unenforceable documents.

This is a business, not a hobby.  After you understand the accounting and legal parts of it, and some of the practical parts - the rest falls into place.  You then just use BP to ask all your questions that come up.