All Forum Posts by: Harry Campbell

Someone asked me a question on my site about changing depreciation for past years. I did some research but could not find a solid answer.

Let's say you buy a property for 200k and use 100k for bldg and 100k for land. 5 years later you realize that you should/could have taken 150k for bldg. What are your options?

To me, it looks like you could amend 3 years worth of returns(and lose out on 2 years of under depreciation but still have to pay it back at 25% when you sell) or file a 3115 with the IRS and take it all at once and use the new depreciation value of 150k going forward?

I know you have to take depreciation but what if you took the wrong amount(not as much as you could have) and never fixed it. I always see that you have to pay depreciation recapture tax whether you claim it or not but how would the IRS know?

@Brian Daly Gotcha, wasn't aware of these types of companies but they may be something I need to look into. I guess it'd be tough to figure out how good a company is b/c there aren't benchmarks to compare performance to(is there?). For ex, with stock investing, I can look and see that 80% of passive funds underperform actively managed funds due to fees/expenses over long periods of time. But I can't do the same thing really with RE. I try to invest based off math and risk instead of what other people tell me is a good idea :)

@Darrin Carey I don't have the $$ to have a team start working for me but this may be something I consider in the future. I actually like building businesses(working on my online empire right now :) ) and seems like hiring a prop manager and wholesaler/agent would be a good starting point. Are there any books/resources(preferably free or inexpensive) that you'd recommend for researching more about these types of setups?

@Michael Lauther Appreciate your responses. And I think there lies the Catch 22 of investing in general. The people who are willing to research/understand their investments are generally the ones who see it's easier to do it themselves or take a more active role.

The ones looking to just drop their money in something they don't understand(whether stocks, re, etc) are the ones who shouldn't be doing that and may ultimately get burned.

I'd disagree that you need to attend to every investment. I come from an investment background and there are extremely cheap (ER's in .2% or less range) target date retirement funds that you can invest your money in and you will outperform a majority of financial advisors. That is a fact supported by countless studies.

I know exactly what to recommend to newbie investors when it comes to stocks/bonds - keep it simple, contribute a lot and keep costs down. Not sure why everyone is talking about risk - I'm not looking for riskless investments.

But when it comes to RE, I'm struggling to figure out what to recommend. There are people like me who are willing to get their hands dirty a bit but how can most people with a day job who are relatively young put their money into investment property?

I saw someone mention building a team but you have to remember people like me and my friends do not do RE full time. We don't want to build a team(whatever this even means) in another state - that's almost like another full time job.

@Brian Daly I've looked a little bit into REITS and things like that. Might need to do some more research into what you're describing. But I don't think the returns are nearly as high as other RE investments that most people on this forum are doing.

@Darrin Carey That's a great response. I run a personal finance blog in addition to writing for several others including real estate sites(plus my W2 day job) so selfishly I also wanted to know the answer to this question.

For whatever reason, a lot of my close friends are doing very well in their careers(all non RE professions) and many of them come to me for advice on what to invest in(we're all around 27-32). I've seen first hand how RE is a great investment/source of income so I always recommend investing in RE in addition to saving for retirement(stocks/bonds), building up an EF, etc

I think your response is pretty on point as far as trust issues/doing due diligence etc. I have been sort of looking for an RE deal that fits for a couple years and that's exactly what I've done. I think you give some good advice, especially the first deal or two you do with someone(or first deal or two in general). And for us out in SoCal, I couldn't have said it any better. We have to trade comfort for cash flow. If we want to be more comfortable we're not going to make as much money and vice versa.

But more specifically for someone in our situation, with money to invest, do you think it's a good idea to invest $25-$50k or more with someone you've never met? I guess this concept seems a little foreign to me but I'm open to it.

I mean people aren't really embarrassed to say the met on match.com anymore so why should RE investing be any different?

So I get questions from people from time to time asking me about how they can invest in real estate? I live in CA and so do most of my friends that ask me about this and I'm not sure what to tell them.

I bought a condo in San Diego at the bottom of the market, no cost refi'd twice and now rent it out for $300/month cash on cash return. There's nothing like that available where my friends and I live now in SoCal - LA, OC, SD, SF, etc so should I tell them to look for SFH's or 2-4 unit properties in other states?

Personally, I'm looking at investment opportunities in other states but I know a lot of my friends who are doctors, lawyers, etc don't have the time/interest to do that. They are basically looking for someone to give their money to and make money off real estate?

Now I know these people exist but how do you find someone like that that's good at what they do and also trustworthy? I'm sure there are plenty of people willing to take 50-100k off your hands :)

I think most of my friends also want to invest in something relatively local since they aren't big time RE dealers or anything like that. They're probably more comfortable being able to drive by the property once in a while knowing that they own a piece of it even if they don't have to do any work for it.

So what would you tell someone like this?

So for all the personal property I converted(oven, microwave, etc) the basis for depreciation is the lesser of fair market value or adjusted basis. Fair market value is straightforward but what is the adjusted basis of my personal property?

My mistake, looks like A/C's are over 27.5 years although they clearly won't last that long. It looks like you can deduct the un-recovered basis(in a single year) once it's out of service(breaks or is replaced) though.

@Dave T Yea, I'm using TT Home & Bus so you're right but I still want to understand exactly what it's doing. I also replaced my dishwasher in December 2013 and it is giving me 50% bonus depreciation plus regular straight line depreciation using mid quarter( I believe this is bc 40% of my assets were placed into service in the 4th quarter as Justin alluded to).

I read about re-setting my tax basis to the lower of my purchase price OR fair market value but I don't see why I would need an appraisal for this. Can't I just go on Zillow and use their estimate or show a graph of home prices in the area since I bought my property in 2009. I purchased for 280k and it's probably worth a minimum of 300-350k now.

As for the cost segregation for personal property, I'd have to disagree. I thought that too at first but I guess it depends on how you look at it. Figuring out the value of these things is so arbitrary you might as well just make a reasonable guess and be done with it. You could spend a ton of time going to Goodwill, saving craigslist ads, etc and then the IRS comes in and says that those numbers are all way too high and you'll have to pay back the taxes right?

I'm not sure what the penalty is but for something this arbitrary but I'm willing to take the small risk. I just listed out all my personal property made reasonable valuations and entered it into my spreadsheet. That took about 5 minutes and will save me a few hundred bucks a year. What do you think?

@Rolanda Eldridge I would love to hire a guy like @Steven Hamilton II but not sure I can afford him :) I only have one property. I did meet with a few CPA's this year but the only one I found that was very knowledgeable in RE charged 1k for a return plus more for tax planning. I met with two other highly rated ones that were about half that but I knew more about RE taxes than they did :(

Here's an article I wrote about why I do my taxes myself: http://yourpfpro.com/average-cpa-isnt-worth-money/

Just as an FYI to anyone who is wondering. NOLO's Landlord Tax Deduction book was awesome! I used the chapter on calculating depreciation to come up with my own land/bldg value. I found a free calculator online at http://www.building-cost.net/ that based it's estimates off the National Building Cost Manual by Craftsman Book Company(recommended in NOLO too).

I ended up with $213k building value and 67k land value which was a lot better than the 70k/210k my tax documents showed. If I get contacted by the IRS about this number I'll at least have something to show them how I arrived at this figure. I think it's smart to be aggressive on the depreciation number since according to NOLO: the penalty may be imposed only if you overstated the value of your depreciable property by at least 200% over the correct amount and the overstatement resulted in an underpayment of tax of at least $5,000.

So basically there is a lot of wiggle room and the IRS knows that.

Hmm everyone busy doing taxes or what? haha

Thanks to this forum I found NOLO's Landlord deduction guide and it has been a god send. It's answered pretty much every question I had and the examples are super helpful too. Great recommendation.

Anyways, I'm just finishing up my taxes and I have a few questions. I converted my primary residence to rental prop in 7/2013(rented on 8/1/13) and I want to use segmented depreciation to accelerate the depreciation of my personal property.

1. First, on a 280k condo does it seem reasonable to take 5k in personal property deductions(washer/dryer, appliances, carpet, etc) for segmentation?

2. I'm also a little confused still about the depreciation method. In the book, it talked about 150% method, 200% method, etc. When can these be used and this is separate from bonus depreciation right? For ex, I know that I have to depreciate my bldg value on a 27.5 year schedule, no way to accelerate that. But what about for personal prop that I claim as segmented depreciation. Obviously I want to frontload these deductions as much as possible right so I should use 200% method? Or do I have to use straight line depreciation on segmented stuff?

3. Similar to 2, I had to replace the A/C last year(October) and that cost me 3k. I believe I can take 50% bonus depreciation but then is my only option to do straight line depreciation(mid quarter convention right?) over 5 years? Or can I do something accelerated here?

I'm still learning all the depreciation terminology so feel free to correct any of it. The depreciation method is straight line, 150%, etc right? The convention is mid quarter, half year, etc?