All Forum Posts by: Harry Campbell

How do I/can I use comps to raise the value of my structure like someone else mentioned? I bought my place as a short sale in 2009 so it's definitely gone up 20-40% since depending on what comps you use. From other posts I've read, seems like land is usually 20% of value but in my case it's closer to 65%.

Harry,

Unfortunately, comps won't help you at all here since comps normally don't separate land/improvements. If you are willing to pay for an appraisal, the appraiser will )if you ask) give you an appraised value for the property and segregate the value of the land from the improvements. Then you can use the appraisal the same way I suggested you use the tax assessor numbers.

Don't be surprised if the appraiser looks at the high cost of vacant land to arrive at the same (or nearly the same) ratio of land/improvements that your assessor used.

Even if you use the numbers you have, 110K in depreciation over the course of the next 27.5 years is sheltering 110K in net rental income from your income taxes. The lower depreciation than my example, might give you a net taxable rental income and you won't be able to use the net passive loss allowance. This is not a bad thing. Just means that it will be easier for you to borrow money to fund your next rental acquisition.

The benefit of rental property investing is not the tax benefits, it is the cash flow your tenants are buying for you. Rejoice when you get to the point when you are paying $1 million in income taxes, because that means you are really hauling in the cash. I will gladly pay income taxes on two or three million of net rental income because that would mean that my tenants are buying up to 100 million of property for me and after my tenants have paid off the loans, I will own all that free and clear.

Hi Dave,

I completely agree with you that it's a good problem to have :) but with depreciation, that's a phantom expense. My marginal tax bracket will be around 40%(fed+state+fica/med) last/this year with an AGI below 100k. I should be doing everything I can to increase depreciation and get as close to a 25k passive loss(assuming most of the loss is depreciation). I pay back depreciation in X number of years at 25% so that's a guaranteed 15 cent on the dollar return plus all that time of tax deferral(a value worth it in itself).

It just seems to me that depreciation calculation is so arbitrary. I have not seen one solid reference/source as to how to calculate it - everyone has a different answer. I'll probably consult with a CPA on this one but don't see why I shouldn't be very aggressive here. Thanks again for the tips, you've been extremely helpful!

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Originally posted by @Andy Collins:

don't confuse your "cost basis" with the value of the property,,in simple terms, what you paid for the structure, plus improvements, are your cost basis,,I don't think its 'market value' plays any part in the cost basis.

I'm not a CPA or accountant, but own rentals (and have a very good CPA) and we have never changed the cost basis because the value went up

Ah ok gotcha, so cost basis does not include the value of the land. What is cost basis used for then other than depreciation calculation?

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Originally posted by @Dave Toelkes:

Originally posted by @Harry Campbell:

That's what one of my friends told me to do actually. My county tax assessment lists the same value that's on Redfin. I bought this place as a short sale in 2009 so I know it's gone up 20-30% or more since then. How would I find the land/building value of a nearby comp though? The are some comps in the 350k range that I would like to use and would also be appropriate.

Here is how you use the tax assessor value. You have to look at the entire assessment -- land and improvements. Take the assessed value of the improvements, divided by the total of land and improvements, then multiply by your purchase price. The result is the initial depreciation basis for your property.

For example, you say you purchased for $280K and the tax assessor value of your land is $110K. If the tax assessor's value of the improvements is $330K, then your initial depreciation basis will be 330/440 x 280 = 210K. If you subtract 210K from your purchase price, then you paid 70K for the land. In this example, your cost basis for the land is $70K and can not be depreciated.

Your purchase price, for depreciation purposes, is allocated $70K to land and $210K to depreciable improvements. Now, you say that you also put another $10K into additional improvements. This is added to the depreciation basis for the dwelling structure, giving you a tax basis of $220K for the dwelling structure (in this example) which you can depreciate over the next 27.5 years. As you make additional capital improvements over time, the cost of each improvement is depreciated on a separate 27.5 year schedule.

In this example, $8000 of net income from your rental will be sheltered by depreciation each full year your property is in service as a rental. If the property cash flows, you may never sell it, and then you will never have to pay taxes on the unrecaptured depreciation. Isn't depreciation great?

To extend this example further, you say you have about $650 per month in net cash flow after you pay the recurring costs each month. That amount is sheltered by your depreciation.

What you have not considered yet, are all the other costs of ownership that take money out of your pocket. You will have advertising costs, legal fees, repairs, maintenance/upkeep. n If your landlord tenant law requires you to pay interest on security deposits, then that may come out of pocket. In one state where I have rental property, there is a rental license that I have to purchase each year. Property management fees may also be in your budget if you don't self-manage. Since your depreciation expense has already been used up to cover your expected net cash flow, these costs will create a tax loss for this property. HOA dues, property taxes, and insurance premiums do go up and those cost increases will add to your paper loss. There may be a time when your property is vacant and there is no rent coming in. The excess depreciation that you did not use to offset income also adds to your tax loss. It is not hard to envision a day when you might have $10K or more in tax losses (in spite of your $8K depreciation expense) to use against the $25K passive activity loss allowance.

Dave, thanks for the detailed reply, took me a few days to digest it :) I wish the numbers you used in your example were for my property but you flipped the land/improvements value. My land is worth 180l, improvements are only worth 100k. Here are the numbers for my property:

Purchase price: 280,000

From my property tax bill, land value =181,355

From my property tax bill, improvements = 100,753.

So (100,753/{181,355+100,753}) * 280,000 = 100,000 (initial depreciation basis).

I did 10k worth of upgrades(new counters, appliances, etc) so I add that to the 100k to get 110,000 as my tax basis for the dwelling structure.

Now if all that math looks right, here's my question. Why is my land value 180k and dwelling only 100k? That just doesn't seem right to me, shouldn't those amounts be skewed the other way?

110/27.5 = 4k a year in depreciation, that won't do much for me. How do I/can I use comps to raise the value of my structure like someone else mentioned? I bought my place as a short sale in 2009 so it's definitely gone up 20-40% since depending on what comps you use. From other posts I've read, seems like land is usually 20% of value but in my case it's closer to 65%.

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Originally posted by @Andrew S.:

I definitely agree with @Brie Schmidt

- don't use redfin for determining land value. County tax assessment is one way, but my understanding is that any reasonable way you come up with in determining the land and building value is acceptable. For example, you could use a nearby comp, if a plot of land happened to sell recently, or you could use the replacement value your insurance company put on your home insurance, etc.

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Thanks for the replies guys. I think I'm going to pick up that book and get to reading. I kind of like this stuff so it's fun for me to figure it all out :)

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Haha ok that makes sense, I spent the past two days figuring out the whole passive loss side of it. Looks like I need to spend some time now looking into to how to calculate depreciation for my property and my repairs/upgrades. And yes, the dishwasher and A/C were put in while the unit was rented out.

Guess I can't complain too much since I'm making money on the property but it would be nice to figure out a way to take advantage of that 25k passive loss exclusion before I start making too much money :)

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So I rented out my condo last July and I'm starting to look over my tax documents in preparation for filing. I've done a lot of research over the past couple days but to my understanding since I make less than 100k AGI, I can deduct up to 25k in passive losses from my W2 income.

That almost sounds too good to be true though since I'll be close to 75k AGI this year putting me in a marginal tax bracket of 25% fed, 9% state, plus fica/med, etc. I understand I'll have to pay back 25% in depreciation recapture when I sell but still 15 cents on the dollar plus all that time of tax deferral sounds pretty awesome - how did I not know about this haha?

I charge my tenant 1900/mo for rent and my expenses are as following: 550/mo for interest, 300/mo for prop taxes/insurance and 400/mo for HOA. I know the basic formula for calculating depreciation, but I haven't looked into it too much yet. I bought the place for 280k, put in about 10k worth of repairs and redfin tells me the land value is 180k(which seems absurdly high). So depreciation would be 290-180 = 110k. 110k/27.5/12 = 333/mo in depreciation.

So that's 1583/mo in expenses/depreciation which obviously wouldn't create a passive loss since my rent is 1900/mo but I spent $3,500 last year on a new A/C and dishwasher. So I had my place rented for 6 months and made $1902($317*6 months) but after the $3,500 in expenses I lost $1,600 on the property.

In my scenario, wouldn't it make sense to get my depreciation as high as possible since this is a phantom expense. My property will still be cash flowing every month but if I can increase my depreciation/month and get as close to 25k in passive losses I'm guaranteeing myself 15 cents on the dollar plus tax deferral.

Another idea I had: I don't want actual expenses but wouldn't it make sense to do a lot of repairs/fixes while I have the place rented out. For example, if I wanted to put in new floors, new carpet, etc wouldn't these all count as expenses and I would get basically a 40% discount off these expenses(until I hit the 25k limit) since it would be reducing my taxes at my marginal rate.

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Originally posted by @Elizabeth Colegrove:

@Harry Campbell

What's the definition of a fair price? If your buying them from him at "market value (my definition of a fair value). Why are you not just buying from the mls?

Make sure you look at the taxes and insurance in Texas. When we were down south there were "cheap" houses but the houses were really old and the taxes/insurance were high!

Have you looked in areas of other areas of CA like the valley? I like CA because the taxes and insurance are much lower than other areas.

That's a good question Elizabeth. I would assume that most of these properties are hard to get with traditional financing. Sellers would rather sell to someone like him with an all cash offer but I'll double check and see what he says.

I haven't really looked in the valley, that's a decent idea though. What taxes/insurance are you referring to?

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Originally posted by @Michael Seeker:

Hey Harry - that sounds like a potentially good set up. There are a couple things that stand out to me right away. First, if I were in your shoes, I would want to have at least one, but probably two other RE agents that are active in that city to represent your interest. Just because your "partner" says the property is worth $100K doesn't mean that's what it would actually sell for. Even if fair market value after rehab work is $100K, you shouldn't have to pay $100K because you're saving your "partner" a lot of trouble and money by not having to sell to a market buyer or another investor.

Another thing to be leery about is the 50% contribution on his part. It sounds to me like he'd be buying a property, rehabbing it and using you to realize the profit. Then, he's giving you a portion of that profit back in return for half ownership. You may run into difficulty structuring these deals. If you're partnering with this person via an LLC, banks may look at the transaction as a refinance and not a purchase, which would limit the ability to extract any "proift" from the original rehab.

Just a few things to consider when working out the details. Best of luck!

Thanks Michael. That is a good idea to enlist an RE agent or two to make sure I'm getting a decent sales price. I'm not sure I understand what you mean that he'd be giving me a portion of the profit back?

Either way, to my understanding, I wouldn't put any money down until he has the property rehabbed(if need be), rented out and ready to sell to me. At that point, I would be able to calc my cash on cash return and if it isn't in what line with what he promised me, I don't think I'd be forced to buy the property. In RE partnerships I've looked at in the past, the principal investor would get 20% before paying out, I think this is kind of like his 20% right?

I would use my credit/downpayment/etc to get financed for a loan and buy directly from him. Then once it's in my name I believe we'd transfer to LLC and split everything 50/50 so I'm not sure the bank would even know about/care what happens after I buy the property right?

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Hi there,

I know there are lots of posts on partnerships but I wanted to get some feedback on a specific RE partnership I'm looking into. I bought my first property in 2009 at 23 and lived in it for 3 years(renting out 2 rooms during most of that time). Now that I've moved an hour north, I rented out that property and am getting a decent monthly return(~$300) which is pretty awesome for a condo in SoCal. So I have a little experience with that side but nothing on the partnership side.

I've been talking to a couple people and I finally found a deal that I think I'm interested in. Here's how it would work: From my end, it would be almost completely passive. My friend who lives in TX goes in and finds properties and buys them with all cash. If need be, he fixes them up and sells to me at a fair price(slight conflict of interest here). I would get the financing and initially pay for everything. Later, we would form an LLC and split everything(downpayment, closing costs, expenses, profits) 50/50. I think he tried it 50/50 from the start, but it was not working well since it's easier to buy the properties all cash(which I think makes sense). So he wouldn't sell the property until he has tenants lined up and property is ready to go. I think this is a good thing since up until this point, I haven't put any money into the deal.

Once the property is ready, he would sell to me(he needs me b/c I have w2 income, he does not) and once the property is sold, he would give me half the downpayment and half the closing costs??(need to check on this but he is a licensed RE agent).

The property would be transferred to an LLC and he would provide prop management(8%), take care of maintenance, etc. Should things go well, it would be completely passive on my side. I like that he is in 50/50 on everything so he has incentive to not only find a good property but also one that will provide a return. I know there's some risk but I am in CA so it's nearly impossible to find a cash flowing property. The properties he's looking at are in the 100-150k range so it's a relatively small investment which I like since I don't want to drop 50k on my first RE investment(which a lot of the past investments I looked at required)

Anyways, I've never done a RE deal like this so just wondering if anyone has any experience or any questions I should ask.

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All Forum Posts by: Harry Campbell

Harry Campbell has started 11 posts and replied 40 times.

Post: How Can I Take Advantage of Depreciation?

Post: How Can I Take Advantage of Depreciation?

Post: How Can I Take Advantage of Depreciation?

Post: How Can I Take Advantage of Depreciation?

Post: How Can I Take Advantage of Depreciation?

Post: How Can I Take Advantage of Depreciation?

Post: How Can I Take Advantage of Depreciation?

Post: First timer: RE partnership

Post: First timer: RE partnership

Post: First timer: RE partnership