Getting Ready For Next Tax Season

by M. Anthony Carr

If you've bought or sold a home in the past year, now is the time to go through your paperwork to find the forms, bills, and old checks you'll need in April -- and beyond.

Having sold three properties within a 13-month period, I learned quite a bit about what records the IRS requires to claim certain deductions, gains, losses, etc., versus what records I actually could find. The silver lining in all the cloudiness about taxes and your home is that the IRS has a great Web site, Digital Daily, filled with plenty of useful information. The site is easily navigable and searchable.

To get started, click over to the site and take a look at Publication 552, Recordkeeping For Individuals. Here you can find several important issues to consider.

Under Why Keep Records, the importance of the home as a strategic part of tax planning becomes evident when you notice the IRS advises that one of the reasons to keep records is to: "Keep track of the basis of property. You need to keep records that show the basis of your property. This includes the original cost or other basis of the property and any improvements you made."

With that said, every homeowner should start tracking the basis of his or her home from the day of settlement. Within Publication 523 there is, naturally enough, a section devoted to determining the basis of your home.

On the paper side, put together a folder that includes the records you'll need in the future to determine the basis of your home. (Reminder: The "basis" of your home is the cost of acquiring it, whether you pay cash, use mortgage financing, or a little bit of both. For real estate, the "basis" can include other items, such as recording fees and certain closing costs. For details, review the IRS publications and confer with your tax adviser.)

If you purchased a fixer upper, rehabilitation costs can be added to basis, with certain restrictions. Other additions to the property (such as that new deck) which added to its value may also be added to your basis.

To add these to the basis, however, you must keep good records on how much you spent for each improvement. If you're faced with a big bill for capital gains, these dollar amounts can be added to the basis, which can reduce your tax bill.
When selling property, a single homeowner can exempt $250,000 from the sale of a house from capital gains taxes ($500,000 for married couples) as long as the ownership requirements are met.

For example, a home buyer purchases a fixer-upper for $175,000 and puts $25,000 of rehabilitation into it. The basis is now $200,000. If in 20 years the homeowner owns the house outright and the property sells for $325,000 it would appear the homeowner would surpass the $250,000 exemption threshold. However, after reducing by the $200,000 basis, the gain is only $125,000 and no tax is due.

As you can see, hanging on to those settlement papers can save you big bucks later on when you decide to sell your house.

While you're at the IRS site, take the time to look up other publications and forms that may be important when looking at real estate and tax matters:
Publication 521: Moving Expenses
Publication 527: Residential Rental Property
Publication 530: Tax Information for First-Time Homeowners
Publication 544: Sales and Other Dispositions of Assets
Publication 547: Casualties, Disasters, and Thefts (Business and Nonbusiness)
Publication 551: Basis of Assets
Publication 587: Business Use of Your Home
Publication 936: Home Mortgage Interest Deduction

As with any tax issues, forms can be helpful but it's always in your best interest to consult with a tax professional.

For more information on real estate investing, resources and news, check out my Commonsense Real Estate Blog at http://commonsenserealestate.blogspot.com/.

Are Landlords Always The Bad Guys?

by M. Anthony Carr

Is it better to rent or buy?

Just when I think I've answered this question for the last time and pointed renters to a good "How To Buy A Home" website, I received this letter from a disgruntled high-rise tenant in Arlington, VA, a suburb of Washington, D.C.

I have been a loyal renter for over five years at the same apartment building in the Crystal City area. I have seen annual rental increases go from 2 percent to 3 percent to 5 percent to 8 percent to now 11 percent. Isn't there some kind of limit to this ridiculousness? This just is not fair. Do rules vary from jurisdiction to jurisdiction?

In the world of low- and moderate-income rental property, there are rules. The government steps in with its calculations on what the property owner can charge. The formula includes such factors as the net operating income for the multi-family complex and the median household income of renters to determine fair market values. And in many areas, though not as many as in the past, there are local rent control regulations which often limit year rent increases.

With private-sector housing, all that really matters is the NOI (net operating income). The NOI represents gross rent less uncollected rent, taxes, government fees, insurance, maintenance and repairs. As time passes, landlords face rising taxes, utility bills, repair costs and other expenses, increases which must be covered by pushing up the rent.

Coupled with the NOI is supply and demand. If you live in an area where the supply of rental properties (as well as homes for sale) is dwindling, than it's likely you'll see higher rents than in areas with a surplus of housing units.

A good web site to research your area's rent statutes is Rental Housing Online where you can find information for landlords, tenants, investors and more. The U.S. Department of Housing and Urban Development also has some good resources for renters.

Rental increases are one of the reasons I encourage renters to purchase instead of lease.
With a purchase, you can largely lock your monthly payment with fixed-rate financing for the next several years, considering most homeowners move about every seven years. In addition, if property values rise you can begin to build cash equity in the property that can be used later for other investments or expenses, such as college tuition, purchasing another home, paying off consumer debt, vacation, retirement, etc.

Another benefit to purchasing is that the mortgage interest you pay each month is generally deductible when you calculate income taxes. For instance, let's say you purchase a condo for $150,000 today with only 3 percent down -- that would give you a monthly loan payment of $1,017 -- of which $909 per month would be interest. The first-year tax deduction would come to$10,908. A homeowner in the 28 percent tax bracket, would save $250 per month in taxes -- $3,054 for the year.

Besides all of this with fixed rate financing you cost to borrow will not rise. Unless you refinance, the monthly payment for principal and interest stays at $1,017 year after year. In fairness, though, costs for property taxes and property insurance can rise, but such costs are usually far smaller than monthly financing expenses.

Now I tend to take exception to the writer's other complaint, that "This just is not fair."
Well, fair for who? For an investor, it's very fair that the property owner should be able to increase his cashflow from his or her investment if the market demands it -- just like investors in any other endeavor. I've never heard anyone say that it's not fair that the stock market keeps going up (on the downside, though, there's plenty of griping).

The investor has taken on all the risk of providing housing, the mortgage, interest payments, taxes, maintenance and management of the property -- all of which keep fluctuating, usually up. Trust me, this is not a cheap investment. For this, the owner charges a rent that will hopefully cover all expenses and then provide a profit at the end of the month.

For renters who are tired of rent increases, my advice is to do something about it. Begin paying yourself by saving money from each paycheck for a downpayment; reduce your debt load (which is the largest barrier to homeownership); and research the many, many private and public programs available to help people get into a home of their own.

Just a little research and budgeting can help stop the rental increases year after year and put you onto a home of your own.

For more information on real estate investing, resources and news, check out my Commonsense Real Estate Blog at http://commonsenserealestate.blogspot.com/.

Landlords Have Rights When Tenant Breaks Lease

QUESTION:

I am a real estate investor in the state of Colorado that purchases single family homes for rent. My question concerns my growing frustration over tenants that break their lease. Typically, we only make a lease for one year periods. The issue typically arises when the tenant finds a home and enters into a purchase contract, then sends a notice to me that they intend to break their lease sometimes within 3-4 months of signing the lease! My question actually has more then one part.

• What can I do to discourage this from happening? (The obvious issues are wear and tear and the expense of finding another tenant).
• What if I have negotiated terms with the tenant for a reduced rate in lieu of a multi-year lease and the same circumstances arise?
• Are there legal clauses that can be inserted into the contract lease that we can rely on for compensation? (It seems that collecting money from a tenant who is moving would be difficult to impossible).
• Are renters able to break a legal contract with impunity?
• Who would I contact in my state for guidance?

There are probably others, but you get the idea. Any advice would be greatly appreciated.

K. Bryant
Colorado Springs, CO

ANSWER:

You have issues, man! But, fortunately, you’re covered by the law. A good resource for landlords (investors) is http://www.findlaw.com/, (in particular for use: http://realestate.findlaw.com/). Here you’ll be able to get a handle on your rights and responsibilities as a landlord and what tenants are responsible as well.

First of all, tenants (and landlords) need to understand that the lease isn’t just a fly-by-night document. It’s a contract, enforceable by the courts. Yes, you can take their deposit money (but check your state’s Landlord/Tenant Act for particulars.) But as a landlord, you have given up the right of possession of the unit to the renters and they have agreed to pay you for that assignment. FindLaw.com says:

“The lease does not terminate just because the tenant moves out. The lease is a contract in which the tenant promises to pay the landlord for the right to possess the premises whether the tenant actually lives there or not.”

Now, what you want to do with the contract is up to you. If you consider that you’re talking thousands of dollars per year in rental dollars, then it would be worth a visit to the courthouse to force some of your home-buying tenants to pay up on the way out. In the D.C. market, we take that into account when renters want to become buyers and I’ve seen some sellers pay off the lease as part of the sales contract.

Make sure the tenants understand what they’re signing when you put the Deed of Lease under their noses. They may be willing to walk because you cave and say, “Okay…I guess you can go.” Rather than: “Sure, you can get out of it, as soon as you find a sublease or pay up for the remainder of your ‘legally-binding agreement’ called a lease.” There’s no need to get nasty. Simply point it to them when they sign it that it’s legally-binding and that you expect them to fulfill it.

Does Uncle Sam Owe You Money?

If you ever held an FHA-insured mortgage -- a loan insured through the Federal Housing Administration -- there may be a refund check waiting for you.
Go to the FHA Refund Site where you can search the database by name or by case number. When I last looked, a quick search under CARR revealed two refundees, who only need to call the Department of Housing and Urban Development to claim their checks.

One Mr. Carr in California had a check waiting for him in the amount of $301.54, while another Carr with no address, could pick up $735.07. Fred's refund has been sitting there since September 1983.

If your name is on the list, call 1-800-697-6967 to get your refund. For those who search the list and don't find their names but believe they are owed a refund, the site advises to call this same toll-free number to ask about the account status.

There are two types of refunds for FHA borrowers. You can find out if you qualify for a "premium" refund if you meet the following criteria:

• You acquired your loan AFTER September 1, 1983;
• You paid an upfront mortgage insurance premium (MIP) at closing; AND
• You did not default on your mortgage payments.

Review your settlement papers or check with your mortgage company to determine if you paid the upfront premium.

Some borrowers may be eligible for a "distributive share" of any excess earnings from the Mutual Mortgage Insurance fund if you:

• Originated your loan before September 1, 1983
• Paid on your loan for more than seven years, AND
• HUD processed your FHA insurance termination BEFORE November 5, 1990.
  

There are always exceptions to the rules, and these HUD refunds have their own set of exceptions:

• Assumptions: When an FHA insured loan is assumed, the insurance remains in force (and the seller receives no refund). The owner(s) of the property at the time the insurance is terminated are entitled to any refund.
• FHA to FHA Refinances: When an FHA loan is refinanced, the refund from the old premium may be applied toward the upfront premium required for the new loan.
• Claims: When a mortgage company submits a claim to HUD for insurance benefits, no refund is due the homeowner.
• Statute of Limitations: HUD is not liable for a distributive share that remains unclaimed 6 years from the date notification was first sent to the last known address of the mortgagor.

If you qualify for a refund, here's how the process works:
The mortgage company notifies HUD of the insurance termination.
If you are eligible for a refund, HUD will either request Treasury to issue you a check directly, or will send you an Application for Premium Refund or Distributive Share Payment (form HUD-27050-B) for more information.

Read the application carefully, sign it, have it notarized, and attach proof of ownership.
HUD either requests Treasury to issue a check or requests additional information from you.
Finally, if you figured you were owed a refund, but have not received a check or an application within 45 days after you have paid off your loan, check with your mortgage company to confirm it has sent HUD a request for termination. If the mortgage company confirms it sent the termination information, contact HUD. If after 60 days from the date you mailed your claim form you still have not received a refund or any other documentation from HUD, contact HUD immediately.

HUD can be notified by:
Phone: 800/697-6967;
By mail: P.O. Box 23699, Washington DC 20026- 3699;
Or by

e-mail.

CONSUMER ALERT
As in any program where money is involved, there are some scoundrels who will offer to help people get refunds for a fee. Known as "tracers," these folks will get information from this free list and contact the people, offering to help them get their money for a portion of the proceeds.
"You do not need to hire someone to collect your money. You can obtain your refund directly from HUD for free," says HUD.

How to Hold Off the Tax Man When Selling Investment Properties

"Marks, Michael D." <MIKE.MARKS@domtar.com> wrote:

I'm not an investor, nor am In the business of selling or buying land. I am a mechanic. my problem is this, in 1994 I bought 80 acres of land for $24,000.00, I sold this land about 2 weeks ago for 160,000.00. other than putting the money in a saving account I don' have a clue. can you tell me what my next move should be? what are capital gains taxes, I've been reading on your web site any advice will be highly appreciated.

 

ANSWER:

Well -- hopefully, you talked with an intermediary about this sale FIRST. If you touched the money, you will most likely owe capital gains taxes. If you haven't gone to settlement, then call the settlement company and request an 1031 intermediary company now. T

 

he way this works is that the intermediary charges a fee to the investor/seller to handle the transition of money. At settlement, the proceeds are directed to an account held by the intermediary who then forwards the money to your next purchase (which must be of equal or greater value than the house you're selling). Thus, your next purchase will need to be at least $160,000; however, it doesn't have to be one property. You could buy two rental properties now or a warehouse, etc. It just has to be real estate.

 

If you need money from the transaction, then one technique is to complete the transaction; purchase the next property; then refinance the property immediately with a cash-out refi.

 

On the other hand, if your intention was to take the money and run, then you WILL owe capital gains taxes.

 

• Resources:
  Internal Revenue Services Publication: Selling Your Home - http://www.irs.gov/pub/irs-pdf/p523.pdf
• Like-Kind Exchanges - Real Estate Tax Tips: http://www.irs.gov/businesses/small/industries/article/0,,id=98491,00.html
• Realty Exchange Corporation: http://www.1031.us

For more information on real estate investing, resources and news, check out my Commonsense Real Estate Blog at http://commonsenserealestate.blogspot.com/.