Calling Tax Gurus II

--GQ-- · Mar 30, 2006

Here is the situation. I'm sick of paying more than my share of taxes. I'm looking for loop holes to rid some of the burden off my shoulder. I'm being taxed for tax refunds I recieved two years in a row. Inaddition bank interests, rental properties are all included as taxable income for 2005. I got nothing back this year. NOTHING, ZELCH, ZERO!! Looks like Top Ramen is for dinner for the rest of the year. And Precious will not be getting any college saving this year. My biggest concern is the income from rental properties. I'm thinking about creating a Management Inc. where rents can directely go into the account and not to my name therefore can not be taxed as income. I think it is feasible. Whats your take?

roscoe · Mar 30, 2006

Re: Calling Tax Gurus II

Sounds like you need a tax advisor. You got nothing back? thats fine, It means you are not overpaying on your withholding throughout the year. You have rental income, but no expenses to offset the income? We (family members) never really made any net income off our rents, but we had good properties in decent neighborhoods. The "plus" was that we were able to put a roof over our heads without any cash outlay, and the properties appreciated. Appreciated property equity was sold/traded for a larger more valuable property. If you are buying cheap enough to have a substancial positive cashflow, then you will be paying taxes on the rental income. If you are buying cheap, performing substantial improvements to get the rents up for a year a two, then you need to pay the taxes, or roll the propety over into another, and start again.

SlowlySinking · Mar 30, 2006

Re: Calling Tax Gurus II

QUOTE from Roscoe; "You have rental income, but no expenses to offset the income?" It sounds like you haven't made enough IRS sanctioned "rental management" trips to the properties. These trips and associated expenses are deductible if they are, "necessary and ordinary". Check IRS publication 527 which states,"Travel expenses. You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip was to collect rental income or to manage, conserve, or maintain your rental property." This really helps offset your rental income.

BoatBuoy · Mar 31, 2006

Re: Calling Tax Gurus II

Not gotten anything back!!?? Taxes on interest?? Taxes on rental income?? How preposterous. Poor baby.

Bondo · Mar 31, 2006

Re: Calling Tax Gurus II

Not gotten anything back!!??

As Stated,..... That's a Good Thing........Actually,.... That's a Great Thing....... I figure if the check I write in April is Less than a Grand,.... Combined State & Federal,............. I call it a Great Year............ I had Their Money,+ they Didn't have Mine,......

KRS · Mar 31, 2006

Re: Calling Tax Gurus II

If you set up an entity to own the homes and collect the rents, any income would be taxable to that entity. Roscoe is right, what was your Total Tax (1040 page 2)? Understand that you should be writing off (on the rentals) the property tax, insurance, interest (if any), maintenance, repairs, mileage, stamps for mailing billings, your fees on your checking account for the rentals, any professional services, subscriptions (such as gardening or repair magazines that "help" you with your rentals), depreciation, etc. Remember also that when it is all said and done, in 20 years, you will still have an asset that should have appreciated and has a resale value. As for the taxable interest, go for a tax-free bond, if you don't need access to the funds and it's long-term savings; discuss it with your tax advisor. Some municipalities will sell bonds that are tax free, that can help too. As for paying tax, you get the enjoyment of a police force, lighted streets, road systems, judges and other gov't officials, etc. I'm sure that it's nice to drive a car on a road to work, I know I enjoy it

Try these things and see if they help. Take out your tax return, and look at your schedule E, read each line and it gives you ideas of deductions.

--GQ-- · Mar 31, 2006

Re: Calling Tax Gurus II

Roscoe, I have exspenses relating to the properties such as Landscaping once a week. New locks, paint, carpet everytime tenants move out. Not to mention other exspenses due to normal wear and tear. As a matter of fact, I did a $35,000 remodel on one of the properties. My tax person said any improvement done to the house is non tax deductible since I will get it back when I sell the house. Slowlysinking, how much of a deductible are we talking about? A trip to the properties once a month is about $30 worth of gas. Just to put things in perspective; my lowest rent is nearly twice the mortgage times 4 properties. Not much I can do to ofset it. Which leads to the question at the end of this post. BoatBoy, I am not complaining. Fairness is all I ask. If we're playing the same game, the same rules should be applied. I'm being taxed on income tax refund from the previous year while other people are getting away with it. P.S. can you creat a post on "Name Change". So we can vote to change your S/N. Suggestion; BoatDude or BoatMan. Thanks Bondo, not getting anything is not really good considering I paid 5 digits in taxes last year. What I have is "Phantom Income". Some of it go back as cost to maintain the properties. In this case I'm being taxed on money I don't have. So the question remains. If I set up a Management Company and direct all rental incomes to that account I won't be taxed on it as personal income. Yea or Nay?

--GQ-- · Mar 31, 2006

Re: Calling Tax Gurus II

KRS, are you talking about taxable income from work or the total including the interest rentals?

BoatBuoy · Mar 31, 2006

Re: Calling Tax Gurus II

Originally posted by --GQ--: I did a $35,000 remodel on one of the properties. My tax person said any improvement done to the house is non tax deductible since I will get it back when I sell the house.

If your tax person hasn't uttered the words "depreciation schedule" yet, find another tax person. A $35,000 improvement is a capital improvement and can have a depreciation schedule applied. Essentially, that means you can deduct a portion of the improvement each year until depreciated, depending on the schedule. And the name isn't Boatboy, it's Boatbuoy, in keeping with the theme of these forums.

--GQ-- · Apr 1, 2006

Re: Calling Tax Gurus II

boatbUoy, I've been digging into this "Tax Laws" thing. The "depreciation schedule" you mentioned not gonna happen (More details if you would). At least not in my case. Depreciation doesn't apply to Real Estate properties. Motor vehicles used for business yes. Having experienced the same situation two years prior to this, you would think I'm a pro by now. But I'm still gettin %&^%$* . <-- edit (family forum). Plain and clear; home improvement costs are non tax deductible, but if all or portion of the costd is due to handi-cap accomondation it is tax deductible. There you have it. The rules of the game is more important than the game itself. P.S. For what ever reason, I over looked the U in "boatbUoy". I guess with all the political hair pulling next door, it is easy to make such a mistake. An apology is due.

KRS · Apr 2, 2006

Re: Calling Tax Gurus II

Not total income (that would be an inappropriate question), rather total tax, located about mid-page on the second page of your 1040 (the page you sign). This figure tells what you had to pay, not what was withheld, or how much extra you paid, but the total bill from uncle sam.

SlowlySinking · Apr 2, 2006

Re: Calling Tax Gurus II

GQ, I had no way to know where your rentals were so I see your local driving distance problem, but put it down anyway, evey dollar counts, it's legal and your money. Having rental properties in another state is the way to go. Remember, every rental write off dollar doesn't save you a dollar. "So the question remains." I suggest you check with a GOOD tax person, preferably a CPA. Too many tax preparers take the safe route to avoid problems or just don't know what they're doing.

--GQ-- · Apr 2, 2006

Re: Calling Tax Gurus II

KRS, "Federal Incometax Withheld" $11,213

roscoe · Apr 3, 2006

Re: Calling Tax Gurus II

You need a new tax advisor/cpa. If he can't figure out how to depreciate a capitol improvement, he is worthless. Period. EVERYTHING associated with those properties is deductable. "" Just to put things in perspective; my lowest rent is nearly twice the mortgage times 4 properties. "" And you need the mortgage interest deduction to offset the rental income. One of the first rules to learn about real estate investments, keep them leveraged. That is, use your money to secure a mortgage, the mortgage enables a larger property. Larger property grows in value through appreciation. Acquired appreciation is used to secure a new and larger property. Example: You use $40k to secure a loan and purchase a 200k property. Use the rental income to pay the mortgage, operating expenses, and capitol improvements. 10 years later, the property is worth $300k, so you now have approximately $150k in equity. Now you structure the sale of the property and use the $150k equity to secure a $700k property. 12 years later, you have $1.1m property, with $550k equity. Time to use that equity to buy an even larger property. When you want your money out, you sellout, pay your taxes, and party with the rest. The other way to make money in real estate, is to buy dirt cheap properties that can demand high rents with a large positive cashflow. Here you are gonna have to pay the income tax as you go. I think you need to sell those properties and roll the equity over into a more expensive one.

KRS · Apr 3, 2006

Re: Calling Tax Gurus II

Withheld was $11m+, did you owe a payment or did you get a refund... or was that figure the total tax due? If you paid $11m in tax, with income like that from your rentals, I'd say not tooooooo bad... although a good cpa is worth the money.

--GQ-- · Apr 4, 2006

Re: Calling Tax Gurus II

KRS, 11+ federal deduction from work only. Doesn't include interest or rental incomes which is why I am paying for it now. Roscoe, even with all the interests paid, donations, business exspenses nearly not enough to offset total income. Normally I would get a little over 3k back. But the extra income from rentals and interest; I'm on the verge of paying back. The tax lady was able to shuffle numbers this time around. Here in california, LOCATION is paramount. Because I'm in the business of renting, a bigger house not neccessary yielda higher rent. There's a "rental cieling". Anything above, people would rather buy. After 9/11, a great number of Californians purchased thier homes on flexible low interest rates. We are now beyond the high point. No where to go but down. By summer of this years, the booming bubble will burst according to Real Estate Gurus working in the area. Preapproved with thousands of pennies in my piggy bank waitng to break out, it's BUYING SEASON. No fishing poles needed. Just 20% and a good Fisco Score. I'm not starving so i don't anticipate any selling.

roscoe · Apr 4, 2006

Re: Calling Tax Gurus II

Curios GQ, for a typical rental, what is the rent as a percentage of the value of the property?

--GQ-- · Apr 5, 2006

Re: Calling Tax Gurus II

I don't think I can give you an accurate number since too many variables to be concidered. Home prices vary greately between communities. For example, a 2 bed room house in the lower end of Long beach, Lakewood area range from $300k to $450k. Closer to the beach prices range from $550k to 700k. Rent on the other hand cielings at around $1,300 through out both cites. There maybe a few odd ball properties that may yield higher rent, but other than that $1,300 is pretty much the standard. As you can see it's very difficult to come up with a simple percentage. Here is my situation. I think its ok to post these numbers. My lowest rent is $1,100 on a 450k lot. My highest rent is $1,300 on a $600k lot. Others fall in between.

roscoe · Apr 5, 2006

Re: Calling Tax Gurus II

WOW !! These are single family homes, right? You are getting .2 - .4% for rents. Used to live in the suburbs of Milwaukee. 220k 4 unit apartment building, rents were 1% of value. $550 x 4 units + $2200 a month. Single family homes bring a little less, but not that much less. Some prime properties were bringing 1.2%. Where I live now, out in the sticks, rentals are lower, about .7%. So, the only way you make money on real estate in California is to ride the inflation bubble and sell before it bursts? I think I'd be selling em all if thats all the return. Seems like an awful lot of risk and hassle for the amount of cash that is tied up in the properties. Or sell them and buy an apartment complex. Use the equity to leverage a bigger property. $4-6 million, 40 units @ $1000 a month. ?? That California is a crazy place. Its a completely different world. Good Luck.

KRS · Apr 7, 2006

Re: Calling Tax Gurus II

I agree, that is terrible return on investment. I would do better to invest in today's CD rates 4.25%+ than risk my money in a historically fickle real estate market, just to get well-below 1% rental return. And, if you are paying a mortgage on top of that, it's hard to make any money at it. Wow, I still can't believe it's that low.... why own rentals?

Calling Tax Gurus II

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