Rental Advice

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DGibb88
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Joined: Wed Aug 07, 2013 2:03 pm

Rental Advice

Post by DGibb88 » Thu Dec 12, 2013 12:40 pm

I am just starting to rent out our previous home. We upgraded to a house about 4 miles from our previous home. The mortgage/interest/pmi/property taxes/insurance on the rental property is $732.18/month. We are renting it for $1,200/month.

What is the best option for the $467.82/month in income? I plan to use a significant portion of it to start an "emergency" fund on the house (we already have our own emergency fund of $15k on a household income of $85k). I realize with depreciation we will not have a huge taxable amount each year, but I would like to reduce that even lower.

My question is would extra payments on the mortgage be considered expenses by the IRS? Our current mortgage is 30 year fixed rate at 3.625%.

rogermexico
Posts: 161
Joined: Tue Jan 08, 2008 5:58 pm

Re: Rental Advice

Post by rogermexico » Thu Dec 12, 2013 12:52 pm

Q#1: Personally I'd just bump up the existing emergency fund. I don't bother with a separate fund (for my 10 rental units).

q#2: Extra principle payments are not deductible. In fact only the interest portion of your total mortgage payment is Sch E deductible (principle portion is not).
There are repairs and other deductions though. I'd highly recommend Every Landlords Deduction Guide/ NOLO press for new landlords (especially if you are planning to do your own taxes). There are special first year landlord expenses for which you qualify.

YttriumNitrate
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Re: Rental Advice

Post by YttriumNitrate » Thu Dec 12, 2013 1:00 pm

DGibb88 wrote:The mortgage/interest/pmi/property taxes/insurance on the rental property is $732.18/month. We are renting it for $1,200/month...What is the best option for the $467.82/month in income?
How far away are you from getting the PMI taken off the rental?

DGibb88
Posts: 36
Joined: Wed Aug 07, 2013 2:03 pm

Re: Rental Advice

Post by DGibb88 » Thu Dec 12, 2013 1:55 pm

I am probably about $17k away from getting rid of PMI. So not very close. At our current rate of savings, I could pay that down fairly quickly though. Maybe within 2-3 years. But at that point it would be a decision of whether to get rid of PMI on the rental or our primary residence.

I didn't realize that principal wasn't deductible. I still need to do more research. I am actually an accountant, though I do not have a CPA and I work in the Not-For-Profit world (so I do not have an extensive tax knowledge base). I will check out the book reference above.

Thanks for the suggestions!

HouseStark
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Location: Minneapolis, MN

Re: Rental Advice

Post by HouseStark » Thu Dec 12, 2013 2:34 pm

DGibb88 wrote:I am probably about $17k away from getting rid of PMI. So not very close. At our current rate of savings, I could pay that down fairly quickly though. Maybe within 2-3 years. But at that point it would be a decision of whether to get rid of PMI on the rental or our primary residence.

I didn't realize that principal wasn't deductible. I still need to do more research. I am actually an accountant, though I do not have a CPA and I work in the Not-For-Profit world (so I do not have an extensive tax knowledge base). I will check out the book reference above.

Thanks for the suggestions!
Payments of principal are not deductible whether they are for a mortgage on a rental property (deducted on Schedule E) or for a mortgage on a personal residence (on Schedule A). Did you not make that distinction when you claimed your mortgage interest deduction on your tax return when you lived there? I hope you did, or else your personal tax return would have been in error.

Twins Fan
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Re: Rental Advice

Post by Twins Fan » Thu Dec 12, 2013 5:21 pm

DGibb88 wrote:I am probably about $17k away from getting rid of PMI. So not very close. At our current rate of savings, I could pay that down fairly quickly though. Maybe within 2-3 years. But at that point it would be a decision of whether to get rid of PMI on the rental or our primary residence.
Yikes... PMI on both places!!

I would get the emergency fund to a level you are comfortable with, and then probably start attacking the mortgage on your primary residence to get rid of that PMI. Someone else is paying your mortgage/interest/PMI/taxes/insurance on the rental and then some, so leave that one alone for now.

What do you pay monthly in PMI on your primary residence now?

denovo
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Re: Rental Advice

Post by denovo » Thu Dec 12, 2013 6:09 pm

jUST AN FYI, I hope you notifed your insurance company (homeowners) when you left the first residence. You need a different policy as a landlord.
"Don't trust everything you read on the Internet"- Abraham Lincoln

tj
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Re: Rental Advice

Post by tj » Thu Dec 12, 2013 6:43 pm

There are special first year landlord expenses for which you qualify.
Do you know these off the top of the head? What if you aren't the landlord (you use a propery manager)

I didn't notice anything obvious on the IRS website when I converted my condo to a rental...

Twins Fan
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Re: Rental Advice

Post by Twins Fan » Thu Dec 12, 2013 6:58 pm

tj wrote:
There are special first year landlord expenses for which you qualify.
Do you know these off the top of the head? What if you aren't the landlord (you use a propery manager)

I didn't notice anything obvious on the IRS website when I converted my condo to a rental...
You're still the landlord. The property manager works for you.

I'm wondering what these first year expenses are also. Hoping I didn't miss out on anyting a few years ago.

denovo
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Re: Rental Advice

Post by denovo » Thu Dec 12, 2013 7:07 pm

Twins Fan wrote:
tj wrote:
There are special first year landlord expenses for which you qualify.
Do you know these off the top of the head? What if you aren't the landlord (you use a propery manager)

I didn't notice anything obvious on the IRS website when I converted my condo to a rental...
You're still the landlord. The property manager works for you.

I'm wondering what these first year expenses are also. Hoping I didn't miss out on anyting a few years ago.
Property management fees are obviously deductible; i would avoid prop managers though.
"Don't trust everything you read on the Internet"- Abraham Lincoln

Twins Fan
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Re: Rental Advice

Post by Twins Fan » Thu Dec 12, 2013 7:32 pm

Yeah, but when you're out of state, like me, prop. managers are great... or can be... mine is anyway. :D

tj
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Re: Rental Advice

Post by tj » Thu Dec 12, 2013 7:47 pm

Twins Fan wrote:
tj wrote:
There are special first year landlord expenses for which you qualify.
Do you know these off the top of the head? What if you aren't the landlord (you use a propery manager)

I didn't notice anything obvious on the IRS website when I converted my condo to a rental...
You're still the landlord. The property manager works for you.

I'm wondering what these first year expenses are also. Hoping I didn't miss out on anyting a few years ago.
I wouldn't consider myself a landlord because I do nothing except receive a check. It's a passive investment rather than a business.

I'm also not sure how the property management fee is "deductible".

Example: X collects $1500 from a tenant and send me a check for $1350. I don't believe that I would report $1500 of income and have $150 of deductible expenses, I just have $1350 of income...at least that would make sense to me...?

Retread
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Location: Southwest Florida

Re: Rental Advice

Post by Retread » Thu Dec 12, 2013 8:04 pm

DGibb88 wrote:I am probably about $17k away from getting rid of PMI. So not very close. At our current rate of savings, I could pay that down fairly quickly though. Maybe within 2-3 years. But at that point it would be a decision of whether to get rid of PMI on the rental or our primary residence.

I didn't realize that principal wasn't deductible. I still need to do more research. I am actually an accountant, though I do not have a CPA and I work in the Not-For-Profit world (so I do not have an extensive tax knowledge base). I will check out the book reference above.

Thanks for the suggestions!
If principal could be deducted you'd be receiving a double deduction when coupled with the depreciation deduction.
Bruce
absit iniuria verbis

Retread
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Location: Southwest Florida

Re: Rental Advice

Post by Retread » Thu Dec 12, 2013 8:06 pm

tj wrote:
Twins Fan wrote:
tj wrote:
There are special first year landlord expenses for which you qualify.
Do you know these off the top of the head? What if you aren't the landlord (you use a propery manager)

I didn't notice anything obvious on the IRS website when I converted my condo to a rental...
You're still the landlord. The property manager works for you.

I'm wondering what these first year expenses are also. Hoping I didn't miss out on anyting a few years ago.
I wouldn't consider myself a landlord because I do nothing except receive a check. It's a passive investment rather than a business.

I'm also not sure how the property management fee is "deductible".



Example: X collects $1500 from a tenant and send me a check for $1350. I don't believe that I would report $1500 of income and have $150 of deductible expenses, I just have $1350 of income...at least that would make sense to me...?
You should report the gross rent and then deduct the fee.
Bruce
absit iniuria verbis

tj
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Re: Rental Advice

Post by tj » Thu Dec 12, 2013 8:13 pm

Retread wrote:
tj wrote:
Twins Fan wrote:
tj wrote:
There are special first year landlord expenses for which you qualify.
Do you know these off the top of the head? What if you aren't the landlord (you use a propery manager)

I didn't notice anything obvious on the IRS website when I converted my condo to a rental...
You're still the landlord. The property manager works for you.

I'm wondering what these first year expenses are also. Hoping I didn't miss out on anyting a few years ago.
I wouldn't consider myself a landlord because I do nothing except receive a check. It's a passive investment rather than a business.

I'm also not sure how the property management fee is "deductible".



Example: X collects $1500 from a tenant and send me a check for $1350. I don't believe that I would report $1500 of income and have $150 of deductible expenses, I just have $1350 of income...at least that would make sense to me...?
You should report the gross rent and then deduct the fee.
Bruce

I understand the logic of this, but is it actually in the iRS rules? I guess that would be better for the purpose of showing a fair market value rent.

Retread
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Location: Southwest Florida

Re: Rental Advice

Post by Retread » Thu Dec 12, 2013 8:18 pm

It's no different than withholding from wages. You receive the net but report the gross. Also, correct accounting entry.
Bruce
absit iniuria verbis

Twins Fan
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Re: Rental Advice

Post by Twins Fan » Thu Dec 12, 2013 8:24 pm

tj wrote:
Twins Fan wrote:
tj wrote:
There are special first year landlord expenses for which you qualify.
Do you know these off the top of the head? What if you aren't the landlord (you use a propery manager)

I didn't notice anything obvious on the IRS website when I converted my condo to a rental...
You're still the landlord. The property manager works for you.

I'm wondering what these first year expenses are also. Hoping I didn't miss out on anyting a few years ago.
I wouldn't consider myself a landlord because I do nothing except receive a check. It's a passive investment rather than a business.

I'm also not sure how the property management fee is "deductible".

Example: X collects $1500 from a tenant and send me a check for $1350. I don't believe that I would report $1500 of income and have $150 of deductible expenses, I just have $1350 of income...at least that would make sense to me...?
Go ahead and see who is stuck with the bill when the roof needs to be replaced. :D Although, you have a condo, so you may not have such apparent landlord type expenses. It is your place... you're the landlord.

Yes, that's exaclty how it works. You report total income, and then mgmt. fees, repairs, expenses, advertising, etc. are subtracted from the total. Remember, the prop. manager works for you. You pay them out of your income. I know it doesn't seem like it since you're not a big corporation, but you are a landlord in the rental business.

tj
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Re: Rental Advice

Post by tj » Thu Dec 12, 2013 8:33 pm

I'm glad I read this thread. That makes perfect sense. I wonder if TurboTax would have prompted it so that I report it correctly---probably not. :)

I might as well throw this out there: On schedule E, would you put HOA fees under "Management fees" or as a separate expense under "Other" ? :)

DGibb88
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Joined: Wed Aug 07, 2013 2:03 pm

Re: Rental Advice

Post by DGibb88 » Fri Dec 13, 2013 8:36 am

Actually, I bought both homes this year so this will be my first time reporting either on my taxes. I was in the first home for 11 months before buying the 2nd, so I am outside of the 6 month window for turning a personal residence into a rental property. I didn't really pan to move so quickly, but there were some extenuating circumstances. We jumped into the first home too quickly, but I am hoping it ends up being a blessing to us since we were able to rent it for quite a bit more than payments. For the person who asked about PMI...yeah, it is definitely not good to have so much PMI and I understand that. I am going to pay down to 78% ASAP on the primary residence. The PMI on it is about $80/month, on the rental property it is about $95/month.

rogermexico
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Re: Rental Advice

Post by rogermexico » Fri Dec 13, 2013 12:50 pm

As for first year deductions these are related basically start-up expenses for getting into landlording. Can't remember the details but allows expensing of tools, office equipment, etc.. stuff that otherwise might have to be depreciated. Probably not as useful if you're using a property manager and won't be buying much additional stuff.

HouseStark
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Location: Minneapolis, MN

Re: Rental Advice

Post by HouseStark » Fri Dec 13, 2013 1:58 pm

tj wrote: I might as well throw this out there: On schedule E, would you put HOA fees under "Management fees" or as a separate expense under "Other" ? :)
I would put HOA fee/dues under "Other". They have to be paid whether a unit is owner-occupied or a rental, so they are not related to the management of the unit as a rental.

Twins Fan
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Re: Rental Advice

Post by Twins Fan » Fri Dec 13, 2013 4:55 pm

DGibb88 wrote:For the person who asked about PMI...yeah, it is definitely not good to have so much PMI and I understand that. I am going to pay down to 78% ASAP on the primary residence. The PMI on it is about $80/month, on the rental property it is about $95/month.
That's actually not all that bad. I have heard horror stories about PMI being HUGE amounts since 2009 (I think that was the cutoff year). That would still be my plan though to get rid of the PMI on the primary residence first. Although not exactly liked on the rental, someone else is paying that for you, so...

I have PMI on my rental also, and that's how I look at it anyway.

sls239
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Re: Rental Advice

Post by sls239 » Fri Dec 13, 2013 6:25 pm

I'd like to recommend that you read Nolo's Landlord Tax Deduction Guide ASAP.

http://www.nolo.com/products/every-land ... -dell.html

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