Flipping Homes

When the real estate market is hot, savvy investors may look to real estate as a way to make fast cash. They buy a home, do some cosmetic fix up, and then resell the property. In very hot markets, homes may be resold without any fix-up, sometimes even before the ink was dry on the closing documents. What is the impact of flipping a home on your taxes?

Capital gains and losses

If you buy a home for investment and sell it within the year, any gain on the sale is a short-term capital gain. Short-term capital gain offsets any capital losses. Excess short-term capital gain is taxed at rates up to 35%.

If the property doesn’t sell quickly and the sale closes after you owned it for more than 1 year, then any gain is long-term capital gain. It qualifies for favorable tax rates of no more than 15%.

Note: If the home is held for investment and not used as a principal residence, the gain cannot qualify for the home sale exclusion.

If the market dries up and you are forced to sell at a loss, it is a capital loss (long term or short term, depending on how long you owned the property). Alternative: If selling proves to be too difficult at a price you think reasonable, consider renting out the property. This will provide rental income to partially or fully offset the cost of carrying the property until the market is hot again.

Like-kind exchanges

To avoid immediate tax on a sale, it may be possible to arrange a trade for another home held as investment property. This is called a “like-kind” exchange, and it requires close adherence to the tax rules:

• No cash can be received on the deal. If it is, then gain is recognized accordingly.
• The swap must be timely. If one property is not traded directly for another but instead the trade is made through a company that handles such deals, the possible replacement properties must be identified within 45 days of giving up title to the flipped home, and the trade must be completely within 180 days.

Trap: If you keep trading until you find a home you want to live in, then all of the accumulated gain that has gone unreported to date becomes taxable.

The reason: A personal residence (a home lived in by the owner, whether it’s a primary home or vacation property) is not viewed as investment property under the like-kind rules.

Learn more about our Real Estate and Tax Services by visiting our website

Renting out your property might sound like a great idea, and it is. Inviting tenants to live in your home, especially if you are not using it, can be a great way to make some extra money and let someone else pay your mortgage.

The idea of enlisting and paying a property manager may at first seem contradictory to your idea of making money. If you only have one property and minimal outside commitments, then you might not have a problem managing your own property. However, there are some things most new landlords don’t consider before taking the leap.

1. A fair amount of legal knowledge is required.

Unless you come from a real estate background, there is going to be a huge learning curve with respect to housing laws and regulations. There is much more to renting out a property than finding a tenant and collecting rent. From complying with Fair Housing Laws during the tenant selection process, to writing a lease agreement that adequately protects your rights, to handling potential evictions, there are many aspects of landlording where knowing the law comes into play. Not to mention, these laws and regulations are always evolving, so you will need to stay on top of any changes that take place.

2. You are on call for maintenance emergencies 24/7.

Part of the landlord title means being able to put on a tool belt and take care of household issues and damages to your property. It is hard to predict exactly when your tenants might need a handyman to fix a leaky faucet or anything that compromises the livability of the home. If the task is much larger than you can handle, you will be responsible for hiring an outside contractor to take care of it.

3. Screening tenants is not as straightforward as it appears.

Choosing someone to live on your property is one of the most critical decisions you will make as a landlord. A tenant who does not take care of your property, or is slow to pay rent, can become an unnecessary burden and liability. Aside from an applicant’s ability to pay rent, there are a number of things to consider before allowing a person to sign a lease. It is essential to perform background and credit checks on all applicants. While this may sound simple enough, interpreting the results that come back may not be as straightforward as you think. You will also have to deal with the fact that you may spend a large amount of time screening applicants who are not qualified, not to mention the real probability of not finding any leads at all. You will need to be effective and creative with promoting vacancies.

4. Managing an ongoing relationship with your tenants requires more than knowing how to cash rent checks.

Even after putting in the time to find a good tenant, issues may still surface. You have to be prepared to be direct with your tenant about fixing the problem, while also doing what it takes to maintain a good rapport with them. This can be considerably more awkward than it sounds. If you are not firm enough, the tenant might not take the initiative to fix the problem. If you are too firm, you might have trouble keeping any tenants at all. It’s a delicate balance that takes a long time to master.

5. You’ll need to plan on spending a minimum of 10-15 hours per month managing your property.

Chances are you probably have a full-time job and various other obligations. Adding landlord duties can become a burden on your to-do list and create much unneeded stress. Between your personal life and the aforementioned commitments of renting your property (these are just a few landlord duties, the list goes on…), this can often be too much for one person to handle.

Professional property managers have a team that specializes in taking on all of these issues with tired and true methods that are effective and efficient. If managing your property is your main project and focus, it is possible that you can handle it on your own. For most people, though, rental properties are a side investment, and spending 10-15 hours a month keeping a rental property running detracts considerably from the return on that investment. For a small percentage of your monthly rent, you can delegate all the hassles that come with owning a rental property to an expert, and turn a tedious part-time job into a passive stream of income.  (A guest post by Dusty Henry)

Innovative Real Estate Investing, LLC

If you are considering the sale of your home or rental investment property, look no further.

We would be happy to advise you at no charge regarding the current rental market, probable rents for specific properties or types of properties, etc. before you make a purchase commitment. We can also send you a package of information that more fully describes our management services. Our goal for our client-owners at Innovative Real Estate Investing is to convert your rental property from a time-consuming hobby or continuing aggravation to a true investment. If this sounds appealing to you, request more information – click here

The IRS reminds homeowners that they still have time this year to make energy-saving and green-energy home improvements and qualify for either of two home energy credits.

The Nonbusiness Energy Property Credit is aimed at homeowners installing energy efficient improvements such as insulation, new windows and furnaces. The credit is more limited than in the past years, but can still provide substantial tax savings.

• The 2011 credit rate is 10 percent of the cost of qualified energy efficiency improvements. Energy efficiency improvements include adding insulation, energy-efficient exterior windows and doors and certain roofs. The cost of installing these items does not count.

• The credit can also be claimed for the cost of residential energy property, including labor costs for installation. Residential energy property includes certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass fuel.

• The credit has a lifetime limit of $500, of which only $200 may be used for windows. If the total of nonbusiness energy property credits taken in prior years since 2005 is more than $500, the credit may not be claimed in 2011.

• Qualifying improvements must be placed into service to the taxpayer’s principal residence located in the United States before January 1, 2012.

Homeowners going green should also check out the Residential Energy Efficient Property Credit, designed to spur investment in alternative energy equipment.

• The credit equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property.

• No cap exists on the amount of credit available except for fuel cell property.

• Generally, labor costs are included when figuring this credit.

Not all energy-efficient improvements qualify for these tax credits, so homeowners should check the manufacturer’s tax credit certification statement before they purchase. Taxpayers can normally rely on this certification statement which can usually be found on the manufacturer’s website or with the product packaging.

Eligible homeowners can claim both of these credits on Form 5695, Residential Energy Credits when they file their 2011 federal income tax return. Because these are credits and not deductions, they reduce the amount of tax owed dollar for dollar. An eligible taxpayer can claim these credits regardless of whether he or she itemizes deductions on Schedule A.

Here are their tips:

1. Time

On average, if you are planning on living in a home for five years or more, you should consider buying. If not, renting is usually the best option.

2. Income Stability

If you do not have a sustained and stable income, you should look to rent because it is easier to change your living situation depending on how much money you are earning.

4. Price-to-Rent Ratio

The price-to-rent ratio is the real estate price divided by the annual rent. If a house has a price-to-rent ratio of 15, that means the price of the house is 15 times the annual rent that home would earn. The New York Times has an easy-to-use calculator that will help you crunch the numbers.

5. Quality and Inventory

The rental and for sale markets vary in the quality and inventory they offer. It is important to compare the markets and see where you are able to find the place that fits you the best. In a normal market, it is usually easier to find what you are a looking for in the for sale market. However, with the increased number of people looking to rent, many investors are converting single family homes that were once for sale into rentals. The quality and inventory vary greatly by the market you are looking in.

6. Research

Research the overall economic health of the neighborhood. It is recommended that you use websites such as RealtyTrac and Foreclosure.com to see the number of foreclosed and distressed homes in the area. It is likelihood that in communities with more foreclosures that price corrections will be much more severe.

Owning rental property is often a good way to increase your net worth. As the property increases in value, you are collecting rent that usually covers the cost of the mortgage and repairs while allowing you to own the property with little or no out-of-pocket expense. Rental income and expenses are generally reported on Schedule E, Supplemental Income and Loss. If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of rental income.

But what if you have a rental property that has been vacant. Can you still deduct your expenses?

Vacant Rental Property Rule:

If the house was available for rent, and you tried to rent it, then you can claim your expenses on Schedule E even if you had no income from the property.

You should pay attention to the not-for-profit activities because if you carry losses on the rental house for too long the IRS might start to question whether it’s really a for-profit rental.

These days, properties often do take longer to rent out, and sit vacant for longer periods of time.  So be sure you can prove you had the house up for rent. Keep copies of ads (and the payments for those ads) and any other means you used to try to get a tenant. Real estate listings, MLS, etc.
If you did nothing, or only ran free ads that disappear in the noise, IRS will not take you seriously as a rental property owner. Your property will fall under the hobby loss rules, or personal property, rather than rental property.

Therefore, to avoid this classification keep records of your efforts to rent your vacancies.

Real Estate Services:

If you are considering the sale of your home or rental investment property, look no further.

We would be happy to advise you at no charge regarding the current rental market, probable rents for specific properties or types of properties, etc. before you make a purchase commitment. We can also send you a package of information that more fully describes our management services. Our goal for our client-owners at Innovative Real Estate Investing is to convert your rental property from a time-consuming hobby or continuing aggravation to a true investment. If this sounds appealing to you, request more information – click here

If you own property and need leasing/management expertise, we can:

• Secure tenants
• Collect rent and security deposits
• Contract for necessary maintenance
• Keep you updated on current market conditions
• Eliminate stress from your long distance or in-town management responsibilities
• Represent your business interest in the investment
• Provide professional management for your home

Homeowners who made energy-saving improvements may be able to lower their 2010 tax bill.
Form 5695, Residential Energy Credits, is used to calculate and report residential energy credits, which include 1) the non-business energy property credit, and 2) the residential energy efficient property credit.

Non-Business Energy Credit
The non-business energy property credit has a maximum of $1,500 for 2009 and 2010 combined.  Costs could include high-efficiency heating and air conditioning systems, water heaters and stoves burning biomass, along with the cost of labor for their installation.  Energy-efficient windows, skylights, and doors, qualifying insulation, and certain roofs also qualify for the credit, though the cost of their installation does not.
These expenses must be made on or in connection with a dwelling located in the United States, owned and used by the taxpayer as his/her principal residence.
To qualify for the credit, improvements must meet certain energy efficiency requirements.

Residential Energy-Efficient Credit
Under the residential energy-efficient property credit, going green can also include qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Labor costs to install this property are generally included in the calculation of the credit.
Qualifying property must be installed in a dwelling located in the United States and used as the taxpayer’s residence.  It cannot, for example, be used to heat a swimming pool or hot tub.  For fuel cell expenses, the dwelling must be the taxpayer’s principal residence; special dollar limits apply for joint occupancy.
Taxpayers will need to obtain certification for their records that a component meets energy requirements; many Energy Star products qualify, though not all do.  Taxpayers can check Energy Star products at their website http://www.energystar.gov.  At the bottom of the screen, click the “Tax Credits for Energy Efficiency” button.
If the taxpayer cannot use all of the credit because of the tax liability limit (line 26 is less than line 23), the unused portion may be carried over to 2011.

Taking the Credit on the 1040 Return
Because these energy credits report in the non-refundable credits section of the 1040, tax liability has an effect on how much credit may be taken.  Let’s say the taxpayers have a tax liability of $1,000.  They have a foreign tax credit of $200 and an expected energy credit of $1,500.  The foreign tax credit removes $200 from the tax liability, making it $800.  That means the taxpayers will only be allowed an $800 energy credit as they are limited to the amount of available tax liability.

You can avoid bad tenants. Really you can. Spend a little more time doing your screening of prospective tenants. Make it clear, even in a bad market, that you are very selective about who moves into your properties. You will attract a better class of people in the first place.

1)       When it comes to new tenants who want to move in right away, accept only cashier’s checks. Verify with the bank it’s drawn on that it really IS one of their cashier’s checks before turning over the keys.  Sigh, yes, there really are fake cashier’s checks out there – yet another scam.

2)       Be sure the lease lists the names of all the people who will live in the house:

a.       Get their names, Social Security Numbers and Drivers License numbers – and get a fingerprint of the primary person.

b.       Make sure your lease specifies that only the named tenants are allowed to be living there. If anyone else moves into the residence, they must get written permission to add that person to the lease (and have them pay extra). (Define “moves in” – a boyfriend who sleeps there 3 or 4 nights a week – is he living there?)

3)       Do a credit check and a criminal check of the adult tenants. When more than one adult lives there, you often find the person on the lease moving out and someone else staying in. Naturally, your prospective tenant must sign a release.  If they refuse to allow it – do you really want to rent to them?

4)       Don’t hesitate to call their former landlords and current/former employers and speak to them yourself. Sometimes, in a friendly conversation, you will learn the truth about a prospective tenant.  Or you will learn that the landlord or job reference is fake.

a.       Incidentally, for the landlords and employers, look up their phone number in the phone book or online. Do not use the number provided. Be sure that you are calling the correct company and/or apartment complex ; then ask for the name of the person on the application.

b.       Look up the prospective tenant online – enter their name in a search engine and see what you find out about them. See if the online picture related to that name matches the person you met.

5)       Never, never, never, never, ever rent to someone who urgently must move in right away. Immediately. No time to check references. That is a SURE and CERTAIN sign that you will be ripped off.

I know all this sounds like a lot of work, and makes you look very suspicious. But con artists are very charming in the beginning. They will beguile you, or give you heart-wrenching sob stories to gain your trust or sympathy.

Trust me, it’s worth the extra time, and the longer vacancy time, to get a really GOOD tenant. I’ve spent enough years dealing with all kinds of rental properties and training managers.

The last thing I want to leave you with is…if someone doesn’t feel quite right, don’t rent to them.

During the rent to own period, the tenant should be using it as an opportunity to build their credit so he/she is able to exercise their right to purchase the home at the end of the lease term.

Your landlord can’t evict you without terminating the tenancy first. This usually means giving you adequate written notice, in a specified way and form. If you don’t move after proper notice (or reform your ways — for example, by paying the rent or finding a new home for the dog), the landlord can file a lawsuit to evict you. (This type of lawsuit is sometimes called an unlawful detainer, or UD lawsuit.) In order to win, the landlord must prove that you did something wrong that justifies ending the tenancy.

State laws have very detailed requirements for landlords who want to end a tenancy. Each state has its own procedures as to how termination notices and eviction papers must be written and delivered to you (“served”). Landlords must follow state rules and procedures exactly.

Notice of Termination for Cause

Although terminology varies somewhat from state to state, there are basically three types of termination notices that you might receive if you have violated the rental agreement or lease in some way:

• Pay Rent or Quit Notices are typically given to you when you have not paid the rent. These notices give you a few days (three to five in most states) to pay the rent or move out (“quit”).
• Cure or Quit Notices are typically given to you if you violate a term or condition of the lease or rental agreement, such as a no-pets clause or the promise to refrain from making excessive noise. Usually, you have a set amount of time in which to correct, or “cure,” the violation.
• Unconditional Quit Notices are the harshest of all. They order you to vacate the premises with no chance to pay the rent or correct a lease or rental agreement violation. In most states, unconditional quit notices are allowed only if you have:
  • repeatedly violated a significant lease or rental agreement clause
  • been late with the rent on more than one occasion
  • seriously damaged the premises, or
  • engaged in serious illegal activity, such as drug dealing on the premises.

Notice of Termination Without Cause

Even if you have not violated the rental agreement and have not been late paying rent, a landlord can usually ask you to move out at any time (assuming you don’t have a fixed term lease) as long as the landlord gives you a longer notice period.

A 30-Day Notice to Vacate or a 60-Day Notice to Vacate to terminate a tenancy can be used in most states when the landlord does not have a reason to end the tenancy. (The length of the required notice can be slightly longer or shorter in some states.)

Rent Control Exceptions. Many rent control cities, however, go beyond state laws and require the landlord to prove a legally recognized reason for termination. These laws are known as “just cause eviction protection.” (Tenants in only a couple of states — New Jersey and New Hampshire — also enjoy just cause eviction protection.)

Eviction Lawsuit

Following receipt of a termination notice, if you haven’t moved out or fixed the lease or rental agreement violation, the landlord must properly serve you with a summons and complaint for eviction in order to proceed with the eviction.

Possible Defenses

If you do get hauled into court, you may be able to diminish the landlord’s chances of victory. Perhaps you can point to shoddy paperwork in the preparation of the eviction lawsuit. Or maybe the landlord’s illegal behavior, such as not maintaining the rental property in habitable condition, will serve as a good defense, as would a claim that the eviction lawsuit is in retaliation for your insistence on needed, major repairs.

Sheriff’s Escort

Even if the landlord wins the eviction lawsuit, the landlord can’t just move you and your things out onto the sidewalk. Landlords must give the court judgment to a local law enforcement office, along with a fee. A sheriff or marshal gives you a notice that the officer will be back within a few days to escort you off the property. At that point, it’s best to acknowledge defeat and leave on your own steam.