REI WEALTH MONTHLY

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Tax Tips for 2021 – Learn the Latest Strategies to Save Money

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By Stephanie Mojica

With the New Year, the continuing COVID-19 pandemic, and now political changes in Washington, it’s more important than ever that real estate investors be aware of how all these changes will impact their taxes.

Realty411 interviewed two tax experts to get the scoop on the best ways for investors to prepare for tax time.

Tony Watson
Enrolled Agent, Senior Tax Consultant, and Public Speaker
Robert Hall & Associates, Los Angeles
https://www.roberthalltaxes.com/
Phone: 818-293-2139

SM: Are there any new tax laws that investors need to be aware of?

TW: Lots of new things! Number one would have to be accelerated depreciation. Under the CARES Act, you can drop QIP (qualified improvement property) depreciation improvements from 39 years to 15 years, which essentially gives you double the write off.

SM: What is the best thing investors can do to plan for tax payments, so they’re not caught by surprise?

TW: Meet with their tax preparers in the fourth quarter with year-to-date figures. This way, we can calculate the year’s liability well before the year is even over.

SM: What are some of the common mistakes you see investors make when it comes to tax planning and preparation?

TW: Not knowing what is deductible or where to maximize the tax benefits.

SM: What documentation is essential for investors to have at tax time?

TW: Gross rents received, mortgage interest forms, property tax paid amounts, and a breakdown of all improvements made to properties throughout the year.

SM: Do you have any additional comments or thoughts to share with Realty411 readers?

It is the right of EVERY taxpayer to plan ahead to pay less tax. If a taxpayer fails to plan, they are ultimately planning to fail.

John F. Duston IV, CPA
Tax Accountant
Los Angeles
https://www.linkedin.com/in/johnfduston/
Phone: 310-683-8769

SM: Are there any new tax laws that investors need to be aware of?

Proposition 19 is the big one this year. It is a property tax increase that greatly limits the scope of the parent-child exclusion for increases in property taxes.

SM: What is the best thing investors can do to plan for tax payments, so they’re not caught by surprise?

JD: I set my clients up with quarterly estimates, so they are already paid in. Additionally, if they have a sale, we can figure out what the resulting tax increase would be.

SM: What are some of the common mistakes you see investors make when it comes to tax planning and preparation?

One of the most common mistakes I see is that investors will use their purchase price as their depreciation on their taxes. What they should be doing is using the escrow statement to determine their basis in the property and then allocating this basis between building — which is depreciable for taxes — and land, which is not. While doing this correctly decreases depreciation deductions, claiming the purchase price as 100% deductible is very easy to identify.

SM: What documentation is essential for investors to have at tax time?

JD: The biggest ones are mileage logs, meals log, and a separate bank account to track rent and expenses.

SM: Do you have any additional comments or thoughts to share with Realty411 readers?

JD: When you’re routinely incurring expenses for the management of a few properties, a Supplemental Business Expense Form can be useful to split said expenses between the properties.

Got Taxes?

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Photo by Karolina Grabowska from Pexels

By Bruce Kellogg

Dealing With Taxes

Most people, including investors, need to deal with income taxes. Many prepare their own returns manually or using purchased software programs. Others trundle down to franchise tax preparation offices with their brown bags of pay stubs and receipts. (Hah!) Some have their own CPA or EA (Enrolled Agent) prepare their return for them. Everyone here tries to be frugal, to minimize their tax preparation expense.

What often is missing is “Tax Strategy”, which can vastly overshadow the supposed benefits of filing parsimony. For example, Tony Watson (EA), of Robert Hall & Associates, spoke at a recent investor meeting of 323 attendees regarding the features of the just-enacted CARES Act. One feature will allow certain taxpayers to go back and amend prior returns to receive a tax refund. Will the tax software company, or the franchise tax preparer, or your CPA or EA, contact you to alert you to this taxation tactic that could produce thousand$? Right. Not hardly.

Tony Watson, EA

Tony Watson is an Enrolled Agent who focuses on providing personalized financial guidance and tax preparation services to individuals and businesses. As a federally-licensed tax practitioner, Tony helps his clients make sound financial decisions, and works to ensure all eligible deductions are received when preparing taxes. Should a client need assistance with audits, collections, or appeals, Tony is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service. In addition to his one-on-one client work, Tony Watson is the keynote speaker for Robert Hall & Associates. He speaks on various tax-related topics at over 200 engagements throughout California each year. His dedication to his clients and expertise in the field of taxation led him to win the Glendale Readers’ Choice Award for Best Tax Preparer in 2016, and 2019. Tony loves tax work!

Photo by olia danilevich from Pexels

Hiring a Tax Professional

Investors who view their property ownership as a business often create entities like Limited Liability Corporations (LLC’s), or partnerships or corporations of various kinds. Even with individual ownership there are good reasons to hire a tax professional. Here are several.

  1. Small errors that you make can result in large penalties.
  2. You could miss paying quarterly estimated tax payments, or underpay them, and owe additional tax. If you expect to owe $1,000 or more when you file your return, you should file for your estimated taxes, according to Tony Watson.
  3. If you have employees and practice withholding of employment taxes for federal, state, and local, including Social Security and Medicare, you need to timely file and pay both the employees’ and the business’ payments.
  4. Filing late has penalties.

A personal illustration is the author’s son. Age 36, he owns a consulting business that grosses $210,000. He pays his accountant $3,500, and says he saves four times that compared to filing his own tax return. The savings comes from the tax strategy that the accountant provides. That’s where the high dollar benefits come from, strategy. That’s the big benefit from hiring a tax professional.

Following up

Interested readers can follow up by going to https://www.roberthalltaxes.com/contact/ and setting up a complimentary initial consultation.

Bruce Kellogg

Bruce Kellogg has been a Realtor® and investor for 38 years. He has transacted about 800 properties in 12 California counties. These include 1-4 units, 5+ apartments, offices, mixed-use buildings, land, lots, mobile homes, cabins, and churches.

Mr. Kellogg is a contributor and copy editor for two national real estate wealth-building magazines: Realty411, and REI Wealth Monthly. He is a recipient of an Albert Nelson Marquis Lifetime Achievement Award, listed in Who’s Who in America – 2019.

He is available for consulting with syndication, turnkey, joint-venture, and other property purchasers and note investors nationally, and other consulting assignments. Reach him at brucekellogg10@gmail.com, or (408) 489-0131.

THE IMPORTANCE OF A TITLE SEARCH IN BUYING INVESTMENT PROPERTIES

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By Glenn Mananeng

It’s important that when buying a potential investment property, there are no legal issues that may arise after it is purchased. With that in mind, properties with a clear title is very important. Unique Wealth Education is here to let you know the ins and outs of a title search.

Who does a title search?

Title company – they conduct extensive research on the property using public records and legal documents to identify the owner, liens, and if there are any loans and property taxes due.

Lender – they conduct a title search to verify ownership of the property and any other judgements for or against it before approving a loan that uses the property as collateral.

A buyer can also do a title search on their own, although it’s not usually recommended. Not only is the process time-consuming, you’ll be prone to making some kind of mistake along the way if you don’t have the knowledge needed when it comes to legal matters. However, this should not hinder you from wanting to know the basics of a title search. After all, you want your purchase to have no strings attached as much as possible.

Understanding the basics of a title search

This will minimize the chance of you regretting the property after acquiring it. The process won’t be as complex and tedious as it usually is if you do it the right way.

STEP 1: Chain of Title

The “chain” refers to a sequence of transfers pertaining to the historical ownership of the property. This will show the list of owners from the current one back to the original owner when the property was first built. This can be obtained from your County Clerk’s public records.

Back then, this step took too much time cause you had to check records dating back to almost 100 years in order to complete the search.

The importance of this step will determine the credibility of the property title. If you happen to pass by a “cloud” or any missing part of the chain, this might indicate that an incorrect deed was done during somewhere along the way. This could also mean that the owner changed their name to reacquire the title. In this case, a quiet title suit is done as a security measure.

Quiet title suit – this is done in order to settle any dispute over the ownership of the property. Think of it as reinforcing the weakest part of the chain so it won’t break. The owner goes to court and describes all of the title defects with an attorney. The judge will “fix” these defects with a court order declaring that the claimant (in this case, the current owner) is now the true owner of the property.

STEP 2: Tax Search

The second step of the title search determines whether the property is up to date with its taxes. Any overdue or unpaid taxes can create a lien against the property. Let’s say that you finally purchased the property and you skipped this step, this can lead to the government placing it up for sale again just to cover the unpaid taxes.

Title insurance – this is done to prevent any overlooked late or unpaid taxes on the property and make it as clean as possible. Without this, the financial burden will be transferred to you as the buyer.

STEP 3: Site Inspection

Inspecting involves a lot more than just dropping by and checking if the property is ok. This should be done to make sure everything matches the records of the property such as the lot size or any signs of an easement. When you are granted an easement, this means you have the legal right to use or enter the property of the owner without possessing it. These are typically granted for utility companies and are usually not removable.

STEP 4: Name and Judgement Search

Any judgement or state and federal tax liens against the current or previous owners must be looked up. It’s up to the current owner to settle any of these judgements or state and federal tax liens found while owning the property. Judgement decrees, unpaid taxes, and liens can have claims over the property. In other words, these defects can complicate your ownership even after purchasing it. A title insurance policy is a good preventive measure against these judgements and insures these items are removed at the time the policy is issued typically at the closing of the sale.

STEP 5: Closing the Deal

The final step is the green light for the buyer to begin the process of purchasing the property with a clear conscience knowing that all legal hurdles have been cleared. Once the deal has been closed, the title company issues a title policy.

Title policy – is the title company’s guarantee that protects you as the new owner in the event that any unknown issue affecting the property comes up after it’s purchased.

Following all of these steps will ensure a smooth transaction between you and the seller. Although we mentioned that a third-party entity usually does this on your behalf, it doesn’t hurt to know the legal aspects of this very important process. Contact us by phone: (734) 224-5454 or email: info@uniquewealtheducation.com. We also invite you to our monthly meet-up every first Thursday of each month to share experiences and hopefully do business with fellow real estate investors.

Overcoming The Unknowns of Texas Tax Deed Sales

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By Arnie Abramson

Texas has a thriving economy, population growth and an incredible rental market.  It also has a tax sale structure that is very, very investor friendly, which makes it very attractive to tax lien and tax deed investors alike. But sometimes people don’t profit as much as they could (or may even lose money) because they don’t understand all the nuances of investing in Texas tax deeds.

For example:

Texas is a tax deed state and when you buy a property at the auction it is a judicially caused foreclosure and you get a deed to the property.  You buy the property – not the tax lien. 

The auction bidding starts with the amount owed for taxes plus administrative charges, and the price of the property is bid up from there.  The winning bidder gets the property but the former owner has the right to buy it back, or redeem it.  The redemption period is either 6 months or 2 years, depending on whether or not the property is a homestead, mineral lease or has an agricultural exemption. But, regardless of the duration of the redemption period, it is unlikely that a title policy can be obtained prior to 2 years.

If the previous owner or lien holder does redeem the property, they must pay the investor their costs plus 25% if they redeem in the first year, and 50% if in the second year.  This is a penalty, not an annualized interest rate and it is not prorated, meaning that if they redeem it the month after you buy it you get the entire 25% profit.

Therefore, it is best to buy the properties and rent them out at least until the 2 year period is over.  While this is what we do for our clients, and their returns are almost always in double digits, there is one BIG CATCH!

Until you buy the property and are the owner, you are not allowed to disturb the occupants of the house and it is deemed trespassing if you do (Remember, this is Texas-you do not want to trespass).  What this is means is, THERE ARE SEVERAL UNKNOWNS ABOUT THE PROPERTY UPON WHICH YOU MAY WANT TO BID!

IS IT OCCUPIED OR VACANT?  It is very easy to be fooled when the neighbors park a car in the driveway, cut the lawn, and maintain the outside appearance.  I started buying tax sale properties in Texas in 1992 and I have been fooled by neighbors that do not want to “advertise” a vacant house on their block.

WHAT IS THE CONDITION OF THE INSIDE OF THE HOUSE?  This may be the most important unknown of all.  From the outside, you may not know whether it needs $1,000 worth of work or $30,000, or even more.  Remember, you are advised not to knock on the door and ask to see the inside of the house.

WHAT WILL IT RENT FOR?  MLS, Zillow, etc. are not always accurate.  Remember, you do not know when it was last refreshed, rehabbed or even if everything works.  Many investors do not list their houses for rent on MLS so they are not always so accurate either.

WHAT WILL BE YOUR TOTAL OUT OF POCKET COST?  How would you know if you do not know how much rehab is necessary?

WHAT WILL BE YOUR CASH FLOW AND ROI?  Let’s see, if you do not know how much it will cost you nor what the rent will be, it might be pretty tough to know how much cash flow you will have and what your return will be.

Let me summarize with a question.  WHEN WAS THE LAST TIME YOU BOUGHT A HOUSE WITHOUT YOU OR ANYONE YOU KNOW SEEING THE INSIDE?

The correct answer usually is NEVER!

So, we now know some of the unknowns that can burn you, how are they overcome?

SIMPLE.  GET SOMEONE ELSE TO BUY THEM FIRST SO YOU CAN TURN THOSE UNKNOWNS INTO KNOWNS!

THATS EXACTLY WHAT WE DO FOR YOU !

In fact, that is so simple we call it the TEXAS 2-STEP FOR TAX SALES !

STEP 1.          WE BUY THE PROPERTY

STEP 2.          WE OFFER IT TO OUR INVESTORS AFTER IT HAS BEEN INSPECTED, REHABBED AND RENTED.

Guess what?  You then know that it is occupied, rented, what your total out of pocket cost will be and what your cash flow and return is.

It is completely TURN-KEY!  We do all the work for our ”priority members”.

Other programs offered or to be offered starting in January are:

All day workshop teaching about and how to purchase tax dees in Texas.

Learn and Earn program that pays you while you learn.

Sharevestor for smaller investments to partner with us.

List of services to do what investors want to outsource.

Arnie Abramson

Before becoming a Texas real estate investor in 1991, Arnie Abramson had successful careers as a financial planner and Vice-President of Marketing for a national real estate management company that marketed public Real Estate Limited Partnerships.  He began buying houses at Sheriff Sales in 1992 and has been an investor, landlord, mentor, educator, speaker and property manager for over twenty years.

Arnie is a national speaker on Texas tax deed sales and is the Texas provider for tax deed purchases for several of the national tax lien gurus seen on the Internet.  He is past president of the Texas Real Estate Investors Association (TxREIA), on the Advisory Board of several REIAs  and was a co-founder of the REI EXPO.

His company, Texas Tax Sales Resource Group LLC, HAS THE ONLY COMPLETELY TURN-KEY PROGRAM THAT COVERS THE ENTIRE STATE OF TEXAS.  This includes the research, due diligence, previewing, bidding, inspecting, rehabbing, renting and management of the properties purchased at the Texas tax sales.

Arnie was a speaker at the recent Lone Star Real Estate Expo in Texas and will be participating in future Realty 411 Expos in the near future.

For more information, contact Arnie Abramson or visit the website at www.txtaxsales.com.  His direct email is arnie@txtaxsales.com

Double Your Return With a Tax Efficient 401k Strategy

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By Clint Coons

Most real estate investors are aware they can use their self directed IRA to invest in real estate.  I have quite a few posts on this topic.  If you are familiar with any of these prior posts you probably know I am not a fan of the self directed IRA unless you are dealing with ROTH funds or you plan to buy and hold one property for an extended period of time.  Outside of these two situations I believe the risks of investing through a self directed IRA do not justify the risks given the IRS current interest in these transactions.  My preference is, and will remain, the Qualified Retirement Plan (Profit Sharing Plan or solo 401k) which offers the same, and many more, benefits over the self directed IRA.  Rest assured this is not another post on why you should avoid self directed IRA, you can read these prior posts if you are in doubt, but a strategy wherein you can partner with your QRP to buy real estate.

Consider John who would like to purchase a house for $200,000.  John has a QRP with 150k and personal funds of $100,000.  John could purchase the house in his own name with financing or he could partner with his QRP to buy the house.  To partner with his QRP John and his QRP would need to form a LLC and divide the ownership proportional to the contributions from each member, i.e., if John contributes $70,000 and his QRP contributes $130,000 then the ownership would be divided as follows:  John 35% and his QRP 65%.

If you are familiar with LLCs and their creation, then you should know profits will be split based upon ownership percentages.  If John’s LLC generates $20,000 then John will receive $7,000 and $13,000 will be distributed to his QRP.  From a tax standpoint, John will have taxable income of $7,000 and the QRP will not have any taxable income from its $13,000 in earnings.  Straightforward right. How about the losses?  If you recall, real estate is depreciated over 27.5 or 39 years depending on its characterization.  Depreciation is often referred to as a paper loss because it can be used to offset your real estate income.  In my example, the 200k house (175k allocated to depreciable structures and $25,000 to land) will generate approximately $6,400 per year in depreciation.  John’s will receive $2,240 of the deprecation thereby reducing his income from $7,000 to $4,760 and his QRP will capture the remaining $4,160 depreciation.  This of course does not benefit John because his QRP does not pay tax on its portion of the income.

Wouldn’t it be more advantageous if John could allocate all of the losses to him where then can be utilized.  Of course it would and you can if you use an Anderson Tax Efficient LLC.  An Anderson Tax Efficient LLC will allow John to take full advantage of all the real estate depreciation by specially allocating all the losses to John. The following table shows the tax advantage of using such a structure:

Without QRP

$20,000 net rental income

<$6,400> depreciation

$13,600 taxable to John

<$4,080> taxes

$9,520 net income to John

With QRP W/O an Anderson Tax Efficient LLC

$20,000 net rental income

$7,000 allocated to John

<$2,240> depreciation

$4,760 taxable to John

<$1,428> taxes

$16,332 net income to John and his QRP

With QRP and Anderson Tax Efficient LLC

$20,000 net rental income

$7,000 allocated to John

<$6,400> depreciation

$600 taxable to John

<$180> taxes

$19,820 net income to John and his QRP

9520 x (X)=19820

Partnering with your QRP can produce some desirable tax benefits and opportunities to increase you’re your overall investment portfolio.  However, this is not something you should set up without the assistance of our firm or another qualified advisor experienced in the tax aspects of LLCs and QRPs.  If you would like to explore the creation of this structure, please call my office to schedule a consultation.