Keith and Kinsey's Real Estate Update

Real Estate Tax Deductions
February 17, 2013, 8:15 pm
Filed under: Income Property, Real Estate

It’s that time of year again… Tax time. I know, I cringe when I think about it too. Real estate is one of the most tax favored assets in the United States. If you’re a home owner or rental property owner, don’t forget to take advantage of all the tax deductions available to you. The following are real estate related items that are usually deductible.

Home Owner Tax Deductions

  • Mortgage Interest: Interest paid on your mortgage is deductible, if the balance is under $1million ($500,000 if married filing separately).
  • Points or Loan Origination Fees: If you bought a home in 2011 check your closing statement for points or origination fees, these may be deductible.
  • Property Taxes: Real estate taxes excluding itemized charges such as trash collection or improvement assessments are deductible.
  • Mortgage Insurance (PMI): If you pay mortgage insurance premiums and your adjusted gross income is less than $109,000 ($54,500 if married filing separately) these premiums are deductible.
  • Capital Gains Exclusion: If you sold a property that was your primary residence for 2 out of the last 5 years, your profits are excluded from capital gains taxes (up to $500,000 married filing joint).

Rental Property Deductions

In addition to the items above, income properties offer even more deductions.

  • Rental Expenses: There’s a whole slew of things listed on IRS Schedule E that are tax deductable for rental properties. These items are pretty self explanatory and include; advertising, cleaning and maintenance, insurance, legal and other professional fees, management fees, supplies, and utilities.
  • Depreciation: Our tax system allows you to claim depreciation on improved portions of your income properties (the building, not the land). This is generally done on a 27.5 year schedule. Note; you do have to reclaim that depreciation when you sell, unless you do a 1031 exchange.
  • Auto and Travel: Most small rental property owners use their personal vehicles for business purposes and can claim the standard mileage rate as a deduction for their rental related travels.
  • Home Office Expense: If your rental business office is in  your home, you may qualify for the home office deduction. This would allow you to deduct a portion of the expenses related to your home (insurance, repairs, utilities).

I hope this information helps you recognize a few ways you could save on your taxes. However, you should always check with your tax adviser before claiming any of these items. I am not a tax professional, and I am not intending to give tax advice.


Purging Properties – Ditch the Non Performers
January 17, 2013, 11:45 am
Filed under: Income Property | Tags: , , , ,

Real Estate Investors are generally optimistic, hardworking, entrepreneurial people. They have the belief that they can do anything, can overcome any challenge, and never give up. These are all great traits to have. Although, there’s one problem with this mindset… Sometimes you don’t realize when a deal has gone bad.

I recommend reviewing the profit and loss of your rental properties monthly or at least once per quarter. If you are in the flip business I hope you’re paying weekly (maybe even daily) attention to your project budget. Last year, after looking at our big picture, we sold our two worst performing rentals. It was a very freeing feeling to ditch the two worst performing properties as they were creating the most stress. It also helped us turn our focus back in the right direction.

The first rental was my former personal residence. It was never intended to be a rental. It just happened to turn into a rental after I met my wife. This property was slightly better than breaking even (the rent covered the mortgage, insurance, and taxes). Although, there wasn’t much left over after paying PITI (principle, interest, taxes, and insurance). This isn’t how I like properties to perform, though. This property was fairly high maintenance. In the long run after factoring in maintenance and rental turn over vacancy, it would have been negative cash flow. So, we sold it. You can read more about this property in our Better Than Renting post.

The second property was our Indianapolis rental house. By the numbers (rent vs payment) it should have been the best performing property we had. However, this one was a nightmare. You can read more about this one in our posts Lesson Learned – No More Long Distance Landlording and Why I Fired My Property Manager. Too make a long story short though… My property manager was horrible, my tenants were horrible. I couldn’t keep a good handle on the place from a distance, it was a daily stress, and I held on too long trying to make it work. So, that one went bye bye too.

My point is if you have properties that aren’t working out the way you would expect, analyze the situation, and seriously think about if they are worth keeping. Look at it from a sunk cost analysis perspective. Ask yourself, if I didn’t already own this property, would I buy it again for what it’s currently worth. If the answer is no, sell it. Consider that getting rid of the non-performers can free up resources, time, energy, and focus for other things that are more important. Sometimes you have to ditch that “I can do it” mentality, swallow your pride, and realize it didn’t work out the way you thought it would. You’ll feel the relief by doing so! You will also regain your focus.

The Fiscal Cliff – How Does It Affect Real Estate?
November 28, 2012, 6:43 pm
Filed under: Income Property, Money, Real Estate | Tags: , , , , ,

There’s been a lot of discussion in the news about the fiscal cliff lately. In case you aren’t already familiar, the fiscal cliff is a combination of several laws which would result in tax increases and spending cuts starting in 2013. So, how does any of this relate to real estate?

The Mortgage Debt Relief Act of 2007 is one of the tax breaks that is set to expire at the end of the year. Generally, if debt is forgiven or canceled, this can be considered income to the borrower because it’s money they borrowed that they no longer have to pay back. So the borrower could be taxed on the amount of debt they were forgiven. This act excludes forgiven debt related to foreclosure, short sale, or loan modification of a primary residence from being taxable.

Even though the NAR (National Association of Realtors) is fighting hard to extend this act, I’m kind of torn on my opinion. Part of me says, we absolutely need to prevent people who have lost their home from being kicked while they are down and taxed on their debt forgiveness. Although, the other part of me says without this act we would have fewer people strategically foreclosing (walking away for convenience or part of their financial plan), which I don’t agree with. Maybe this act could be revised to provide incentives for short sales instead of foreclosures? This may prevent some strategic defaults while still helping those that are really trying to work with the banks.

Capital Gains Taxes are also set to increase from 15 to 20% on January 1st. I’m somewhat indifferent on this topic too. As real estate investors, lower capital gains taxes are beneficial for my wife and I in the long run. Although, I also understand the need for the government collect more than they spend, and I don’t think this is such a terrible place to squeeze more money out of tax payers. This will however, raise expenses for investors who are helping to revitalizing distressed properties, which could have a negative impact on a recovering market. So, I’d prefer to delay the increase a year or two or slowly raise it back to 20% over a period of a couple years.

The Mortgage Interest Tax Deduction is also a discussion item. Currently mortgage interest is a tax deductible item. Although, law makers are threatening to trim deductions allowed related to mortgage interest. Again the NAR is fighting to keep this tax deduction around. I think we all realize that this tax deduction is an incentive for home ownership and taking it away could slow (if not severely damage) the recovery of real estate markets. Although, I don’t think it would have much market affect if they set a lower maximum allowable deduction or eliminated the deduction for second homes. I’m probably the only Realtor and real estate investor that you will ever hear say this…  but I wouldn’t mind if this tax deduction was reduced over time and eventually disappeared. Why? because I don’t think our government should dole out rewards for having debt. Debt and the willingness of the American people to overspend is what got us in this mess to begin with.

What are your thoughts on the fiscal cliff? Do you agree or disagree with my thoughts?


Benefits of A Buyers Agent
November 9, 2012, 11:30 am
Filed under: Income Property, Real Estate | Tags: , , , ,

A couple weeks ago, I wrote about the home buying process and picking a real estate agent. Although, I never really explained why you should have a buyer’s agent. There are tons of benefits to using a buyers agent! They will:

  1. Talk through your financials and recommend a mortgage lender who will work well for your needs.
  2. Analyze your wants and needs to help determine your requirements for a home and location.
  3. Guide you to homes that fit your criteria. Ask your agent to set up a search that will notify you every time there is a new listing or price change meeting your criteria.
  4. Educate you about the current market and help you make a wise decision on which home to choose.
  5. Look at comparable sales to determine a reasonable purchase price on the home you choose.
  6. Walk you through an offer contract and help you determine all the terms required in the contract to meet your needs.
  7. Negotiate on your behalf. Real estate professionals are trained negotiators and can often get a better price then a consumer can on their own.
  8. Keep you on track to meet all the dates and requirements outlined in your contract.
  9. Recommend inspectors and testers who will provide you knowledgeable input on the condition of your future home.
  10. Coordinate with the lender, inspector, title company, and listing agent to get everything ready for closing.
  11. Solve any problems that may arise related to the contract, financing, inspection, title, etc.
  12. Get the deal closed so you can start moving into your new home!

….and best of all…

In most cases you don’t have to pay a penny for the buyer’s agent, they’ll split the commission paid by the seller with the listing agent. For more info on this see How Does a Buyers Agent Get Paid. Don’t believe the lie that you get a better deal without a buyer agent.

Prepare Your Home For Winter
November 3, 2012, 8:09 am
Filed under: Income Property, Real Estate | Tags: , , ,

Winter is fast approaching; don’t forget to prep your home for the winter. Here are tips to get your home ready for the cold season.

Test your furnace – Before you absolutely need it, test and inspect your furnace to make sure everything is functioning properly. While you’re at it, change your furnace filter too.  It’s a good idea to have your furnace professionally inspected ever couple of years too.

Inspect chimney – Take a look at your chimney to make sure it is clear and free of debris. Animals seem to think a chimney is a great spot to build a nest over the summer. If you have a fireplace make sure the damper opens appropriately. It’s also a good idea to have chimney’s professionally cleaned every 1-5 years (depending how often your fire place is used).

Check your hose bibs (outside faucets) – Disconnect any outside hoses to prevent trapping water. If you have valves inside your house to shut off your exterior faucets, shut off those valves and open your hose bib to let any trapped water out.

Clean gutters – Make sure your gutters are clear of leaves and other debris. Clogged gutters can prevent melting snow from draining which can lead to ice dams.

Seal up leaks – Check all of your window and doors for air leaks, and add weather stripping if needed.

Storm windows – If you don’t have double pain windows, adding storm windows or a window shrink kit can make a big difference in your heating bill.

Insulate – Check your attic to see how much insulation you have. The recommendation these days is 16”-22” or an R-value of 49

Reverse your fan – Change your ceiling fans to blow upward. This will help circulate the warm air that rises up to the ceiling back down toward the floor and not give you a windchill affect.

Switch your return vents – If you have high and low return vents in each room, block off the high vents and open the low vents. This will also help the warm air that naturally rises drift back down low to return to the furnace.

Check smoke and carbon monoxide detectors – A bad furnace can often be the source of carbon monoxide. So test all your smoke and carbon monoxide detectors. If you don’t have detectors, get some!

Vacant Homes – If you’re winterizing a vacant property, you have a lot more work that needs to be done. The main thing is protecting pipes from freezing. Drain all the water out of your pipes, water heater, fixtures, well tanks, etc. Also, it’s a good idea to pour RV antifreeze in all your fixtures and traps.

Investment Property Financing – Latest Requirements

This is a Guest Post by Ryan Huemmer, the lender we use on our own rental properties.

As an owner of investment properties, I get no greater joy than helping someone purchase their first investment property.  I’ve worked with AnchorBank for almost 8 years and the world of investment property financing has changed dramatically.  With larger down payment requirements, higher interest rates and fees, limits to the number of properties financed and minimum cash reserve requirements.  It’s best before you contact Keith & Kinsey about buying an investment property, you need to consult with a mortgage lender…….hopefully me.  Ryan Huemmer, 221-6533 or 

Fannie Mae only finances 1-4 unit investment properties.  The down payment requirement varies based on the number of units.  When buying a 2-4 unit property a 25% down payment is required.  In addition to standard closing cost Fannie Mae has its own fees.  The Investment Fee is 1.75% (fee times the loan amount) and the Multiple-Unit Fee is 1.00% so you would have to pay a 2.75% fee to buy the property.  That fee can also be converted to an interest rate increase instead.  (1.00% equals a 0.25% rate increase)  The maximum fee conversion allowed is 2.00%.  So you can get market rate with a 2.75% fee or market rate plus 0.50% with a 0.75% fee.

A borrower who owns 1 to 4 financed properties has a 2 month PITI reserve is required for each property.  A borrower with five to ten financed properties will require 6 month reserve for each property and the required down payment is 30%.  Fannie Mae will not finance more than 10 properties and properties in LLC’s.

There is really so much to know about buying an investment property so I was only able to touch on the key guidelines.  With record low mortgage rates, no interest being paid on deposit accounts, extreme volatility in the stock market and home prices down; why not invest your money in real estate.  Whether it is for additional tax deductions, monthly cash flow or just to have someone else grow your equity position in a property……..I believe in investment properties.

Added note, by Keith… These requirements that Ryan mentions are for non-owner occupied investment properties. Financing for an owner occupied rental property can be much easier. So, if you are a first time home buyer considering income property ownership, think about buying an multi-unit property and living in one unit. I started with living in one half of a duplex that I purchased, and it worked out great.

100th Post – Help Us Give!
September 3, 2012, 8:05 am
Filed under: Business, Income Property, Money, Real Estate | Tags: , , , , ,

This is our 100th post! In the short time we’ve been blogging, we’ve seen our readership numbers drastically increasing and we are approaching our 10,000th view. Thank you to all of our readers for paying attention to what we have to express. We hope you are enjoying our information on real estate, finances, investments, and some personal tidbits

To celebrate our 100th post and an amazingly successful year thus far, we wanted to do something more for charity and to spread the word of what we do. So, for the next week, in addition to our usual charity program, we will donate $1 to charity for any new Facebook page “like”, Twitter follower, or blog subscriber (up to $1000). The best part is you get to help us choose the charity! Go to our Facebook page to vote which charity you like the best. If you find our Blog, Twitter feed, Facebook page, or website useful information, please share it with your friends and family to help us donate more! Thanks for your support!

Our top 5 posts of all time have been:

1) Marriage and Money – Dave Ramsey vs. Suze Orman

2) Homeowner (and Rental Owner) Tax Deductions

3) Build Wealth and Passive Income With Rental Properties

4) Our Home Build Series

5) My Debate With Suze Orman

…and one of my favorites that I thought was way underrated is Entrepreneurial Ideas For the Unemployed