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Recent Reading: Income Taxes Explained in 100 Pages or Less

5 May

Note: this post uses referral links, but I was not asked to read this book. You don’t have to use our links, but we’re very grateful when you do!

Inspired by the recent tax season, a solid recommendation from Afford Anything, and the impressive tax savings by Root of Good, I set out to better educate myself on the US tax system. Lately I’ve had this nagging doubt about whether I should be taking more proactive steps to minimize my income taxes… somehow.

To that end, I picked up “Taxes Made Simple: Income Taxes Explained in 100 Pages or Less” and was immediately in love with the concept. What a great way to get a basic foundation about an otherwise complicated and intimidating topic. I’ve filed my own taxes before (though not since our first rental property), and even then only with the prompted assistance of online tools like TurboTax.

Bonus: at the time of this writing this book was FREE as a part of the Kindle Owners’ Lending Library – which allows Amazon Prime members to digitally “check out” books on Kindle devices.

My Personal “Aha” Moments:

  • Source of Income Matters, A Lot – I never appreciated how much a dollar of earned income ≠ a dollar of self-employment income ≠ a dollar of qualified dividend income ≠ a dollar interest income. I don’t know if there’s anything I’m going to do differently with this information, but I do now understand why some think the game is rigged!
  • Above-the-Line vs. Below-the-Line Deductions – I already knew this was relevant to the home mortgage interest deduction, but I gained more clarity on how all the parts fit together. I suspect many people claim deductions that offer no tax benefits whatsoever and don’t even know it.
  • The Disappearing IRA Deduction – While contributions to a traditional IRA do not have an income cap, the valuable above-the-line deduction does (IF you or your spouse have access to a retirement plan at work). I consider myself pretty retirement account savvy and I had no idea.

This material should be required reading in high school, and this particular book will now join Suze Orman’s “The Money Book for the Young, Fabulous & Broke” as my default graduation gift (I know, I’m fun at parties too).

Income Taxes

(photo by Alan Cleaver)

Our key takeaway is to reconsider our above-the-line deductions, specifically traditional IRAs and HSAs. On one hand, we’re hesitant to reduce our tax exposure at the cost of tying up our money until retirement age – money that could otherwise be invested in rental properties. Still, this could definitely be useful if we find ourselves at risk of getting phased out of Roth IRA eligibility and want to take proactive measures to reduce our AGI.

I sure hope the author writes a rental property-specific book someday. Eventually I’ll also check out “Independent Contractor, Sole Proprietor, and LLC Taxes Explained in 100 Pages or Less” from the same author. LLCs and rental properties seem to go together like peanut butter and jelly, but I still have a lot to learn before I’d be comfortable committing.

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Preparing Rental Property Taxes: The Good, The Bad and the Ugly

2 May

Tax preparation for our investment property has always been intimidating to me.  Lots of things weren’t in my favor: decoding depreciation vs. deductions, repairs vs. improvements, 1-time expenses incurred while purchasing the property, and 50/50 ownership (and income distribution) between myself and my fiancé.  But being a do-it-yourself kind of individual, I was determined to put on my big-girl pants and figure it out.

Every Landlord's Tax Deduction GuideFirst I brushed up on the basic of rental property investing with the help of this great book, Every Landlord’s Tax Deduction Guide.  I really recommend this book – it explains a niche area of tax code in a very easy-to-understand way.

I planned to rely heavily on my go-to tax software, TurboTax.com. They offered a “Premier Investments and Rental Property” service for $74.95 that seemed ideal for my situation. I also appreciated their handy (and free) Real Estate Tax and Rental Property page to organize my expense categories.

The end result: I fought the tax law and the tax law won. For the first time in my tax-preparing life, I raised the metaphorical white flag and took my taxes to a professional.  Honestly if I hadn’t read the book, the TurboTax.com product probably would have sufficed, but I realized the step-by-step online guide wasn’t asking me everything I felt I needed to satisfy the level of detail the book recommended. For example, I knew gift expenses were deductible to a max of only $25 per unit, but Turbo Tax didn’t question whether any of my expenses were gifts – so what else wasn’t it asking? Maybe it was user error, but I was pretty confident I was about to screw this up.

I found an accounting firm to prepare my taxes through yelp.com – first looking for a large number of positive reviews and then evidence of real estate investment experience. I called my chosen accountant and explained the situation, and she gave me some basic instructions about what information to provide her.

Pulling together expenses was relatively easy because I was already in the habit of putting all rental property receipts in a manila folder as they come in, and then I cross-referenced that with a rental-only checking account that would remind me of anything else I’d forgotten. One twist I wasn’t expecting was the requirement to separate the expenses and income by unit, not by property, so that all expenses for Unit A are separate from Unit B. This will affect how I purchase supplies in the future, including going through the check-out line twice in order to separate expenses at the time of purchase.  Dividing sales tax based on what % of the receipt is for which unit is… unpleasant.

As a reminder, we closed on our duplex in October 2011, so here’s our 2011 income:

Side A Side B
October 2011 Rent $310.40 $301.53
November 2011 Rent $875.00 $875.00
December 2011 Rent $875.00 $875.00
Security Deposit Interest $0.82 $0.76
Total $2,061.22 $2,052.29

And 2011 variable expenses, which doesn’t count insurance/taxes/and mortgage payments:

Payee Side A Side B Both
Amazon.com – 9/13 $26.39
Property Inspection – 9/14 $495.00
Office Depot – 9/17 $16.22
Appraiser – 10/6 $575.00
Office Depot – 10/19 $5.73
USPS – 10/20 $1.08
USPS – 10/20 $1.68
Office Depot – 10/22 $17.31
Safeco of Indiana – 11/9 $8.00
USPS – 11/9 $1.48
Walmart – 11/19 $5.38
Lowe’s – 11/19 $66.45
Lowe’s – 11/19 $17.99
Toys R Us – 12/16 $26.95
Jo-Ann – 12/16 $26.95
The Home Depot – 12/23 $25.94
Total $94.48 $79.77 $1,143.30

Something I vow to do better in 2012: recording the driving mileage to and from the investment property – otherwise we’re just leaving money on the table. I acquired an inexpensive vehicle mileage book from Office Depot and it lives in my glove box.  The trick will be remembering to use it.

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Book Review – How to Invest in Rental Properties Without Mortgaging Your Soul

5 Jan

Every now and then I’ll review a different real estate investment book and share its unique perspective.

How to Invest in Rental Properties Without Mortgaging Your Soul was written in 2004 by a woman who owned 34 rental units. She started with a duplex, and expanded to single-family and small apartment complexes. She’s retired now, receives half of her income from rentals, outsources all of her property management, and has a genuine enthuiasm for real estate investing. What she really has is the real estate portfolio I aim to build over the next 20 years. 🙂

Real Estate is An Understandable Investment. The book begins with the top 8 reasons the author owns rental property, and this one resonated with me. Basic research allows the average investor to determine the expenses and expected returns, and to predict the result of your investment with some certainty. The author is discouraged by the whims of the stock market, and is skeptical of stock “experts” who make predictions that may or may not happen. I am reminded of ads that mention gold, unlike stocks, will never be worth zero.  The same can easily be said for rental property; even in the worst of times, people will still need a place to live.

Make a Living, Not a Killing. This phrase perfectly describes a philosophy I follow myself – the belief that a lot of landlords have a miserly approach that creates distrust and undesirable properties. And I think when you have a portfolio of undesirable properties, you’re likely to end up with undesirable tenants. I don’t need to squeeze every penny I can out of the property; it is possible to make improvements and still make a return.

Do Good. The author describes the socially responsible benefits that can be achieved through neighborhood and environmental improvements. It starts getting a little hippie around these sections, diving into “spiritual equity” and “the power to promote healthy communities and a healthy planet.” I would consider it a little extreme at points, like when she’s implying that her ability to lower rents below market rent would help the homeless problem. While I roll my eyes heavily, I do admit that honoring our tenant’s request for a new faucent provided a satisfying sense of giving – so I believe there is some truth to viewing charity as a part of your management style.

The bad: I found a lot of the information overly basic and not specifically relevant to investment properties, covering topics such as: choosing a realtor, saving for a down payment, applying a loan, etc. The good: this book is very inspirational for the first-time investor. It dispels the fears and assumptions that prevent people from moving forward,  and encourages the reader to see the possibilities as possible.

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