Real Estate Investing – Who, What, Where, When…

As many of you know, I love, love, love real estate! In addition to the wealth-building aspects, there are great tax benefits to owning real estate (and who better to know that than the “Big Bear Tax Lady”?). A few of my musings:

If you can own your primary residence, then go for it. If your AFTER-TAX mortgage payment and property taxes are equal to or less than your monthly rent, why line a landlord’s pocket when you can “pay yourself” by building your own equity (or net worth) every month? What do I mean by “after-tax?” Since mortgage interest and property taxes are tax-deductible, you will probably pay less in income taxes throughout the year than if you were renting. When calculating the rent versus mortgage payment, you must reduce the mortgage payment by the difference in the income taxes to come up with a true monthly amount. Definitely worth a phone call or visit with your tax professional!

When purchasing your primary residence, buy what you can afford, keeping in mind the possibility for appreciation, as well as rental desirability (should you decide to move and then rent out your place). People tend to get wrapped up in having to have the “best of everything” when they buy that first home and extend themselves with high-end flooring, furniture, etc. You’re better off buying the 2-bedroom condo with basic amenities versus the totally decked-out 1-bedroom. Think of what will give you the best bang for your buck in the long run. You can always upgrade later when you have the cash.

For investment property, you have a lot of options. If you want to “fix and flip,” you want to look at the hot markets like San Diego, Seattle, etc. The high prices will not make those areas good for rentals, but if you know what you’re doing, they are good fix/flip markets. Those hot markets might be attractive for vacation rentals (like Airbnb), so I wouldn’t totally discount them, especially if you can find a property at a bargain. Do your research!

For rental investments, I like the “bread and butter” areas where the home prices are low, and you have a good tenant base. Don’t limit yourself to your own location. Do your research on the area that interests you. Find a good property manager FIRST, as well as a good realtor (hopefully in the same company) and run your numbers before you buy. I’m feeling really bullish about the Midwest and the Southeast right now. Manufacturing is making a comeback, and factories are being built in those areas. These employees are going to need a place to live….

I’ve been asked about investing overseas, say Eastern Europe, to help diversify one’s real estate portfolio. While learning about that market is on my To-Do list, I’m a bit of a newbie there, and still need to do more research. You really need to research that market, the country’s landlord/tenant laws and find a team you can REALLY trust. Stay tuned!

And finally, when should you get into the market? I like to be counter-cyclical– when the masses are buying, going crazy and out-bidding the other, I’m very careful and back off and quietly save my money and secure funding. When the masses are dumping their properties, foreclosures are high, and people are walking away, that’s when I think of buying. The challenge is in determining “how high is high” and if we’re in a bubble market. In addition, foreign investors and the house-hacking/sharing market (i.e., Airbnb, etc.) trend is driving real estate prices up higher in those already hot markets, so for now, there is no end in sight.

Once you have that rental property, make sure you track all your expenses (including mileage). I advise my clients to keep separate credit cards and bank accounts for their rentals, making tax preparation a lot cleaner. Plus, you don’t want to miss those deductions!

Good luck and happy investing!

 

 

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The “Gig” and Sharing Economy Are Here To Stay

As more and more of my clients are joining the “Gig” and sharing economy, I attended an amazing seminar by William Rogers, of ASCEND Business Advisory out of San Diego.

A “Gig” worker is also known as a “contingent worker” or “freelancer.” You may be working on a 6-month project (or “gig”) for a company, and then move on to another gig with another company. This group comprises about 40% of the current workforce. Ironically, I remember attending a Tom Peters seminar back in the early 90’s and learning that the future will be the “era of the freelance professional.”

The “Sharing” economy is one of the largest part of this gig trend, and it includes ridesharing (Uber, Lyft, Via, etc) and property sharing (Airbnb, VRBO, Flipkey, etc). It’s a pretty simple concept actually– basically taking an under-utilized asset and re-purposing it to fulfill an existing market, whether it be a residence, a vehicle, spare time, commercial space, etc. For example, NYC-based “Spacious” takes under-utilized restaurant spaces (when a restaurant is closed during the day) and “converts” them into work spaces for telecommuters, entrepreneurs and “gig” workers.

If you drive for Uber or Lyft, chances are you are an independent contractor and will receive a Form 1099 (in some cases, you may be a W-2 employee, but that’s not the norm). You need to track your vehicle expenses (mileage, gas, repairs, tolls, insurance, etc), as well as supplies and cell phone expenses. Since no income taxes are withheld, and you are also liable for Social Security and Medicare taxes, you should also make quarterly tax payments.

Property sharing, like Airbnb, can be a little tricky tax-wise: are you running it like a hotel/motel business (Schedule C business) , or a real estate rental (Schedule E)? First of all, if you rent your property less than 15 days a year, you do not even need to report the income, as it’s not taxable. If you received a Form 1099 for rental income less than the 15 days, you then need to report the income on the Schedule E, but offset it on Line 19 as exempt income.

If you rent your property more than the 15 days per year, then you need to figure the number of personal use days, as well as calculate the “average rental period” during the year. If the average rental period is 7 days or less, the activity is treated as a BUSINESS (Schedule C) and not a rental (Schedule E). IF the average rental period is over 7 days, you can consider it a rental– unless significant personal services are provided (for example, you make the guests breakfast, give them a tour, etc.).

The property sharing trend brings with it considerable local issues– such as Transient Occupancy Tax, property zoning, etc. Airbnb does NOT collect TOT taxes on all of its properties, so make sure you get all that information prior to renting out part of your home.

Another part of the sharing economy is “Crowdfunding.” It consists of “Peer-to-Peer Lending” (Lending Club), Personal Fundraising (“GoFundMe”), or project or business funding (Kickstarter, Indiegogo). The tax treatments for these items vary, depending on if the funding is donation-based, reward-based or equity/debt-based.

If your funding is a loan, the interest may be deductible if the loan is secured by real estate. If it’s a business loan, you may be able to deduct the interest as a business expense.

For personal fundraising via GoFundMe, if the monies received are a GIFT, and nothing is received in exchange for that gift, then it’s not considered taxable income. The donor can give a gift of up to $14K without having to file a gift tax return. If it’s over that amount, it’s the donor’s filing responsibility, not the recipient. The recipient may receive a Form 1099K, which must be reported on the tax return as tax-exempt income.

If you donate to a charity using GoFundMe, make sure it has the “Certified Charity” badge, or the donation will NOT be deductible. Also, if you are fundraising for a project on one of the crowdfunding websites (GoFundMe, Kickstarter, etc) and are offering a reward (say a gift card or a copy of your book, etc), then the proceeds ARE TAXABLE income to you– regardless of the value of the reward!

This sharing economy is only going to expand, so if you’re joining this trend, always make sure you check with your tax preparer so there are no surprises at tax time!

Tell-Tale Signs Of an IRS Scam

I know I sound like a broken record, but it’s important to be vigilant in recognizing scammers who claim to be from the IRS. As per the IRS:

Tell Tale Signs of a Scam:

The IRS (and its authorized private collection agencies) will never:

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. The IRS does not use these methods for tax payments. The IRS will usually first mail a bill to any taxpayer who owes taxes. All tax payments should only be made payable to the U.S. Treasury and checks should never be made payable to third parties.
  • Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
  • Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone.

Yikes– Yet Another Scam Involving IRS Impersonators

Now the scammers are sending bogus certified letters claiming to be the IRS. Please, please, please, don’t respond to these without checking the authenticity. If you’re not sure, call your tax professional. Per the IRS:

IRS Warns of New Phone Scam Involving Bogus Certified Letters; Reminds People to Remain Vigilant Against Scams, Schemes this Summer

WASHINGTON – The Internal Revenue Service today warned people to beware of a new scam linked to the Electronic Federal Tax Payment System (EFTPS), where fraudsters call to demand an immediate tax payment through a prepaid debit card. This scam is being reported across the country, so taxpayers should be alert to the details.

In the latest twist, the scammer claims to be from the IRS and tells the victim about two certified letters purportedly sent to the taxpayer in the mail but returned as undeliverable. The scam artist then threatens arrest if a payment is not made through a prepaid debit card. The scammer also tells the victim that the card is linked to the EFTPS system when, in fact, it is entirely controlled by the scammer. The victim is also warned not to contact their tax preparer, an attorney or their local IRS office until after the tax payment is made.

“This is a new twist to an old scam,” said IRS Commissioner John Koskinen. “Just because tax season is over, scams and schemes do not take the summer off. People should stay vigilant against IRS impersonation scams. People should remember that the first contact they receive from IRS will not be through a random, threatening phone call.”

EFTPS is an automated system for paying federal taxes electronically using the Internet or by phone using the EFTPS Voice Response System. EFTPS is offered free by the U.S. Department of Treasury and does not require the purchase of a prepaid debit card. Since EFTPS is an automated system, taxpayers won’t receive a call from the IRS. In addition, taxpayers have several options for paying a real tax bill and are not required to use a specific one.

Tell Tale Signs of a Scam:

The IRS (and its authorized private collection agencies) will never:

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. The IRS does not use these methods for tax payments. Generally, the IRS will first mail a bill to any taxpayer who owes taxes. All tax payments should only be made payable to the U.S. Treasury and checks should never be made payable to third parties.
  • Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
  • Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone.

For anyone who doesn’t owe taxes and has no reason to think they do:

  • Do not give out any information. Hang up immediately.
  • Contact the Treasury Inspector General for Tax Administration to report the call. Use their IRS Impersonation Scam Reporting web page. Alternatively, call 800-366-4484.
  • Report it to the Federal Trade Commission. Use the FTC Complaint Assistant on FTC.gov. Please add “IRS Telephone Scam” in the notes.

For anyone who owes tax or thinks they do:

The IRS does not use email, text messages or social media to discuss personal tax issues, such as those involving bills or refunds. For more information, visit the “Tax Scams and Consumer Alerts” page on IRS.gov. Additional information about tax scams is available on IRS social media sites, including YouTube videos.

IRS Notices and Correspondence Audits

Due to the Internal Revenue Service’s shrinking resources (coupled with the possibility of future budget cuts), audits of individual tax returns fell to a 10-year low of just 0.7%. In addition to directing more and more of their everyday questions and functions (such as paying your taxes) to their website (www.irs.gov), the IRS will be relying more on “Correspondence Examinations (or audits).”

Basically an “audit by mail,” they are more efficient and automated than the standard office audit AND consume far fewer IRS resources. That being said, we may expect the individual audit rates to increase, especially after they’ve implemented the “Taxpayer Digital Communications” pilot program, which will further automate the audit process (still in the infant stages).

Items usually selected for Correspondence Exams are usually the Earned Income Tax Credit, Schedule A, C, E, F and Form 2106 (Employee Business Expenses). I hate repeating myself, but again, the IRS will NEVER initiate contact by phone– only by mail!

How does the IRS analyze returns for a potential audit? 1) Results of prior audits (i.e., are you making the same errors you did before?); 2) Third party information returns (W-2, 1099s, etc.) don’t match with your return; 3) Certain entries on the return “pop” by being too high/low and then require substantiation.

Correspondence audits are generally far less extensive than office or field audits and usually just focus on specific items on your return, like substantiating employee business expenses,  providing documentation for charitable contributions, providing backup for the vehicle expense deduction, or providing school records for the education credit. Most of the time, it’s just a matter of mailing or faxing (but NOT both!) the required backup.

So, what should you do if you receive an IRS notice by mail? My first piece of advice is DO NOT THROW IT AWAY! Ignoring it will only make the problem worse. Let your tax professional know about the notice, and he/she will either handle it for you or tell you what to do.  The most important tip from IRS auditors? Respond to these notices in a timely manner! Usually they require a response within 30 days of the notice, but you can always request additional time to put together your response (very easy to do so). Also, if you’re going to mail the requested documentation, NEVER mail originals– always mail photocopies.

 

 

Employee or Independent Contractor? Know the Rules

If you’re not sure how to classify your new hire– whether Employee or Independent Contractor, the IRS  lists these rules:

The IRS encourages all businesses and business owners to know the rules when it comes to classifying a worker as an employee or an independent contractor.

An employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Employers normally do not have to withhold or pay any taxes on payments to independent contractors.

Here are two key points for small business owners to keep in mind when it comes to classifying workers:

1. Control. The relationship between a worker and a business is important. If the business controls what work is accomplished and directs how it is done, it exerts behavioral control. If the business directs or controls financial and certain relevant aspects of a worker’s job, it exercises financial control. This includes:

  • The extent of the worker’s investment in the facilities or tools used in performing services
  • The extent to which the worker makes his or her services available to the relevant market
  • How the business pays the worker, and
  • The extent to which the worker can realize a profit or incur a loss

2. Relationship. How the employer and worker perceive their relationship is also important for determining worker status. Key topics to think about include:

  • Written contracts describing the relationship the parties intended to create
  • Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation or sick pay
  • The permanency of the relationship, and
  • The extent to which services performed by the worker are a key aspect of the regular business of the company
  • The extent to which the worker has unreimbursed business expenses

The IRS can help employers determine the status of their workers by using form Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. IRS Publication 15-A, Employer’s Supplemental Tax Guide, is also an excellent resource.

NOTE: If you have deemed the new hire to be an Independent Contractor, make sure you have he or she sign an Independent Contractor agreement listing and agreeing to all the specifics. That way, there are no issues in the future.

Sole Proprietor? Hire Your Kids!

If you’re a Schedule C Sole Proprietor and are looking for some extra help, think about hiring your own kids. If you have minor-age children (17 and under), you can add them to your payroll without having to pay the employer payroll taxes or Workers Compensation. In addition, if they earn under the Standard Deduction ($6,350 in 2017), and they are your dependent, they won’t have a tax liability. The kicker here is that your business gets to deduct your kids’ payroll, and your kids don’t have to pay taxes on the money earned (as long as it stays under the Standard Deduction).

You still have to treat them like any other employee– have them fill out a time card, pay them via payroll and issue them a Form W-2 at year-end.

If you do this correctly, it’s a great way to put away funds for college, as well as teach your children responsibility and important skills.