As a landlord, your tightest months for cash flow are usually at the end of the winter and beginning of spring, in March, April and May. You’ve just finished paying for the extra costs that winter brings; sky-high utility bills, snow and ice removal, heating issues and so on. Not only that, but any vacant units probably took longer to fill because people are less likely to move during the winter. You might even have had damage from ice dams or frozen pipes.

The end of the winter is the worst possible time to get a huge unexpected bill. And yet here it comes; hundreds or even thousands of dollars due to your {{{CPA or bookkeeper|tax advisor}}}.

Fortunately, there are ways to really reduce this bill without adding a lot to your workload. The key is to organize your tax documents in a way that will let your tax advisor (or yourself, if you do your own business taxes) prepare your return in a lot less time.

I use property management software to organize all of my income, expenses and assets, and make sure that my bank account statements match up with my own personal accounting. It’s faster than maintaining my records in Excel, and it only takes a little longer than the method used by lots of old-school landlords; stuffing all their records into a shoe box and hoping for the best.

Because you’ve organized your land lording income and expenses in your property management software as they occur throughout the year, they are completely organized and ready for you at the end of the year, at tax prep time. Somebody’s going to be doing a lot less work then – either your tax advisor (which means you pay him less) or yourself (which means you get to bed earlier).

You want your records to be organized along the categories of the IRS Schedule E form, which you use to report rental property income and loss, along with income and loss from related investments such as partnerships and trusts. You’ll need to submit an IRS Schedule E along with your 1040 tax return. You’ll also take the summarized results from the Schedule E and incorporate them into your 1040 calculations. You can do all this with the correct property management software.

There are two Schedule E categories for Income and 14 for Expenses. For Income, any time you receive rents, you’ll record them in your rental property program as a deposit; thus updating both your bank account records and your ledger account records. For Expenses, any time you spend money on anything related to your properties, you’ll record those Expenses either through the check register or a journal entry. Your property management program should let you enter any Expense under a category that matches a Schedule E category; they are Advertising, Auto and Travel, Cleaning and Maintenance, Commissions, Insurance, Legal and other Professional Fees, Management Fees, Mortgage Interest, Other Interest, Repairs, Supplies, Taxes, Utilities, Other, and Depreciation. Some of these property management expense categories will make perfect sense to you, but others may need explanation.

• Advertising: this is really all of your marketing expenses, including things like signs and web postings.

• Auto and Travel: this is an easy Expense to miss because you won’t pay it with a check or something else that’s easily tied to your bank accounts. One option is to record all the actual expenses such as gas, oil and depreciation. The other, simpler way is to just record your mileage spent on business travel and multiply the total times the current per-mile expense rate (48.5 cents for 2007).

Not only is it simpler to record expenses this way, it may also be a better deal for you. That 48.5 cents per mile applies whether you are driving a new Hummer H2 or an old Toyota Corolla. Obviously you spend a lot less than 48 cents a mile driving that old Toyota (and it makes a better impression on your tenants).

You should record auto expenses by mileage every time you take a trip related to your investments; these include every time you drive to a building. Once per month, if you can afford to do so, pay yourself for the mileage or any other expenses from personal funds with a check from your business account. Record that as well. (Obviously you can’t record mileage expenses as you incur them (the day you drive) and when you reimburse yourself – that would be double dipping.) You can also expense tolls and parking fees, but not tickets or other legal fees from parking or driving violations.

• Mortgage Interest: new landlords often think they can expense all of their debt service, which is your mortgage payments plus any other money paid toward retiring the loan. But you can’t expense the money that goes toward principal because it’s not really an expense. For example, suppose you make a $1,000 mortgage payment, $200 of which goes to principal and the rest to interest. By doing so, you spend $1,000 from your checking account, while increasing your equity in the property by $200. The correct transaction will be a $1,000 credit to the checking account, an $800 debit to the Mortgage expense and a $200 debit to the Building Equity Asset account. Your rental property program should calculate this automatically.

• Depreciation: this expense relates to the natural deterioration that happens to almost any long-lasting asset. Most landlords think of depreciation in terms of buildings. For example, most residential buildings have a depreciation period of 27 1/2 years. This means that you can take 1/27.5 (3.63636… percent) of the building’s value as an expense each year; until you’ve owned it for 27.5 years or sell it, whichever comes first. How are you going to determine the building’s value? Multiply the purchase price by this ratio: building assessment / overall assessment. You can usually get the assessments from the town or county.

It makes a lot of sense to depreciate items in a building separately from the building itself, because such items usually have shorter recovery periods (meaning you can take more of the value – as much as 20 or even 33 percent – each year until the end of the period).

Depreciation is tricky – one reason is that the federal government frequently changes depreciation rules in esoteric ways. For example, they changed the rules to make investing in New York City more appealing after the 9/11 attacks. It may make sense to get some additional help from your tax advisor here.

Around February 1st of the new year, print out a profit and loss report and all of your bank reconciliation reports for the previous year. All of this information will be neatly organized by your property management software. Review the reports carefully and either send them to your tax advisor or enter the information into tax forms yourself. If you send them to your tax advisor, include the actual bank statements as well. He’ll want these records to prove that you recorded all of your financial transactions honestly.

At the same time, make sure your CPA or bookkeeper knows that you’re NOT expecting him to do your Schedule E calculations all by himself. You don’t expect to be charged for all that work, either.

Last point – even though property management software is going to help you with your record keeping and calculations, don’t throw out your paper records. You’ll need them if you are ever audited.

Brendan O’Brien is the founder and president of Property Master Web property management software. Our rental property software runs from any Internet-connected computer, includes FREE customer support and training, full accounting and reports, and property evaluation tools, and works with your other programs to help you manage anywhere from 1 to 100,000 rental units.

Visit www.pcpropertymaster.com

Additionally, the amount of time it takes to renovate a property means that on top of the financial problems raised by the section 20 notice, there will be structural problems relative to the type of renovation being undertaken. However, you can also understand that even if a buyer agrees to a sale on a property he knows is going to be subject to a section 20 notice, he will not be happy by the presence of scaffoldings or other building materials.

Furthermore, you as a property owner are required by law to inform the prospective buyer of the property about this section 20 notice if you have already received it. Getting out a ‘section 20 notice situation’ can be tough if you do not have the cash flow to finance the renovation of your property; however, there are some companies out there that will help.

Some services on the internet will provide you with information about how to make money on the side of your day job, but beware of ‘get quick rich’ or pyramid schemes as they have been proven to make you loose more money than you earn, if you do earn anything. On th other hand, there are some companies that will make sure you do not have to pay a penny of the requested amount by making an offer for your home -which usually results in a sale in less than a week. They usually offer cash lump sums, buy back and rent back options, but will only pay around 90% of the market price of your property. They are, however, a solution that should not be overlooked as they have helped many people avoid repossession of their home in the past.

The section 20 notice can be a real pain if it arrives at a time when you cannot afford, and can also make you feel very isolated as you may think ‘they did it on purpose! Just when I moved in”! The purpose of the section 20 notice is not to scam or trick leaseholders, but rather to split the costs of a necessary renovation between the landlord and the tenant to ensure that the tenant pays towards the renovation of the place he is living in.

Avon Barksdale writes articles for News on the Block, a leading flat & property mangement magazine for landlords and tenants. The magazine and its website also contains invaluable infromation about resolving Section 20 notices & problems.

*Review of Capital Gains*

A capital gain is known as the profit from selling an investment. It is the difference between the cost basis of purchasing the investment and the amount for which it was sold.

Capital Gain Tax Deferral Through a 1031 Exchange

A 1031 Exchange would enable the investor to avoid paying tax on the capital gains realized from the sale of an investment or business property. A third party intermediary, an entity not related to either party, would retain the capital gains (profit) from the sale until a replacement investment property is found and purchased by the investor.

The capital gains realized from the sale of the investment property will be applied to the purchase of the newly acquired property, thus avoiding the payment of capital gains taxes. Very specific requirements must be met and only certain properties qualify for a 1031 exchange.

Determining If Your Property Qualifies For a 1031 Exchange

The detailed process of a 1031 is somewhat complex and it’s always advised to seek out a tax professionals’ guidance throughout this process. Any errors will disqualify the investment property exchange and the investor would be required to pay the capital gains tax.

Summary of 1031 Property Qualifications

Certain qualifications of the existing property and the replacement property in question must be met. These qualifications include:

1. Type of Property
2. Intended Use of Property
3. Like-Kind Property
4. Specific Requirements

Type of Property

Two types of Real Estate Properties qualify: Business Properties and Investment Properties that are owned for the purpose generating income. This may be revenue from a business or income generated from the investment itself (ex. Rental income).

*Key Point: Personal Property Does not Qualify

For example, rental properties or a Plumbing business would generally qualify for a 1031 exchange.

This is a very specific requirement and excludes any personal property. While most homeowners consider their home an investment, its primary purpose is a place of residence, not to generate investment income.

Summary of Properties Excluded

1. Inventory
2. Dealer Inventory (Flipping is excluded)
3. Personal Property held for sale
4. stocks, bonds and notes
5. Interests in Partnerships
6. Vacation homes
7. Certificates of Trust

Intended Purpose

The intention of current property and the replacement property must be for a business or investment purposes.

* This may sound obvious, but there are some situations where intent will come into play. For instance, an investor wants to buy a rental home in Florida as part of a 1031 exchange. The investor currently owns apartment rentals and is looking to sell and replace them with the vacation home.

Intended purpose will determine if this situation qualifies for a 1031. For instance, the vacation home will qualify if the intent is to collect monthly rent from tenants. However, if the investor intends to reside in the vacation home, even if only in the winter, it does not qualify for a 1031 exchange.

*Key Point: Personal Property AND Vacation Homes are Excluded from a 1031 Exchange.

Like-Kind

The properties to be exchanged must be of “Like-Kind”. According to the IRS, the investment properties must be of similar character and nature. However, the grade and quality of the new property does not have to be similar.

For instance, an investor may have own a landscaping business and wants to sell it in exchange for a residential home that he or she wants to fix up and sell for a profit. Would this qualify for a 1031 exchange? The answer is No.

Purchasing homes with the intent of flipping’ them does not qualify for 1031 exchanges because they are considered “Inventory”. Inventory is not eligible for a 1031 exchange.

However, a shopping center can be exchanged for an apartment complex, or raw land intended for business can be exchanged for a department store.

Summary of Specific Requirements and Safe Harbor Provisions

1. Both Properties are held for investment or use in a trade or business.
2. A Replacement property must be identified within 45 days of the sale of the relinquished property.
3. Replacement property must be purchased within 180 days of the sale of the relinquished property.
4. A qualified intermediary must be designated to hold the proceeds of from the sale of the relinquished property until the closing date of the replacement property.
5. To remain tax free, capital gains received from the original sale must be utilized for the purchase of the replacement property.

In closing, the 1031 Exchange is an excellent strategy to protect business profits, yet it’s a complicated endeavor that requires the assistance of professional guidance and planning.

Author Kelly Lucas, is a successful Freelance Writer with a specialty in writing web copy and content utilizing the most advanced and up to date optimization techniques. Her first book is expected to be released and available for purchase in early 2008:

“A Web Content Style Guide: Web Content Optimization”

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http://KellyMLucas.googlepages.com/home

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Consultations are always free and prices are the most affordable.

Email Kelly at Lucas.Associates@Gmail.com