Tax deductions for landlords in the US – Part 2

Now is the time to save money;tax time is near. Landlords and taxes both are at times despised and are seldom loved for all the goodness they likewise do. Therefore these two life necessities have a lot in common, although they themselves are at odds with each other when one says you owe me, hand it over’ and the other says, not so fast’.

You as a landlord cries on the shoulder of the IRS representative and, believe it or not, he listens. (Turns out he also has rental property and he understands.) He hands you some booklets and tells you to read them and to learn ways you can save on your income taxes. You read and you are aghast to learn you have been paying more than you should.

Ways to lower taxes on rental properties:

Landlords have at their disposal more tax benefits than most all other investments; yet not everyone takes advantage of them. Just think of all the repairs that must be done and all these are valid deductions. The IRS is not going to fault you over replacing leaking roofs, or making upstairs balconies secure.

They will gladly glide over that deduction. Whatever you do to improve houses that you rent of others is a good solid deduction. Even the gasoline and the other traveling expenses incurred while driving distances to check on your rental properties are accepted as deductions. Interest that must pay on the loans that you borrowed to get the money to afford the repairs and the improvements are also deductible. The depreciation value is also a tax deduction. Anything that has to do with your maintenance of your real estate rentals is usually a plus for you when it comes to paying taxes.

Ways in which you as a landlord can become friendlier with your tax representative:

You have been lax in record keeping. A few miles to that house to listen to complaints and to placate unfriendly neighbors and the cost of gasoline are negligible. Fifty cents for gasoline over a month adds up. This one place has cost you in that time about fifteen dollars out of your pocket. By the time income tax comes around next year you will have forgotten about it.

Had you kept daily accurate records, your accumulative little expenses could have saved you a few dollars on taxes. Why you failed to record this has to do with time. You were busy and did not take the time to record these small transactions. A great way to get around this is carry a small recorder in your pocket and record your estimates. Have your secretary make use of these notes.

Term life versus cash value life insurance

I’m going to tell you all I know about insurance in five minutes. So here we go.

When it comes to houses, we all know the difference between renting and owning.

With renting, each month your landlord gets a rent check. You get to live on their property for a month. If you don’t pay you’re out! Lather, rinse, repeat.

Stay in the same place and you can count on one thing – your rent will go up.

If you stay for a long time, what do you get back? Absolutely nothing, unless your landlord is also your mother.

Term insurance is like renting a house.

You pay the insurance company a premium. They give you life insurance. Like a lease, the premium is fixed for a “term” such as five, ten or twenty years. Thus, “term” insurance.

What happens if you stop paying premiums? The policy lapses and you have no protection, just like a renter who doesn’t pay.

What happens if you pay faithfully for the entire term? Just like renting, the price goes up!

If you pay your premiums for a long time, what do you get back? Nothing they are definitely not your mother!

Cash value life insurance is like owning a house.

Part of your monthly mortgage payment pays interest, and part goes into your “piggy bank”, home equity. The value of your property can go up, also increasing your home’s “piggy bank”. Plus, mortgage interest earns you a tax break so Uncle Sam gives you money back.

What happens when you pay your mortgage faithfully? You own your home free and clear, and you don’t owe another penny. You have a permanent, no-cost dwelling.

With cash value life insurance, part of your premium pays for “pure insurance” and part of your premium goes into a “savings account”. This account compounds, growing on its own. As well, Uncle Sam gives excellent tax advantages to this “savings account”.

What happens if you don’t pay your premium? Your “piggy bank” will pay it for you, for as long as there is cash. This can make all the difference during tough times, maybe from illness or layoff.

What happens if you pay your premiums faithfully for thirty years, just like a mortgage? Eventually, the interest from your savings account gets big enough to pay the premiums, so you don’t have to. The policy will never lapse, guaranteeing your heirs a tax-free payoff. Thus, the name “permanent” insurance.

With a good policy held for the long-term, every penny you pay in premium is returned to you, with a bank-like return.

Owning a house costs more at the beginning, and in the end pays you. In the same way, term insurance costs less in the beginning, but much more in the long-term.

These are the two extremes. There are hybrid products that combine term and cash value characteristics. Just like a condominium is a hybrid between renting and owning.

That’s everything I know about insurance.

What should you do? Is term or cash value right for you? Just like renting vs. buying this decision depends on your circumstances and your goals. A seasoned insurance professional representing one or more top companies can help you sort this out for yourself.

Buy To Let Mortgages – Part 2

As far as investments go, property is one of the safer bets. Buying a house to let out can be a safe and profitable way to put spare cash to use, and a good way of expanding your assets. While some approach letting as a purely commercial exercise, parents may also buy a place for their children, which they then charge them rent for. This can be seen as investment in both your and your family’s future.

Mortgages available for letting property used to be subject to higher rates of interest than standard residential mortgages, but in recent years this has changed. In an active attempt to encourage growth in the private rental sector of the market, interest rates have been lowered and criteria made more flexible. This led to a boost in the amount of properties being bought as income-producing investments.

The Association of Residential Letting Agents (ARLA) run the Buy-to-Let initiative, designed to encourage private investing in the letting market. Taking on an agent can help boost the confidence of your lender that you know what you’re doing – a letting agent will advise you on suitable property and how to manage it. Under a bonding scheme that members of the ARLA belong to they can also provide compensation if there’s a problem with rent or deposits.

The rent you charge, as a rule of thumb, should be around 150% of your monthly mortgage repayments. This should cover all the associated expenses – while letting can prove profitable you should take into account the time and cost involved. Not only will you need to find and purchase suitable property, but you will have to manage it well, whether this means maintenance, furnishing or advertising. An agent can take care of some of these tasks, but bear in mind you will have to pay their fees. Generally, you should think of buying to let as a medium or long term investment.

You should always make sure that a professional agent or solicitor draws up leases and agreements. While you can buy ‘readymade’ leases, these are not comprehensive enough to rely on. Remember too to include an inventory of all furnishings and fittings in the property.

Other costs to consider are: Insurance – both buildings and contents, plus you may want to take out rental protection in case a tenant fails to pay. Service charges and maintenance costs – try to ensure the property will require the minimum of upkeep and repairs.

Where Now For Buy To Let

After a series of five interest rate rises in eleven months buy to let lenders are still insisting that buy to let even today is still a sound bet. Should consumers be viewing this as merely feelgood propaganda in a time of uncertainty and should the realisation of the bandwagon having passed by that it may well be too late, or does the great British love affair with property underpin the whole ideal.
The buy to let positives can be typically drawn from lenders commentaries and confirm that the average total return for a buy to let investor was 13.0 per cent over the past year to June 2007, exclusive of fees and mortgage interest costs. The price of the typical buy to let property in the UK increased by 7.3 per cent over the year to June 2007 and house price growth rose slightly over the past year from 6.0 per cent in June 2006.
UK Buy To Let rental yields have fallen marginally over the past year to 5.5 per cent in June 2007 from 5.7 per cent in June 2006. Nationally, the average rent increased to £651 per month in June 2007, compared with £623 per month in June 2006.
By region, total returns for BTL investors were highest in Northern Ireland over the year to June 2007, followed by Scotland and the South East. The lowest returns seen in the East Midlands. rental voids (the time a property is without tenants) have fallen for the last nine months and is at 2.8% confirming strong tenant demand. Voids have remained somewhat stable between 2.6 and 3.0 weeks for the majority of the last four years but have declined over the first half of 2006.
Most Investors though simply want to cover costs as their property investments are seen as long-term. Intimating that an investment into bricks and mortar is the preferred route than into a pension. Accepting that there will always be peaks and troughs and to weather the storm. Landlords who bought ten years ago will no doubt be more comfortable with this scenario than novice landlords. Landlords entering the market today will also be greeted with lender arrangement fees of up to 2.5% of the advance compared with a standard arrangement fee over a year ago of between £300 to £500.
More lenders have also entered the market with relaxed criteria increasing loans to 90% of the property value and reducing rental income cover in some cases to between 100% and 115%. One lender no longer looks at rental income at all and/or earned income, justifying the decision by saying rental income was not a robust test, as many lenders accepted the word of a letting agent on rental achieved.
Tenant deposit protection schemes were launched on Friday 6 April. Under new regulations, all landlords will be required to protect their tenants’ deposit using one of three government-authorised schemes alongside two insurance-based schemes which allow landlords to retain the full deposit amount themselves. These schemes require a fee to join, and a premium is payable for each protected deposit. Only any disputed amount is passed to the scheme at the end of the tenancy period.   Landlords of properties that house five or more tenants and are at least three storeys high (House of multiple occupancy) from April 6 2006 have to apply for a mandatory licence from their local authority and meet a raft of criteria. Including upgrading fire and safety regulations to installing wash basins in every bedroom, this latter criteria was branded as ‘daft’ by the Council of Mortgage Lenders (CML). The licence fee is set by individual councils and will not be uniform. Around 10 per cent of the 2.6m private rented UK households are defined as houses of multiple occupancy.
Reports also suggest that Revenue & Customs are stalking 80,000 landlords over incorrect payment of tax. The buy-to-let market is coming under fire for rendering the housing market even more unattainable for first time buyers. In its annual plan for 2005-06 the OFT identified and prioritised attention to landlords who ignore legislation. The OFT guidance outlines why some standard contract terms used in tenancy agreements are considered to be potentially unfair. While landlords also have a potential green tax to look forward to in 2008.
Many entrepreneurial landlords are now looking further afield to enjoy the previous returns while also securing their own piece of paradise. Current developments in Thailand and The Dominican Republic offer guaranteed rental yields of 8% and ten years of tax incentives and no purchase tax. while the term ‘off plan’ within the UK property market may well have lost some resonance and compounded by the wettest summer since records began, the incentives along with sharing paradise with 10 people per acre is realising significant demand.