RENT Magazine discusses the latest investing, legal, screening, and tech trends in the rental industry. Contributors include attorneys, tax experts, investors, and real estate influencers. Stay in the know and read RENT Magazine for FREE.
SPRING 2023
THE WHITE HOUSE REAL ESTATE TAX BENEFITS vs
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UNDERSTANDING THE HAZARDS OF HIRING UNCHECKED CONTRACTORS: PAGE 80
PAGE 56 SCAM PROOF YOUR ASSETS
TENANTS FROM HELL
RENTAL INCOME REPORTING MISTAKES That Can Put You in Hot Water with the IRS
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RENT INCREASES MAY BE A FAIR HOUSING DANGER BEWARE:
REAL ESTATE INVESTING SCAMS AND NIGHTMARES PAGE 33
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THE OFFICIAL PUBLICATION OF THE AMERICAN APARTMENT OWNERS ASSOCIATION
AAOA.COM
TEAM Editor in Chief Robbie Cronrod
Staff Editor Nancy Abrams
Marketing Manager Alexandra Alvarado Contributors Adrian Smude Alexandra Alvarado Alice LaPlante Andrea Hardaway Ashley Wilson Brad Barth, Esq. Dr. Michael Threatt Elizabeth Campbell Garret Sutton, Esq. Gemma Smith Gita Faust Himanshu Kaplash Jason Kogok Chris Cooke Dallas Roark Daniel Sharabi
CONTENTS
05 07 12 16 20 33 24 30
ARE YOU PAYING MORE TAXES THAN YOU NEED TO? BEWARE: RENT INCREASES MAY BE A FAIR HOUSING DANGER TOP REASONS A TENANT MAY SUE YOU AND HOW TO REDUCE YOUR LIABILITY RISING UTILITY COSTS EATING AWAY AT YOUR NOI? THERE’S HELP!
FAILING 1031 EXCHANGES ON THE RISE: WHY DSTS COULD BE THE ANSWER.
Joshua Christinsen Julie Anne Peterson Kathelene Williams, Esq. Kaylee McMahon Nancy Abrams Nikki Senopoulos Omid Ghanadiof Richard D. Gann, JD Shiral Torres Schmuel Siegel
RENTAL INCOME REPORTING MISTAKES THAT CAN PUT YOU IN HOT WATER WITH THE IRS
CELEBRITIES ON THE MOVE
REAL ESTATE INVESTING SCAMS & NIGHTMARES
Scott Varney Steve Haskell
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Welcome Spring has sprung, the sun is shining and flowers are blooming. Spring is also tax season, so now is a good time to evaluate your financial and operational processes and assess how you can improve your systems and protect yourselves from common rental property pitfalls. In this issue of RENT, we address these pitfalls, including how to avoid housing scams, nightmare tenants, overpaying taxes, IRS reporting mistakes, and failing 1031 Exchanges. We also discuss the subject of rent increases and fair housing violations. Property management issues can also affect your bottom line. Be prepared for the California Balcony Law and its fines for non-compliance. Learn about rising utility costs that can affect your NOI and also how hiring the wrong contractors can end up costing you thousands of dollars. In this jam-packed issue, we tell you how to avoid landlord-tenant issues that often end up in court and how to improve property-wide Wi-Fi and increase traffic to your website. We top it off with reviews of some noteworthy real estate-themed books. Thank you for reading RENT. We always enjoy your feedback.
37 41 47 52 56 66 61 70
TENANTS FROM HELL – 7 TRUE STORIES TO LEARN FROM
HOW TO PROTECT YOURSELF FROM TENANTS FROM HELL 2 SECRETS TO ACCELERATING WEALTH CREATION THROUGH REAL ESTATE INVESTING: HOW TECHNOLOGY AND TAX DEDUCTIONS IMPROVE RESULTS, PART 1
$500/DAY FINE COMING FOR NON-COMPLIANT LANDLORDS
SCAM-PROOF YOUR ASSETS: THE RISE OF BANK AND REAL ESTATE SCAMS
AAOA’S RECOMMENDED SPRING READS FOR SMART INVESTORS
THE WHITE HOUSE VS. REAL ESTATE TAX BENEFITS [OPINION]
NEGLECTING INTERNET ACCESS AND CYBERSECURITY FOR TENANTS COULD COST LANDLORDS BIG HOW TO SUCCEED AT DRIVING QUALIFIED TRAFFIC TO YOUR PROPERTY’S WEBSITE WITH A LEAN TEAM AND A TIGHT BUDGET UNCHECKED CONTRACTORS: UNDERSTANDING THE HAZARDS OF HIRING HOW TO PREVENT 3 COMMON LANDLORD/TENANT ISSUES THAT OFTEN END UP IN COURT
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A few years ago, I was working at a table at a large event. We were promoting a particular capital gains tax strategy. Early in the day, someone visited with me at the table and shared that she had sold a 52-bed care facility and had to pay $1M in capital gains taxes. Toward the end of our visit, she asked me, “Do you mean to say that I did not have to write that $1M check?” I told her that unfortunately, that was correct. Throughout the day, she stopped at the table multiple times and asked me that same question. She was devastated by the news. My guess is that she won’t make the same mistake again. I speak with dozens of real estate investors every week, and I will often hear them say they are disappointed in their tax professionals because they didn’t share with them the tax deferment strategies I share in my webinars. ARE YOU PAYING MORE TAXES THAN YOU NEED TO?
THE “PROBLEM” WITH TAX PROFESSIONALS
I have to encourage them that the tax professionals are typically good at what they are doing: tax reporting. However, because most of them are “plug-n-play" professionals, they often do not get involved in many of the tax strategies that are out there. In some cases, they believe it’s too much of a liability risk to do so. On occasion, I come across CPAs and Enrolled Agents who research tax strategies and educate their clients. If you have one of the latter, you found a gem! The great news is that there are several available tax mitigation strategies. There are ways to reduce,
defer, and even eliminate capital gains taxes. That can also apply to income taxes, however, there are not as many options for those who are W-2 employees. The issue with tax mitigation, quite often, is there may be long term commitments and restrictions with the funds as well as added tax reporting costs. The IRS believes that when you put money in your pocket, they should get theirs. That is understandable. But I do believe that we ought not pay more than we legally must.
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THE GREAT NEWS IS THAT THERE ARE SEVERAL AVAILABLE TAX MITIGATION STRATEGIES.
CREATING YOUR TAX DEFERMENT DREAM TEAM
So, now we have a problem. Where do we start looking? The first place to search is with your team: tax professionals, estate planning attorneys, financial advisors, real estate agents, and so on. While these professionals may not know how the tax strategies work, they may know a tax strategist that can help. One thing to understand about tax strategies is that they are often put together by independent organizations. Most likely you will not find a group that provides all the strategies. For example, a Delaware Statutory Trust team will likely not also be working on Complex Spendthrift Trusts or Deferred Sales Trusts. And neither of those groups are likely to be Capital Asset dealers that deal with Structured Installment Sales or the Tax Deferred Cash Out. You will need to find someone who is well enough
connected to various teams so that they can help you to find a solution to your tax problem - if there is one. Essentially, you will want to find someone who acts more like an independent broker of tax strategies. By doing so, you have a greater chance of success at addressing your tax bill. By the way, sometimes it’s simply better to take the gut punch, pay the tax bill, and avoid having the IRS watch over what you do with the funds. Paying the taxes buys freedom that all of us that use valuable strategies don’t have. While I spend a lot of time finding solutions for large capital gains tax bills, in some cases I encourage people to pay the taxes. Everyone is different and needs to be helped accordingly. Click here to get a free tax deferment consultation .
SCOTT VARNEY Capital Gains Tax Strategist S V Consultants, Inc (408) 569-0778
Scott Varney is a capital gains tax strategist as well as a financial services professional. He helps clients think through options to defer, reduce, or eliminate capital gains taxes upon the selling of a highly appreciated asset, in this case, apartment buildings. He has a background in real estate as a top 1% producer nationally in the realm of residential real estate. He enjoys being with people and loves the opportunity to help solve challenging issues.
Disclaimer : We do not give legal tax advice. The best way to get guidance on your specific legal issue is to contact an attorney.
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BEWARE: RENT INCREASES MAY BE A FAIR HOUSING DANGER
As the cost of living and doing business continues to rise, property management companies may consider raising the rent to keep up with expenses. In the first half of 2022, the average percentage change in rent was 12.2% for new tenants and 3.5% for the same tenants. With rent increases trending up, what potential fair housing dangers should landlords and property management companies be on the lookout for?
The Fair Housing Act was signed into law in 1968 to combat discrimination in housing. The law prohibits properties from denying housing or setting different terms and conditions of tenancy based on a person’s protected class status. These protections extend to all aspects of housing, including advertising, leasing, and rent increases. While rent increases are a common practice, you need to beware that they carry potential fair RAISING RENT AND PROTECTED CLASSES
housing dangers. This article will focus on private market properties as federally funded or tax credit properties fall under completely different and somewhat complicated criteria. That being said, private market properties must be cautious when implementing rent increases to ensure they do not even appear to be discriminatory and of course under no circumstance violate fair housing laws.
Protected classes under the law include:
RACE
COLOR
NATIONAL ORIGIN
RELIGION
SEX
FAMILIAL STATUS
DISABILITY
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To avoid violating fair housing laws, companies need to be transparent about their rent increase policies and ensure they are applied consistently across all properties. Another best practice is to be prepared to provide documentation to support their rent increases, such as market analysis or the cost of necessary repairs and maintenance. This is critical should a resident raise an allegation of discrimination. Documentation is also a critical fair housing best practice. Every interaction staff has with a resident—good or bad—should be carefully recorded. This way, should any concern be raised, you can immediately refer back to the documentation to see what transpired. Also, be sure to look into your local, state, and municipal laws to ensure you are complying with them as well. If you are ever unsure, you should contact a fair housing lawyer to help you maintain compliance. RAISING RENT - FAIR HOUSING BEST PRACTICES company raises rent in a way that only affects families with children, they may be violating fair housing laws. So how could a company potentially appear discriminatory? Companies that raise the rent in a way that disproportionately affects protected classes may be in violation of the Fair Housing Act. For example, if a company increases rent on all their properties in a predominantly black neighborhood but not in a predominantly white neighborhood, they may be engaging in discriminatory practices. Similarly, if a
COMPANIES NEED TO BE TRANSPARENT ABOUT THEIR RENT INCREASE POLICIES.
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Even if you have done all the above steps and are sure of your fair housing compliance, how you proceed with raising rents can mitigate a potential disgruntled resident. Let’s face it, no one is going to jump up and down about their bills going up. RAISING RENT - BETTER CUSTOMER SERVICE TO AVOID COMPLAINTS Here are a few things you can do to help:
• Give plenty of notice
• Offer incentives or upgrades
• Ensure staff are thoroughly trained to educate and de-escalate any situations if a resident demands to know why their rent is going up
HOW YOU PROCEED WITH RAISING RENTS CAN MITIGATE A POTENTIAL DISGRUNTLED RESIDENT.
CONCLUSION
In conclusion, while rent increases are a common practice in the housing industry, property management companies must be cautious to avoid violating fair housing laws. Discrimination in housing based on protected class status is prohibited under the Fair Housing Act, and properties that choose to implement rent increases must ensure they do not disproportionately affect protected classes. By being transparent and consistent with your policies and practices, along with ongoing training and education for staff you can successfully avoid any fair housing dangers while raising rents.
KATHELENE WILLIAMS Attorney and President The Fair Housing Institute
Kathi Williams is one of the founders of Fair Housing Institute. FHI is the accomplished vision of Kathi who views its educational courses as the best method housing providers can use to accomplish compliance and avoid litigation. Kathi is also a partner in the Law Firm of Williams Edelstein Tucker, P.C. providing defense and preventative representation for the housing industry in all civil rights matters. During the many decades Kathi has been advising her housing provider clients, she developed a unique understanding of the most effective methods of communicating fair housing best practices through training. Click here to watch Fair Housing Educational Videos.
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PAGE 11
There are many potential reasons why a tenant may want to file a lawsuit against their landlord. These reasons might include breach of contract, failure to make necessary repairs, illegal eviction, discrimination, or harassment. TOP REASONS A TENANT MAY SUE YOU AND HOW TO REDUCE YOUR LIABILITY
HERE ARE SOME COMMON TYPES OF LAWSUITS THAT TENANTS MAY BRING AGAINST LANDLORDS: BREACH OF CONTRACT A tenant may file a lawsuit against a landlord if the landlord has failed to uphold their contractual obligations, such as not providing a habitable living environment or not following the terms of the lease agreement. FAILURE TO MAKE REPAIRS If a landlord fails to make necessary repairs to a rental property, a tenant may be able to file a lawsuit for breach of the implied warranty of habitability, which requires landlords to maintain safe and livable conditions.
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ILLEGAL EVICTION A tenant may be able to file a lawsuit against a landlord for an illegal eviction, such as when the landlord tries to evict the tenant without following proper legal procedures. MOLD We are also seeing more and more mold liability cases. Landlords can be held liable for mold in rental properties under certain circumstances. In general, landlords have a legal duty to maintain safe and habitable living conditions for their tenants, which includes addressing mold issues that may arise. If a tenant reports mold in their rental unit, the landlord should take prompt action to investigate and remediate the problem. If the landlord fails to do so, and the mold causes property damage or health problems for the tenant, the landlord may be held liable for the damages. DISCRIMINATION Landlords cannot discriminate against tenants on the basis of protected characteristics, such as race, gender, or religion. If a tenant believes they have been discriminated against, they may be able to file a lawsuit. HARASSMENT If a landlord engages in harassment, such as repeatedly entering a tenant’s apartment without permission, the tenant may be able to file a lawsuit.
LANDLORDS CAN BE HELD LIABLE FOR MOLD.
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LIMITING YOUR LIABILITY Due to all the potential for liability when owning rental income property, it’s critically important to set up a proper legal structure for your property. A limited liability company (LLC) can be a great option for owning rental property because it provides personal liability protection for the owners (members) of the LLC. This means that if something goes wrong with the property or a tenant sues, the members of the LLC will not be personally liable beyond the amount of their investment in the company. Additionally, LLCs provide flexibility in terms of taxation. They can be taxed as a pass-through entity, which means that the profits and losses of the LLC flow through to the members’ personal tax returns, avoiding double taxation. Alternatively, an LLC can elect to be taxed as a corporation if that is more advantageous for the members. To set up an LLC for rental property, you will need to file articles of organization with your state’s Secretary of State office and pay the associated fees. You will also need to create an operating agreement that outlines the rules and procedures for running the LLC, including how profits and losses will be allocated among the members. It’s important to consult with a lawyer and an accountant before setting up an LLC to ensure that you understand all the legal and tax implications and make sure an LLC is the right choice for your specific situation.
IT’S CRITICALLY IMPORTANT TO SET UP A PROPER LEGAL STRUCTURE FOR YOUR PROPERTY.
Bradley Barth is a partner and Supervising Attorney of the firm’s Transactional and Estate Planning Department encompassing business formations and transactional matters, estate planning, domestic and offshore asset protection, probate, trust administration, tax and real estate law. He views his role as a trusted and long-term advocate of asset protection planning in helping his clients achieve and protect their financial goals and lifetime accomplishments. BRADLEY BARTH, ESQ. Partner BarthCalderon, LLP (714) 704-4828 ext. 114 For a complimentary planning assessment contact paul@barthattorneys.com
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DEFER CAPITAL GAINS Without Doing a 1031 Exchange
Quite often, investment property owners feel very stuck. They’d like to sell their highly appreciated property and use the funds to pay o debt of other properties or simply invest in another financial vehicle and retire, but if they sell, they are faced with a steep tax bill.
Great News! There are multiple ways to defer capital gains taxes! Join our webinars and learn more about your options.
REGISTER FOR A FREE TAX STRATEGY WEBINAR
PAGE 15 Schedule a Consultation | Visit Our Website | Call Us: (408) 569-0778
RISING UTILITY COSTS EATING AWAY AT YOUR NOI? THERE’S HELP!
Utility costs continue to climb while rents and unit demand are dropping, leaving many property owners scratching their heads trying to figure out how to continue to profit from their properties. According to the U.S. Energy Information Administration, the residential electricity price nationwide increased 1.5% in 2022. This seems to be a trend with no end in sight.
Water bills have increased at an even greater pace, driven by massive drought and increased population growth in the Western United States. Many cities are contending with aging systems, fewer resources, and extreme weather, pushing water and wastewater bills up by 30% in less than a decade. The rental market in the US has been in continual flux. People are paying the highest percentage of their income in rent that has ever been reported—a staggering 40%. (The recommended proportion is 25% to 30% of income to rent.) An inevitable market correction has seemingly arrived. October 2022 saw the third largest drop in rental market prices since 2010, a trend that
continued into 2023. Some areas have seen a rebound, but demand and costs continue to fluctuate, changing what some markets will bear. Housing providers and residents alike are being squeezed by inflation that, while slowing, is still much higher than we’ve seen in recent years, causing people to be much more conservative in their spending.
AN INEVITABLE MARKET CORRECTION HAS SEEMINGLY ARRIVED.
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MORE AND MORE COMMUNITIES ARE CONSIDERING RENT CONTROL MEASURES.
“As the rental market continues to be in upheaval, it’s in the interest of the housing provider to work on recovering master-billed utility costs now,” Daniel Sharabi, CEO of Livable explains. “Not every market has been affected by a correction yet, but it will happen. The time to get ready is now, especially for independent rental owners who pay master-billed utilities and own a smaller number of units. They don’t have the resources of a major corporation behind their investments to help them recover utility costs from their residents.”
On top of utility spikes and market fluctuations, more and more communities are considering rent control measures. Some, like the law passed in Pasadena, California, last fall, restrict utility bill recovery programs as being an increase in rent. So, it’s crucial for housing providers to enroll in these programs prior to potential restrictions occurring.
Even in places like Michigan, where rent control has been prohibited for 35 years, communities are rumbling about needing to implement it in the face of stagnant wages and rising costs that tenants can no longer afford. At the same time, maintaining a healthy net operating income is important for housing providers.
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WHILE WATCHING THESE TRENDS CAN BE OVERWHELMING, ALL IS NOT LOST! Recovering master-billed utilities is an essential element to retaining your highest possible profits, and Ratio Utility Billing (RUBS) is an easy, cost-effective way to do that. RUBS can significantly aid housing providers in maintaining a solid bottom line by placing financial responsibility on residents for their usage, leading to reduced consumption. If you’re not ready for RUBS or are prevented from implementing it for some reason, a Sample Statement showing residents what they WOULD pay can also drive conservation behaviors, even if they aren’t spending any money directly. Studies show that the simple act of informing people of the costs of their habits will cause them to reduce consumption significantly, saving property managers and owners money. That can also increase the timeliness of leak reporting, especially when housing providers maintain an atmosphere in which tenants can report small problems without fear of negative feedback or reprisal. Blaming residents for normal wear and tear, such as a running toilet with a worn- out tank flap, doesn’t encourage them to promptly report problems that can be fixed cheaply and easily, saving money down the road! Livable’s Ratio Utility Billing System allows housing providers to fairly bill residents for their shares of master-billed utility use, including Wi-Fi, water, trash and sewer, and recover up to 90% of utility costs. Livable has no minimum number of units required to enroll and no minimum monthly billing requirements. Unlike submetering, Livable’s RUBS system doesn’t require investment in acquiring and installing pricey equipment.
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RUBS CAN SIGNIFICANTLY AID HOUSING PROVIDERS IN MAINTAINING A SOLID BOTTOM LINE.
And it works! In a fully-occupied, 4-unit building, water and electricity use went down 31% in the first year that Livable’s customizable RUBS system was implemented. Livable has seen similar reductions across property sizes, with even a 300+ unit building showing a 24% reduction in usage and an 89% recovery rate for the owner. In this case, that
meant over $180,000 recovered in just one year of using RUBS. Livable often hits double-digit decreases in buildings that implement its best-in-field RUBS program. To find out how you can get started, contact Livable today.
DANIEL SHARABI CEO & Co-founder Livable
Daniel Sharabi is the CEO & Co-founder of Livable, a utility management company with software solutions designed to save money, as well as the environment. Daniel’s immersive experience working within a multitude of sectors in Silicon Valley offers a homegrown advantage in his vision of leveraging technology to provide benefits for all: the property owner, property manager, the tenants, and our environment. To find out what Livable can do for your property check out livable.com or call 877-789-6027.
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FAILING 1031 EXCHANGES ON THE RISE: WHY DSTS COULD BE THE ANSWER. If you are in the midst of a 1031 Exchange in today’s unstable debt market, you may be having a difficult time finding a mortgage to satisfy your 1031 exchange requirements. These days, 1031 exchange investors are afraid they might not be able to locate and close on their replacement property within the 1031 exchange timeframe. Why is this an important factor to consider? Let’s say that you have successfully sold your investment property and are now searching for a replacement property to complete your 1031 Exchange. In today’s market, you may discover that identifying and closing on high-quality, “like-kind” assets within the specified timeframe is not as easy as it sounds.
ENTER THE DELAWARE STATUTORY TRUST This situation is when DSTs can be used as a backup option. DSTs are pre-packaged specifically for 1031 Exchanges. They can be a very helpful tool to have in the bag should your primary real property option fall through and you’re facing a failed exchange. In addition, because of their turnkey nature, DSTs can often be closed within just 3 -5 days, which provides investors a viable strategy to successfully complete their 1031 Exchange. That’s why many investors find DSTs also make a suitable primary investment option for their 1031 Exchanges. Kay Properties has a variety of leveraged DSTs that are pre-structured with non-recourse debt already built-in, typically ranging from 30% to 70% offering loan to value (LTV).
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COVERING AN EXCHANGE Another popular use of DST investments comes in the form of providing a cover strategy for leftover equity. Let’s say you sell one property and cannot find a suitable replacement property that uses the full exchange proceeds, and you now have leftover equity you need to place. One of the benefits DSTs can provide you in this situation is the ability to enter one without investing a lot of money. Because DSTs typically do not require you to qualify for a loan or even fill out loan documents, DSTs can create a reliable tool for you to access high-quality real estate investments without having to jump through the hoops of getting approved for a loan.
DSTS ARE PRE-PACKAGED SPECIFICALLY FOR 1031 EXCHANGES.
Because DSTs require a low minimum investment amount (typically $100k), they can be a good way for you to use any extra 1031 Exchange proceeds to avoid having a “boot” to pay taxes on. Placing the leftover exchange proceeds into a DST property can potentially allow you to achieve full tax deferral for your 1031 exchange. Consult your own tax or legal advisor for tax and legal advice.
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AN EXAMPLE OF HOW DSTS CAN PROVIDE COVER FOR A 1031 EXCHANGE Here’s an example of how DSTs can provide a cover strategy for your 1031 Exchange:
Let’s say you need to replace a $3,000,000 purchase price for a 1031 Exchange, but your real estate broker finds a property for $2,700,000. By investing the leftover $300,000 in a DST, you could successfully avoid the taxable boot. In this way, you could successfully complete your 1031 Exchange by acquiring both a real property investment and a DST investment with an aggregate value of $3,000,000.
the expensive taxes that could accompany a failed exchange. Kay Properties team members are always available for in-person meetings, Zoom meetings and conference calls with investors to educate and explain various DST options, strategies, and potential benefits and risks.
Look here for access to a complete list of current 1031 eligible exchange DST properties, or use the convenient QR code above and receive your FREE DST 1031 Exchange Toolkit.
DST properties continue to be one of the most popular passive investment options for 1031 Exchanges. If you know how to best use DSTs to avoid common 1031 Exchange challenges, you will be better situated to potentially complete your exchange and avoid
STEVE HASKELL Senior Vice President Kay Properties & Investments LLC (855) 899-4597
Steve Haskell works with 1031 exchange and direct investment clients throughout the country. Steve served for seven years as an officer in the United States Air Force in the special operations community. Prior to his military service, Steve worked in sales and marketing for multiple businesses, which included providing energy management solutions to institutional multifamily apartment owners.
Disclaimer : Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market. Kay Properties team members collectively have over 150 years of real estate experience, are licensed in all 50 states, and have participated in over $30 Billion of DST 1031 investments. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing. IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation. There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed. Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. Securities offered through FNEX Capital, member FINRA, SIPC.
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RENTAL INCOME REPORTING MISTAKES THAT CAN PUT YOU IN HOT WATER WITH THE IRS When it comes to reporting rental usage for income tax purposes, landlords are no strangers to potential mistakes. Being aware of some of the most common mistakes when reporting rental income is essential to avoid trouble with the IRS. 9
Failure to report all rental income received Mistake #1.
One of the most common mistakes landlords make when reporting rental usage to the IRS is failing to report all rental income received. This happens when landlords only report rent from certain tenants, overlook short-term rentals, or omit income from other sources. To avoid this, landlords must remember that ALL rental income, regardless of origin or amount, must be reported on their tax returns. It is crucial to keep detailed records of all rental income received and report it accurately to the IRS to avoid potential issues.
IT IS CRUCIAL TO KEEP DETAILED RECORDS OF ALL RENTAL INCOME RECEIVED.
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Mistake #2.
Improperly designating property as personal use Instead of rental use
When a landlord uses their property for both personal and rental purposes, it can be easy to misclassify it on their tax return. This often occurs when the landlord occupies the premises for part of the year and rents it for the remainder. It’s crucial to remember that if a property is rented out for any length of time, it’s considered a rental asset for tax purposes.
IF A PROPERTY IS RENTED OUT FOR ANY LENGTH OF TIME, IT’S CONSIDERED A RENTAL ASSET FOR TAX PURPOSES.
Failing to keep accurate records of rental expenses and income
Mistake #3.
Without proper record-keeping, tracking expenses, calculating net rental income, computing deductions accurately can be difficult. This can lead to underreporting of rental income, over-claiming of deductions, and other errors that can result in penalties and fines. To avoid these issues, keeping detailed records of all rental income received and expenses incurred throughout the year is essential. This includes receipts, invoices, and other relevant documents that can help you accurately track and report rental activity.
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Mistake #4.
Improperly claiming deductions for rental expenses
While it’s essential to claim all eligible deductions to reduce your tax liability, it’s also vital to ensure that you’re claiming them correctly and within the guidelines set by the IRS. This includes property taxes, mortgage interest, repairs, maintenance, and other costs associated with owning and operating a rental property. However, some landlords may overclaim expenses, claim expenses that are not eligible, or fail to provide adequate documentation to support their deductions. To avoid these issues, it’s essential to keep accurate records of all rental expenses, know which expenses are eligible for a deduction, and consult with a tax professional to ensure that you’re claiming deductions correctly.
Mistake #5.
Misreporting rental property depreciation
Depreciation is a tax deduction that enables landlords to deduct the rental property’s cost over a span of years. They may fail to recapture depreciation upon the property’s sale or misclassify it as residential or commercial. To avoid these issues, accurately calculate and report rental property depreciation on your tax return, keep detailed records of their value, and consult with a tax professional if necessary to ensure that you’re claiming depreciation correctly.
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Less Common Mistakes When Reporting Rental Usage to the IRS
Mistake #6.
Failure to report income from short-term rentals, such as those from Airbnb
Short-term rentals have become increasingly popular in recent years, but many landlords may not realize that they must report all rental income received from these types of rentals on their tax returns. This includes income from Airbnb or other short-term rental platforms.
Mistake #7.
Claiming a rental loss for a property that was not available for rent
Landlords can only claim a rental loss for a property available for rent during the tax year. Claiming a rental loss for an unavailable property could lead to legal issues, penalties, and fines if discovered by the IRS. To avoid these complications, landlords should strive to ensure their property is available for rent and take steps to market it to potential tenants.
LANDLORDS CAN ONLY CLAIM A RENTAL LOSS FOR A PROPERTY AVAILABLE FOR RENT.
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Mistake #8.
Failing to report security deposits correctly
Security deposits are an essential tool for landlords to protect their property from any damages caused by tenants. These deposits are not considered rental income when received, but landlords must handle them carefully to avoid any tax-related issues. When a security deposit is received, it must be appropriately documented and accounted for in the landlord’s financial records. If a landlord keeps a security deposit, it must be reported as income on their tax return for the year it was kept. It’s worth noting that landlords may not be required to report security deposits as income if they plan to use them for their intended purpose, such as covering damages caused by a tenant. However, if a landlord decides to keep the security deposit for another reason, such as to cover unpaid rent or other expenses, the deposit must be reported as income. On the other hand, if a security deposit is returned to the tenant, it is not considered rental income and should not be reported to the IRS. In this case, the security deposit is simply a refund of the tenant’s money and is not taxable income for the landlord.
Incorrectly reporting repairs vs. improvements
Mistake #9.
Landlords must distinguish between repairs and improvements when reporting rental income to the IRS. Repairs, such as fixing a leaky faucet or patching a hole in the wall, are deductible in the year they are made. Improvements, such as adding a new roof or renovating a bathroom, must be depreciated over time.
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HOW PROPERTY MANAGEMENT TOOLS HELP LANDLORDS AVOID MISREPORTING RENTAL USAGE
Managing rental assets can be daunting, especially for landlords who own multiple properties. Luckily, there are free tools, such as Azibo that can simplify the process, providing features such as the automatic tracking of rental income and expenses. This can help landlords keep accurate records and report the information to the IRS. In addition, these tools can simplify landlords’ tax preparation. By automating the record-keeping and
tax preparation process, landlords can minimize the risk of making mistakes when reporting rental usage to the IRS. With the ability to generate detailed financial reports and identify potential deductions, landlords can prepare their tax returns quickly and easily. If landlords have any questions about their tax obligations, seeking the help of a professional is always recommended.
GEMMA SMITH Entrepreneur & Property Manager
Gemma Smith is an experienced property manager with a passion for writing valuable content related to rentals. She provides insightful information to benefit renters and landlords, serving as a valuable resource for navigating the complex world of property management. This article was written on behalf of Azibo, the free all-in-one financial platform for landlords and real estate investors. Save time, stay organized, and achieve passive income with tools such as online rent collection, landlord tax prep, and accounting software, landlord insurance, rental applications, and much more. To learn more visit Azibo.com, email info@azibo.com, or call (855) 920-9907.
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CELEBRITIES
ON THE MOVE
Brad Pitt When oil heiress Aileen Getty purchased his $33 million estate, Brad Pitt returned the favor by buying the home she was leaving, a 3-bedroom, 2-bath midcentury modern set on a quarter acre in Los Feliz, California. $5.5 million bought Pitt, an avid fan of architecture, a 2,092 square foot steel and glass design inspired by the Case Study program. His new home boasts such midcentury features as terrazzo floors, cantilevered eaves and beamed ceilings. A redwood hot tub, pool and a sauna building are featured.
Colin Farrell
After recently selling the 4000-square-foot Los Feliz home where he lived for the past 17 years at a price of $5.3 million, Colin Farrell purchased another home in Los Feliz for $5.9 million. His new residence covers 5200 square feet with the main house and the detached guesthouse offering a combined five bedrooms and six baths. The 1920s revival property enjoys panoramic views of downtown Los Angeles and includes a pool, wine cellar, movie theatre and a book-lined library.
Rihanna
With her growing family in mind, Rihanna recently paid $21 million for a 9000-square-foot penthouse in The Century, one of Los Angeles’ most prestigious residential buildings. Occupying the entire 40th floor, the home’s curved windows provide sweeping views from downtown L.A. to the Pacific Ocean and Catalina Island. The Century furnishes homeowners with such amenities as 24/7 concierge service, security guards, an outdoor swimming pool, onsite storage, conference rooms and an in-house restaurant.
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CELEBRITIES
ON THE MOVE
Britney Spears Having owned it for just eight months, Britney Spears has sold her Calabasas mansion for $10.1 million, $1.7 million less than she paid for it last year. The sprawling single-level home boasts 7 bedrooms and 9 baths in 11,650 square feet on 1.6 acres. Among the many luxury amenities are a detached 1-bedroom guesthouse, wine cellar, luxe 10-seat movie theatre and a 2000-square-foot patio equipped with a fireplace and barbecue. The 55-foot-long pool features a spa, waterslide and tiered waterfalls.
Jim Carrey
Jim Carrey has put his light-filled Brentwood home on the market at $28.9 million after enjoying it for 30 years. Enclosed by 280 feet of tall hedging and surrounded by lush landscaping, the residence consists of 5 en suite bedrooms and 3 half baths in 12,704 square feet. Skylights, fireplaces and an oversize family room are joined by a movie theatre with a snack bar. Outdoors, a rock-lined swimming pool, pool house, a sauna and steam room, a gazebo, tennis courts and a vegetable garden offer the new owner many hours of fun activities.
Bradley Cooper
In 2004, Bradley Cooper purchased this 1921 2-bedroom, 2 bath “starter home” in Venice, California, close to the popular boardwalk and trendy Abbot Kinney restaurants and shops. Now, after holding onto it for 19 years, he has listed the 1571-square-foot, single-level residence for $2.4 million. Tall hedges provide privacy and create a lovely al fresco patio with a unique water feature. Distinctive designer features include reclaimed wood ceilings as well as concrete and wood floors.
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Real estate investing nightmares can take many forms, and often the best way to learn is through others’ experiences. In this article we share seven stories from real estate pros covering everything from title issues, forged leases, squatters, legal disputes, and outright embezzlement. Read on to help you spot these scams in your real estate investing journey and take proactive measures to protect your assets.
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CONTRACTOR EXTORTS WOMEN-OWNED COMPANIES
TITLES MATTER
We were asked to coordinate a land sale between a buyer and seller. After completing the purchase sales agreement and the offer was accepted, we opened escrow. While reviewing title, escrow found out the title was never conveyed from the previous owner to the current "seller”. We thought the seller was trying to fool us, but he explained that they did a New York closing, and the deed was just not recorded correctly. We had to find the previous owner, who lived in the woods of Northern California, a total hermit. After walking onto his property and him threatening to shoot us, we asked that he sign off the deed to the current owner, which he did. The deal was done, and it all worked out. But please, ALWAYS run title, close deals with an escrow company and officer that can convey title correctly and use a broker that can help get the deal done.
My company was renovating a large apartment property and hired "Summit Construction" as the general contractor. We were promised quality work, fair pricing, and timely completion. However, as the project progressed, we noticed that the subcontractors and suppliers were not being paid on time or in full, despite it being Summit's contractual responsibility. The job was dragging, and we found the cause when it was too late. We had a $385,000 lien on our property. It soon became apparent that "Summit" was using this tactic as a means of emotional and financial abuse, hoping to pressure female clients like me into paying them what they had not earned. This was a clear case of extortion. "Summit" had repeated abusive actions to other women-owned companies. So, we came together to expose “Summit” on live television news. Eventually, we received a judgement against "Summit Construction," and they were blacklisted from ever receiving any government contracting work again.
ALWAYS RUN TITLE, CLOSE DEALS WITH AN ESCROW COMPANY AND OFFICER THAT CAN CONVEY TITLE CORRECTLY.
THIS WAS A CLEAR CASE OF EXTORTION.
Schmuel Siegel Real Estate Broker Santa Monica, CA Connect with Schmuel
Kaylee McMahon Investor and Founder The Apartment Queen Connect with Kaylee
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SQUATTERS TAKE OVER VACANT RENTAL
EMPLOYEES EMBEZZLE $300K
I recently used a rental company to rent an investor's home. They advertised online, put out a lockbox and started showing the home on a Wednesday. That Saturday, my client stopped by the house and found things on the primary bedroom floor and bathroom. He locked the house with a deadbolt and called the cops. The cops came, gathered up all the stuff, took a report, and called the rental company. The next day, two people showed up at the police department demanding their stuff back, claiming they had been scammed on Airbnb. The cops ran their background and found multiple counts of fraud and misdemeanors. The rental company believes they pretended to be a potential renter and watched as the property manager opened the lock box.
One of my clients called me in a panic because they couldn't issue a 1099 form for $139,000 to a repair vendor whose phone was disconnected and whose address was fake. We launched an internal audit and discovered $300k was embezzled by two employees who had experience "working with AppFolio." The bookkeeper had not followed our new vendor's SOP. Everyone had access to all accounting functions, and they also failed to conduct employee background checks. Accounting is serious. Even minor errors can have far- reaching consequences. So I highly recommend daily triple tie-out, balancing, and reconciling your books. When I asked why they were only checking on tenants and not employees, they responded, “We were in a pinch.” Their only requirement was the person to be experienced with the software.
THEY PRETENDED TO BE A POTENTIAL RENTER.
THEY DIDN'T CONDUCT EMPLOYEE BACKGROUND CHECKS.
Gita Faust Author of Residential Property Management for Landlords: QuickBooks Desktop
Elizabeth Campbell Lysi Bishop Real Estate Boise, ID Connect with Elizabeth
Read Gita’s Book Connect with Gita
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A realtor asked if he could show our rental property to a client of his. We had a few conversations, and things sounded like they were on the right track. But there was NO rental application. The realtor was instructed to arm our security system when leaving the property, but we noticed it was not armed. After a few conversations with the realtor, I decided to head to the property. It was about 6am, and I found a man with three dogs there. The man shouts, “Stop, my dogs bite!” After a brief discussion, the man realized the realtor did NOT have the right to let him move in. We were lucky. He packed up his dogs and went away. Be careful with allowing realtors you don’t know to show your property! REALTOR LETS RANDOM MAN MOVE-IN
SURPRISE LIEN
FORGED LEASES
When I first started investing in real estate, I bought a value-add property for cash from another real estate investor. I was not a REALTOR® at the time, and as an anxious new real estate investor, I was not thinking about liens. The property had an outstanding lien because the current tenant had not paid the electric bill. The previous owner was only concerned about their rental payment and nothing else. When I got ready to pay the bill, I realized the tenant was stealing power and had severely damaged my electric meter socket load center. I had to get the electricity brought up to code. I spent triple what I paid for the property based on the lien, purchasing new equipment to get the property’s electricity up to the latest residential code, and inspection fees with the city’s community development department. I learned a valuable lesson in real estate investing.
A few years ago, during a final walk- through, we noticed five units were vacant, despite the rent roll stating they were leased. We questioned the owner, who stated that all five units had furniture delays. We then requested to see a copy of each lease and quickly identified that all five lessees not only had the same handwriting, but miraculously had the same handwriting as the property manager! Once again, we spoke to the owner and they doubled down, stating that they were legit leases. It was only after we pushed further that he confessed to having his team forge the leases. The best part of the story is the broker knew the truth the entire time, but still lied on behalf of the seller. This birthed our motto which we still live by to this day: “Never trust, always verify!”
Adrian Smude Mobile Home Investor Author of How to Buy Mobile Homes Read Adrian’s book
Dr. Michael Threatt Principal and CEO Elevate Housing Solutions, LLC Connect with Dr. Threatt
Ashley Wilson Co-Founder of Bardown Investments
Author of The Only Woman in the Room Read Ashley’s Book
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