3 Tax Mistakes that Real Estate Professionals Make

Written by The Bryan Ellis Real Estate Investing Letter

Training & Education: 3 Tax Mistakes that Real Estate Professionals Make

Carole VanSickle | February 14, 2013 |

No one wants an audit, and unfortunately if you are in the real estate business, you are more likely to be audited than most. Real estate agents and professionals tend to be eligible for many itemized deductions on their tax returns, but fail to document those deductions appropriately and you could be staring an audit – not to mention fines and penalties – right in the face. Check out these three potential problem deductions and make sure that you are documenting them correctly before you turn in your taxes:

1. Did you claim a vehicle as a business deduction?
   If you are like most real estate investors, you use your car for business all of the time. However, if you claimed that vehicle as 100-percent business use and it is your only car, you had better have documentation to back that claim up.
2. Do you claim travel and entertainment deductions?
   Networking and travel are part of your job, right? That’s fine, but real estate investors often can claim far more in this area than most. Keep those receipts, and be prepared to show not only how much you spent, but what you were doing when you spent it in order to make sure that you get to keep those deductions and don’t end up paying make-up taxes, penalties, and fines.
3. Are you a part-time real estate professional?
   Real estate professionals are dedicated, and many work a full-time job in addition to managing rental properties or investing in other formats. If this describes you, documentation is going to be key for your tax survival. Individuals who claim relatively large deductions based on part-time work (even if you know you’re basically working two full-time jobs) are a prime target for auditing, so make sure you can demonstrate that the expenses related to real estate are legitimate.

When it comes to filing taxes, having more documentation is always better than having less – especially when you are working with an entity that has the kind of firepower that the IRS does. Make sure you save everything and work with a tax professional to determine the best route for you when it comes to filing your taxes and maximizing your returns.

10 Steps Toward Low-Risk Landlording

Learn how to protect your rental property from common mishaps and risky situations.

Most rental property owners worry about protecting their investment. From physical damage to the property to insurance claims to lawsuits brought by tenants, there are myriad ways that you can lose money. Fortunately, minimizing risks in a rental business doesn't require a ton of money or a staff of experts. All you need to do is learn where you're vulnerable and then take commonsense steps to minimize that vulnerability.
Here are ten steps you can take to protect yourself against liability as a landlord. By acting now, you'll enjoy a big payoff: reduced likelihood of lawsuits, harm to tenants and guests, damage to your property, and financial distress to your business.

Step #1: Get the Right Insurance for Your Property and Business

Don't wait until a loss occurs before you determine whether you have the right insurance for your business and property. Review your current policy with your agent or broker, then discuss coverage options that fit your needs.

Step #2: Make Your Property Physically Sound

Keep your property safe so that people don't get hurt. To do this, learn the basic legal requirements for repairing and maintaining your property, and then follow them.

implied warranty of habitability. Virtually every landlord must comply with a legal rule known as the "implied warranty of habitability." This means you must make sure your rentals are in a "fit" and "habitable" condition when tenants move in, and you must maintain this condition throughout the tenancy. Get familiar with your state and local health, building, and safety codes, and strive to keep your property compliant. (To learn how to find the laws that apply to your rental property, see Nolo's Legal Research area.)

Take steps to prevent injuries and losses. In addition, take other reasonable steps to prevent injuries and other losses. For example, take all tenants' repair requests seriously and fix problems promptly. Inspect your property yourself for hazards. If you can't address a hazardous situation immediately, warn tenants and visitors about the danger. (For example, put traffic cones around a pothole, or post signs and safety tape near a spill on the floor.)

Step #3: Make Your Rental Property Accessible to Disabled Tenants

Make your property accessible to tenants with mobility impairments and other disabilities. Check whether structures on your property must follow the Fair Housing Act's "design and construction" requirements. (Generally, multifamily buildings that were designed and constructed for first occupancy after March 13, 1991 must comply.)
Regardless of when your buildings were constructed, seriously consider all requests from a disabled prospect or tenant to modify your building in order to meet that person's needs. Review each request on a case-by-case basis and grant it if it's reasonable. For example, a prospect's request to install grab bars in the bathroom or lower kitchen cabinets is probably a reasonable modification request.

Step #4: Remove Environmental Hazards from Your Property

Removing environmental hazards is often trickier than removing other physical hazards. Environmental hazards often can't be seen, and they may not become apparent until they cause injury or property damage. For example, a landlord might not learn of lead paint dust on her property until a family gets their child's blood test results showing elevated levels of lead. What's more, in some cases environmental hazards remain invisible even once they've caused damage, as in the case of carbon monoxide or radon.
Do your best to address environmental hazards before they cause serious damage. Here are some ways to do so:

• Require tenants to report all leaks and flooding to you promptly so that you can take quick action to prevent mold.
• Maintain your heating systems and appliances, and install carbon monoxide detectors in order to prevent carbon monoxide build-up.
• Comply with federal testing requirements when employees or contractors work on asbestos-containing building materials, such as sprayed-on ceilings. These tests will reveal to workers what's in your building, and you can use this knowledge to protect your tenants, too.

Step #5: Prepare for and Handle Disasters and Emergencies

Take steps to safeguard your business and protect your property, tenants, and employees in an emergency. For example:

• Back up your computer files and keep important documents (such as a mortgage, note, and management contract) in a secure and fire-proof off-site storage facility.
• Report suspicious objects, activities, and mail to the police, and take bomb threats seriously.
• Document the location of utility shut-off valves, a step that can save lives and minimize damage if a fire or other disaster occurs.
• Create an emergency procedures manual with an evacuation plan that's tailored to your property.

Step #6: Lower the Risk of Crime at Your Property

In recent years, courts have increasingly found landlords partially responsible for crimes on their properties because they didn't provide adequate security.
To prevent problems and keep your property and tenants safe, comply with state and local laws concerning security measures on rental properties. Screen your applicants and employees carefully -- don't just look for experience and know-how when it comes to filling a position on your staff. Adopt a smart key policy so that keys don't fall into the wrong hands, and make sure your intercom system doesn't link tenants to their apartment numbers. Answer prospects' questions about security candidly, and deliver on any promise you make to increase security.

Step #7: Avoid Fair Housing Complaints When Choosing Tenants

If a prospective tenant believes you violated her civil rights, she may take legal action against you. Even if you win, defending yourself takes time, money, and energy.
To avoid problems, learn the basics of fair housing laws. The key to compliance is treating everyone the same. Some ways to do this include:

• putting your screening criteria into a written tenant selection plan and giving a copy to applicants
• rejecting applicants for legitimate business reasons, such as poor credit or negative references from prior landlords, and letting applicants know your reasons for rejecting them, and
• keeping an updated log of apartment availability, and granting prospects' requests for reasonable accommodations. For example, if you have a "no pets" policy and a prospect needs a guide dog to accommodate his disability, let him keep the dog as an accommodation.

Step #8: Adopt Careful and Consistent Business Practices

Many landlords create risks just by the way they go about their business. Be a careful and consistent landlord by using a written lease or rental agreement with tenants and by enforcing lease clauses consistently. Create house rules for tenants to follow (for example, regarding pets or children's health and safety) and enforce them. Don't let a friendship with a tenant interfere with your professional relationship. Also, to prevent identity theft, don't use tenants' Social Security numbers any more than needed.

Step #9: Avoid Problems When Hiring Help

Hiring help brings the promise of efficiency, savings, peace of mind, and profitability to your business -- but it also brings risk. To lower your risk, determine whether you must classify a helper as an employee or an independent contractor.

For employees, be sure to withhold the appropriate payroll taxes and create a zero-tolerance policy against sexual harassment. (To learn more about your duties as an employer, see Nolo's Human Resources area.)

When using contractors, make sure they have insurance and sign a written contract with you. (To learn more, see Nolo's Using Independent Contractors & Freelancers area.)

If you're considering hiring a management company or need to hire a lawyer, ask questions until you're satisfied you're choosing the right one.

Step #10: Taxes: Stay on Good Terms with Uncle Sam

Take steps to avoid a tax audit and to maximize your deductions. For example,

• Establish a recordkeeping system for your business so that you keep track of every document that will substantiate your claimed income and expenses.
• Understand how your choice of business structure and tax year affect your taxes.
• Find out what deductions you're entitled to claim, and then claim them. (See Nolo's article Top Ten Tax Deductions for Landlords.)
• Finally, hire the right type of tax pro for your business, and review your past returns for evidence of trends or problems.

More Information

For more in-depth information on the steps outlined above, plus practical advice to help landlords and property managers, see Every Landlord's Property Protection Guide: 10 Ways to Cut Your Risk Now, by Ron Leshnower (Nolo).

POSTED AS A COURTESY ARTICLE, PLEASE CONSULT YOUR OWN PROFESSIONALS.

What If A Tenant Writes A Bad Check To You, Criminal, Civil, Or Both

The answer is both. And most likely it will be a Class 6 Felony and it will probably be a rent check over $200 in value.

Here is the Virginia Code that proves that writing bad checks is not only a civil matter but a crime that must be prosecuted. Today I had an experience where a tenant intentionally gave me a bad check and the magistrate said that a tenant writing a bad check is a civil matter so they won't have her arrested. Here we go again....

Call the police and have the officer contact their lieutenant on duty if they are not fully up to speed on this law that appears to be last updated in 1981.

§ 18.2-181. Issuing bad checks, etc., larceny.

Any person who, with intent to defraud, shall make or draw or utter or deliver any check, draft, or order for the payment of money, upon any bank, banking institution, trust company, or other depository, knowing, at the time of such making, drawing, uttering or delivering, that the maker or drawer has not sufficient funds in, or credit with, such bank, banking institution, trust company, or other depository, for the payment of such check, draft or order, although no express representation is made in reference thereto, shall be guilty of larceny; and, if this check, draft, or order has a represented value of $200 or more, such person shall be guilty of a Class 6 felony. In cases in which such value is less than $200, the person shall be guilty of a Class 1 misdemeanor.

The word "credit" as used herein, shall be construed to mean any arrangement or understanding with the bank, trust company, or other depository for the payment of such check, draft or order.

Any person making, drawing, uttering or delivering any such check, draft or order in payment as a present consideration for goods or services for the purposes set out in this section shall be guilty as provided herein.

(Code 1950, § 6.1-115; 1966, c. 584; 1975, cc. 14, 15; 1978, c. 791; 1981, c. 230.)

Criminal Tresspassing, Squatters

As many of you know, I've been working with Roanoke City Police Chief, Chris Perkins, on some state laws we didn't feel were being enforced. A victory for REI of Virginia and the City came out of this. Chief Perkins worked with the city attorney over several months and found lots of case law that supports CRIMINAL ARREST on any person who is in your property that is NOT on the lease and has been warned to leave by either you as the owner or the bonafide tenant. Save this post and you can let the officer read the chief and the City Attorneys position word for word.

The Roanoke City Police Department has decided to enforce this crime only if they are being called due to a disturbance call that they receive. I would suggest that both you or your tenant fill out a trespassing form similar to what I posted on the REI of Virginia website prior to having non tenant who has taken residence arrested.

Squatters have NO RIGHTS in Virginia! And NO ONE can MAKE themselves a tenant. The any and all other occupants is technically unnecessary that you put on your unlawful detainers as they are criminals illegally in your property and trespassing!

Communication from me to Chief Perkins:

Chief Perkins,

Real Estate Investors of Virginia is trying to find an answer to a very important question of the law. We have had officers come to our meetings and it seems that everyone has a different opinion on the trespassing laws.

Some say that in any case if a person has taken residence in a landlords property that is not on the lease, weather it is a squatter or guest of the tenant that overstayed their welcome, that this is a civil matter and not a criminal matter and the tenant or landlord would have to file an unlawful detainer to attempt to remove them from the property.

Other officers have said that squatters have no rights but people that the tenant let live with them that are not on the lease, that the tenant on the lease wants out, have rights to the property because they have taken residence there.

It appears by the trespassing laws quoted below that no one has rights or residency to a house or apartment if they are not the tenant on the lease.  And it doesn't say anywhere that I am aware of that the person who doesn't belong in the house can become a tenant without a lease.

However it appears that if the person who moved in and is not on the lease has been given a trespassing notice and they reenter the property they are trespassing and it is a criminal matter, not a civil matter. Could you please clarify the law if we are wrong?  Many of our members feel that the police department may not be enforcing this law as we are not able to find anywhere in Virginia Code that states that a person can take residence if they are not on the lease making it a civil matter rather than a criminal matter as the law suggests. If you know of where there is some law that we are missing that says that this is not trespassing or it is a civil matter could you please lead me to the code.

As always, thank you for your help!


Best regards,


Dallas.

PS: below are the laws that we have found pertaining to this issue.

Virginia Code § 18.2-119 defines the crime of trespassing as follows:
If any person without authority of law goes upon or remains upon the
lands, buildings or premises of another, or any portion or area
thereof, after having been forbidden to do so, either orally or in
writing, by the owner, lessee, custodian or other person lawfully in
charge thereof, or after having been forbidden to do so by a sign or
signs posted by such persons or by the holder of any easement or other
right-of-way authorized by the instrument creating such interest to
post such signs on such lands, structures, premises or portion or area
thereof at a place or places where it or they may be reasonably seen,
or if any person, whether he is the owner, tenant or otherwise
entitled to the use of such land, building or premises, goes upon, or
remains upon such land, building or premises after having been
prohibited from doing so by a court of competent jurisdiction by an
order issued pursuant to §§ 16.1-253, 16.1-253.1, 16.1-253.4,
16.1-278.2 through 16.1-278.6, 16.1-278.8, 16.1-278.14, 16.1-278.15,
16.1-279.1, 19.2-152.8, 19.2-152.9 or § 19.2-152.10 or an ex parte
order issued pursuant to § 20-103, and after having been served with
such order, he shall be guilty of a Class 1 misdemeanor. This section
shall not be construed to affect in any way the provisions of §§
18.2-132 through 18.2-136.

Here is another little bit of

Virginia Code 55-248.31:01. Barring guest or invitee of tenants. A. A guest or
invitee of a tenant may be barred from the premises by the landlord
upon written notice served personally upon the guest or invitee of the
tenant for conduct on the landlord's property where the premises are
located which violates the terms and conditions of the rental
agreement, a local ordinance, or a state or federal law. A copy of the
notice must be served upon the tenant in accordance with this chapter.
The notice shall describe the conduct of the guest or invitee which is
the basis for the landlord's action.
B. In addition to the remedies against the tenant authorized by this
chapter, a landlord may apply to the magistrate for a warrant for
trespass, provided the guest or invitee has been served in accordance
with subsection A.
C. The tenant may file a tenant's assertion, in accordance with
55-248.27, requesting that the general district court review the
landlord's action to bar the guest or invitee.

What I posted on the REI website about it:
http://www.reiofvirginia.com/search/label/trespassing%20notice

And here is some more:
Virginia Code § 18.2-119. Trespass after having been forbidden to do so; penalties.
If any person without authority of law goes upon or remains upon the
lands, buildings or premises of another, or any portion or area
thereof, after having been forbidden to do so, either orally or in
writing, by the owner, lessee, custodian, or the agent of any such
person, or other person lawfully in charge thereof, or after having
been forbidden to do so by a sign or signs posted by or at the
direction of such persons or the agent of any such person or by the
holder of any easement or other right-of-way authorized by the
instrument creating such interest to post such signs on such lands,
structures, premises or portion or area thereof at a place or places
where it or they may be reasonably seen, or if any person, whether he
is the owner, tenant or otherwise entitled to the use of such land,
building or premises, goes upon, or remains upon such land, building
or premises after having been prohibited from doing so by a court of
competent jurisdiction by an order issued pursuant to §§ 16.1-253,
16.1-253.1, 16.1-253.4, 16.1-278.2 through 16.1-278.6, 16.1-278.8,
16.1-278.14, 16.1-278.15, 16.1-279.1, 19.2-152.8, 19.2-152.9 or §
19.2-152.10 or an ex parte order issued pursuant to § 20-103, and
after having been served with such order, he shall be guilty of a
Class 1 misdemeanor. This section shall not be construed to affect in
any way the provisions of §§ 18.2-132 through 18.2-136.

Response by Chief Perkins After A Few Months of Research:

Dallas,

    Per you your request, police staff has worked with the City
Attorney's Office in researching the issue regarding whether a police
officer should charge an individual for criminal trespass when they are
found in a residence, which they do not either own or are not specifically
named as a tenant.  This situation most often arises when a police officer
is responding to a domestic disturbance complaint.  Once the officer
arrives, he finds that one of the parties is either the owner of the
property or the named tenant on the lease.  The Virginia Court of Appeals
published a case in 2002, McCracken V. Commonwealth of Virginia in which
the Court held that is was reasonable for two officers who responded to a
domestic disturbance to believe that a defendant was trespassing when they
had previously verified that the owner had ordered the defendant to leave
the property.  This particular case was fact specific and involved a
domestic disturbance.  The Court found that the two police officers knew
that one of the individuals was the owner of the property.  The police
officers had previously arrived at the property in response to a domestic
disturbance call.  All parties involved agreed that the non-owner of the
property would move out.  The non-owner removed his possessions from the
property and left the property while the officers were present.
Approximately ninety (90) minutes later, the officers were again called to
the same property for another domestic disturbance complaint.  When they
arrived on the scene, they observed the male non owner inside the property.
The Court of Appeals held that based on these facts, the police officers
had “probable cause to believe that the defendant was trespassing” under
Virginia Code Section 18.2-119.  The Court took into consideration that
these officers had observed the initial domestic call and that they had
verified that the female, Ms. Fields was the actual owner of the property.
The Court noted that as the owner of the residence, Ms. Fields could revoke
her permission for the defendant to remain in the property.
    Likewise, in a tenant situation, should one of the residents of the
property be a named tenant on the lease, then they have the right to ban
another individual from the property who is not named on the lease.  If a
police officer is responding to a domestic disturbance complaint, as in the
McCracken case, then a tenant may ask the non-tenant to leave the property,
If the non-tenant refuses to leave the property, then it is opined that the
police officer has probable cause to arrest the non-tenant for criminal
trespass under Virginia Code Section 18.2-119.  When the Court of Appeals
has cited the McCracken case, it has noted that an owner has the right to
revoke permission for a non-owner to remain on the property.  Under the
concept of quiet enjoyment, it is believed that a named tenant to a lease
would have the same right to restrict the access of a non-tenant.  See
Farrow v. Commonwealth of Virginia, 05 Vap UNP 1811042 (2005).  Therefore,
police officers will only utilize criminal trespass in these situations
that arise out of domestic disturbance complaints where the
non-owner/non-tenant refuses to leave the property.  It is important that
the police officer be able to clearly establish who owns the property or
the individual who is the named tenant, prior to charging anyone with
criminal trespass.
    In situations arising out of landlord/tenant disputes, police
officers will advise the parties that such matters are best resolved in the
civil courts or advise the landlord that he/she may attempt to obtain a
criminal warrant through the magistrate because a police officer should
remain neutral when confronted with what is obviously a civil
landlord-tenant dispute.  The McCracken case emphasized the importance of
maintaining the peace during a domestic disturbance complaint and a police
officer having probable cause to arrest a non-owner or non-tenant who
refused to leave the property when ordered.  In cases involving disputes
between a landlord and a named tenant, such matters are better left to
civil courts.


Sincerely,



Chris Perkins


Email From Me Back To Chief Perkins:

Hi Chief Perkins,

REI of Virginia would like to thank you for working with the City Attorney's Office to search for case law in Virginia.  We're glad to hear that in a domestic disturbance call the police can arrest someone has refused to leave by request of the owner or bonafide tenant. If you could pass that on to your officers so we are all on the same page it would be greatly appreciated.

Thanks again for your help!


Best regards,



Dallas

10 Things You Should Know About the American Taxpayer Relief Act of 2012

There is a tremendous amount of uncertainty and misunderstanding about the "Fiscal Cliff" and its impact on the American Taxpayer.  My agency, Carico Insurance, consults with Tax Attorneys, CPA's, Financial Advisors and other professionals to help sort through confusing topics like this for our Clients.  No one person can master all the intricacies of a document this complex, so we work with some of the brightest minds and trusted experts in their fields.  Please find below a few of the changes you should know about the "American Taxpayer Relief Act of 2012".

The information below came from Farmers Insurance Group's "Advanced Markets" team.

2013 started off with a lot of drama in Washington while we anxiously stood on the precipice of the “Fiscal Cliff.” The President signed the American Taxpayer Relief Act of 2012 which addresses many of the tax increases that were set to take place at the beginning of this year, at least temporarily addressing “Fiscal Cliff” fears. The Act does not impose new taxes on life insurance, annuities, pensions, retirement savings or employer-provided benefits. But because many Americans now face increased tax liability, these products may hold more appeal for those impacted by the new tax law. Here is a summary of some of the provisions of this Act:

1) The federal estate tax, gift tax and the federal generations skipping transfer (GST) tax will continue to have $5,000,000 exemptions, indexed for inflation.  The IRS has not yet announced the 2013 inflation adjustment. The highest estate tax rate will go up from 35% to 40%.  This is a permanent change to the law.

2)  The income tax rates for 2013 are:

                              Married Filing Jointly           Single

     10% Bracket    $0 - 17,850                            $0 - 8,925

     15% Bracket    $17,851 – 72,500                   $8,926 – 36,250

     25% Bracket    $72,501 – 146,400                  $36,251 – 87,850

     28% Bracket    $146,401 – 223,050                $87,851 – 183,250

     33% Bracket    $223,051 – 398,350                $183,251 – 398,350

     35% Bracket    $398,351 - 450,000                 $398,351 - 400,000

     39.6% Bracket $450,000 and up                    $400,000 and up [this is a new tax rate]

3) Payroll taxes will increase to 6.2%, reverting back to the levels of 2010.  Many of us will see a reduction in our paychecks as a result of this 2% increase in taxes.

4) There will also be a phase-out of the personal exemption for individuals earning more than $250,000 and couples earning more than $300,000.  Head of Household limit is $275,000.  Married Taxpayers filing separately is $150,000. These limits are to be indexed for inflation.

5) The phase-out on itemized deductions curtails how much may be deducted of otherwise allowable deductions.  This phase –out is applied to individuals earning more than $250,000 and couples earning more than $300,000.  The corresponding Head of Household limit is $275,000 and Married Taxpayers filing separately is $150,000. Above these thresholds, otherwise allowable itemized deductions will be reduced by 3% of the amount by which the income exceeds the threshold.

6)  Permanently indexes the Alternative Minimum Tax (AMT) for inflation.

7)  Dividend and Capital Gains Tax Rates for 2013 go from 15% to 20% for individuals earning $400,000 or more and couples earning $450,000 or more.  It will stay at 15% for everyone else. 

8) Extension for 5 years of the $1,000 child tax credit and the tax credit for higher education costs is extended through December 31, 2013 applying retroactively to the 2012 tax year.

9) Extension for 1 year of the accelerated "bonus" depreciation on business investments.

10) Extension of tax free distributions from individual retirement plans for charitable purposes.

                                                                                                                                                          Source:  taxpolicycenter.org

The gift tax exclusion increases from $13,000 to $14,000.

Please call me with any questions I might assist with finding answers to:  

Terry Carico    (540) 797-5916

This material was prepared for educational purposes only and does not constitute tax, legal or accounting advice.  Neither Farmers Insurance nor any of its agents, employees or registered representatives are authorized to provide tax or legal advice.  This material was not written for, or intended for, and cannot be used by any taxpayer for, the purpose of avoiding any IRS penalty. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation.  Tax laws are subject to interpretation and legislative change.  The actual tax results and the appropriateness of any product or arrangement for any specific taxpayer may vary depending on the facts and circumstances.  You should consult with and rely on your own independent legal and tax advisers regarding your particular set of facts and circumstances.