Welcome to the StarPoint Tenant Screening Blog. This blog is dedicated to sharing valuable and helpful info with property managers and individual landlords about tenant screening, state tenant laws, useful forms and more.
As 2012 is wrapping up, so is the tax year. It’s a good time to focus on the tax deductions for landlords you can claim as a rental property owner.
Below are seven key 2012 tax deductions for landlords rental property owners can look forward to:
1) Mortgage Expenses
Rental property owners can write off the interest paid on their mortgage. The mortgage company will send you a Form 1098 that tells how much interest you paid the previous year.
Unfortunately, one-time expenses at closing — such as commission and appraisal – aren’t fully deductible in the year that you pay them. Instead, you can amortize them over the life of the loan, still leaving you with a hefty deduction.
2) Repairs
When something breaks, you have to fix it and the landlord foots the bill. The good news is that repair and maintenance costs are tax deductible.
The distinction is a repair that keeps your property in good working order. If something breaks or could potentially break and you spend the money to replace or update it, the cost is considered tax deductible.
3) Travel Expenses
Keep tabs on any time you travel to the property to make improvements or collect rent. On your taxes, you can either take a standard mileage rate (55 cents per mile in 2012), or deduct actual expenses including gas, upkeep and repairs.
4) Taxes and Preparation Fees
If you have someone else prepare your taxes, like attorneys or accountants, those expenses can also be written off.
5) Insurance and Losses
The cost of insuring the property can be written off along with any losses from casualties, like burglaries or natural disasters such as tornados, hurricanes or floods.
6) Lawn Care or Association Fees
If have a lawn service cut the grass or maintain the landscaping of your rental property, those expenses can be written off as well. Association fees that condo associations often use to cover lawn care, exterior maintenance and the upkeep and maintenance of other common areas are also deductible.
7) Depreciation
The IRS allows rental property owners to deduct depreciation of the value of a rental property. The assumption is that since property is useful for a long time, over that time, it wears out and is worth less money. You should not be taxed on the same value as when the property was purchased.
You calculate depreciation by adding up the total costs of the property and dividing it by the useful life of the property Anchor. For residential rental real estate, the useful life expectancy is 27.5 years. You would take the total value and divide it by the useful life to discover the depreciation.
For example, if you purchased a rental property for $120,000, you would divide that number by 27.5 for a depreciation of $4,545 per year.
Remember
As with all tax-related details, it is vital to keep excellent records to back up all your tax deductions. If you are audited, you will get penalized and pay more because you don’t have the proper documentation. For further peace of mind, consult a tax professional to help you get the most tax deductions you deserve and organize your documentation.
If you’re thinking about renting out your property, it’s important to set a rent that will cover your costs, earn you a profit, minimize vacancies and provide value to your tenants.
The key factor in determining your home’s rental price is its assessed value. Ask at least 1.1 percent of your home’s value up to $100,000, 1.0 percent for the next $25,000, and less than 1.0 percent for the remainder. This factors in such variables as usage and wear, as well as the length of time that your property goes empty in between renters.
The value of the premium you charge for additional amenities or grounds is a judgment call that reflects both the added value you are providing to renters and the extra costs you bear as a resulting of maintaining, repairing and replacing the extra perks. If you rent your home fully furnished, you can ask a considerably higher rent, about double what you would ask for an empty property–and even more if you have high-quality furniture and expensive decorations. In the event your property has the opposite of amenities, such as dysfunctional plumbing or a shabby lawn, the same logic applies in reverse: Ask a lower rent to offset these unappealing features.
You have to adjust your rent to reflect the local rental economy. If rental properties in your neighborhood are going unoccupied, then it makes sense for you to adjust your rent downward so as to be more likely to attract a tenant. If rental housing is in short supply, you can ask for a higher rent. Generally, in a low-demand economy you may have to reduce your rent by one-third to one-half as compared to a high-demand economy.
The desirability of a location is tricky to estimate. One renter might place a premium on a location near bus lines, coffee houses and museums, while another might place a premium on a secluded, quiet property with no commerce nearby. You can spin your advertisement so as to appeal to people who will be more likely to place a premium on the location of your property. Some factors are unspinnable: If your property is next to railroad tracks or a sewage treatment plant, you will need to ask a lower rent in order to remain competitive.
You can expect to collect a premium for shorter rental durations. This reflects two purposes. First, it reflects the fact that your own costs are increased because of having to clean and prepare the property more often. Likewise, it reflects the cost of a greater frequency of vacancy. Second, it reflects the different nature of short-term versus long-term housing. People who are renting for the short term are usually doing so for some special occasion, in addition to their underlying need for living space. That makes the rental worth more, to the tune of 10 to 50 percent depending on the length of the rental, as compared to a long-term rental of six months or more.
Background
The Protecting Tenants at Foreclosure Act of 20091 became effective on May 20, 2009. This new law protects tenants from immediate eviction by persons or entities that become owners of residential property through the foreclosure process and extends additional protections for tenants with U.S. Department of Housing and Urban Development Section 8 vouchers.2 The law is self-executing; no federal agency has authority to issue regulations implementing the law or to interpret the law. The law was originally set to expire on December 31, 2012 but The Dodd–Frank Wall Street Reform and Consumer Protection Act revised the Tenants Protection Act by adding a definition for the date of a notice of foreclosure and by extending its expiration date to December 31, 2014.
The fundamental purpose of the Protecting Tenants at Foreclosure Act is to ensure that tenants facing eviction from a foreclosed property have adequate time to find alternative housing. To that end, the law establishes a minimum time period that a tenant can remain in a foreclosed property before eviction. The law does not affect any state or local law that provides longer time periods or other additional protections for tenants.
Definitions
Bona Fide Lease or Tenancy
A lease or tenancy is bona fide if the tenant is not the mortgagor or the parent, spouse, or child of the mortgagor; the lease or tenancy is the result of an arms-length transaction; and the lease or tenancy requires rent that is not substantially lower than fair market rent or is reduced or subsidized due to a federal, state, or local subsidy.
Requirements
Under the law, the immediate successor in interest at foreclosure must (a) provide bona fide tenants with 90 days notice prior to eviction and (b) allow bona fide tenants with leases to occupy property until the end of the lease term, except the lease can be terminated on 90 days notice if the unit is sold to a purchaser who will occupy the property.
1. Title VII of the Helping Families Save Their Homes Act of 2009. Public Law 111-22, effective May 20, 2009 (www.gpo.gov/fdsys/pkg/PLAW-111publ22/pdf/PLAW-111publ22.pdf). 2. www.gpo.gov/fdsys/pkg/FR-2009-06-24/pdf/E9-14909.pdf
and www.hud .gov/offices/pih/programs/hcv/about/fact_sheet.cfm#6
A Conditional Acceptance Letter is a letter that specifies additional requirements such as additional deposit monies or that the tenant applicant has to meet to be accepted as a tenant. The Fair Credit Reporting Act requires that a form of this conditional acceptance letter must be provided to any rental applicant you choose to accept with conditions if that decision is based solely or partly on information in a consumer report. Use our free conditional acceptance letter now.
The notice must include:
The Conditional Acceptance Letter is required even if information in the consumer credit report was not the main reason for the increase in security deposit or rent or other adverse action. In fact, even if the information in the report plays only a small part in the overall decision, the applicant still must be notified.
A Denial Letter with Reasons is also known as an Adverse Action Letter with Reasons. It’s very similar to the Denial Letter but it provides specific reasons for denial based on information in the applicant’s a consumer report. A form of this denial letter must be provided to any rental applicant you choose to deny residency to if that decision is based solely or partly on information in a consumer report. While oral adverse action notices are allowed, written notices provide proof of FCRA compliance. Use our free denial letter with reasons now.
The notice must include:
The Denial Letter with Reason is required even if information in the consumer credit report was not the main reason for the denial, the increase in security deposit or rent or other adverse action. In fact, even if the information in the report plays only a small part in the overall decision, the applicant still must be notified.
A Denial Letter is also known as an Adverse Action Letter. The Fair Credit Reporting Act requires that a form of this denial letter or adverse action letter must be provided to any rental applicant you choose to deny residency to if that decision is based solely or partly on information in a consumer report. While oral adverse action notices are allowed, written notices provide proof of FCRA compliance. Use our free denial letter now.
The notice must include:
The name, address and telephone number of the Credit Reporting Agency (CRA) that supplied the consumer report, including a toll-free telephone number for CRAs that maintain files nationwide;
A statement that the CRA that supplied the report did not make the decision to take the adverse action and cannot give the specific reasons for it; and
A notice of the individual’s right to dispute the accuracy or completeness of any information the CRA furnished, and the consumer’s right to a free report from the CRA upon request within 60 days.
Disclosure of this information is important because some consumer reports contain errors.
The Denial Letter or Adverse Action Notice is required even if information in the consumer credit report was not the main reason for the denial, the increase in security deposit or rent or other adverse action. In fact, even if the information in the report plays only a small part in the overall decision, the applicant still must be notified.
For at least three years, Related Cos. had been planning for the 151
apartments on the highest floors of its new apartment tower in Midtown to be
condominiums, sitting atop 663 rental units in the building’s first 50 stories.
Now, with construction finishing up on the final apartments in the bulky
63-story MiMA building on 42nd Street and 10th Avenue, the developer is changing
course. Related is putting all of the formerly for-sale apartments up for rent,
aiming at the high-end with rents of more than $20,000 a month for a
three-bedroom unit.
“We really built through the downturn, and it opened up our rentals into a
very, very strong rental market,” Jeff Blau, Related’s president, said in an
interview Wednesday. “There was more value creation by renting this up and
holding it than selling the units.”
The shift away from condos comes as the rental market has taken landlords by
surprise with its growth. Rents in many buildings are at peak levels, while
condo prices have lagged.
Average Manhattan condo and cooperative unit prices are still more than 10%
below their 2008 peak, according to real-estate appraisal firm Miller Samuel
Inc.
Driving the rental market is a broader national shift in the attitudes of
would-be homebuyers, from the low-end to high-end, as they increasingly turn to
renting while homeownership rates drop. This comes, in part, as credit is tight
in the home lending market, making it harder to get a mortgage.
“Most of the improvement in the rental market has nothing to do with the
economy—it’s more that lenders are making it tough,” according to Jonathan Miller,
chief executive of Miller Samuel.
Since the economic downturn began, other developments in Manhattan have
switched condo units to rentals, including at the William Beaver House on
William Street and 25 Broad St. in Lower Manhattan, and a planned Northside
Piers development in Williamsburg, Brooklyn.
But by and large, these have been properties under financial distress when
the decision was made to switch.
MiMA, by contrast, appears to be doing quite well. Related began construction
on the black-glass apartment tower in the depths of the downturn—in 2009—in a
bet that the market would recover.
The building has been opening gradually since the spring, and the 500
apartments always planned as market rate rentals are more than 90% leased, at
rents above where Related expected, according to the company.
The switch isn’t without some risks, namely that it’s unclear just how big
the market is for the large, high-end rentals in a building in an area that is
less than high-end.
The units at the top are larger than the rest of the apartments —two bedrooms
generally on the top levels range between 1,200 and 1,400 square feet, compared
with 1,100 to 1,200 square feet in the apartments below, for instance—and come
with a separate lobby and entrance initially meant for the condo buyers.
The rents, of course, are higher as well. Expected rents range from $4,595 a
month for the smallest apartments to $20,000 a month for the largest
three-bedroom units.
Write to Eliot Brown at eliot.brown@wsj.com
There comes a point when apartment owners find that despite their best
efforts at resident screening, they will have to grapple with evictions and
collections in response to non-payment of rent.
The weak labor market is currently contributing to greater numbers of people
encountering difficulty with paying their rent compared to just eight years
ago—so owners beware.
Where evictions for nonpayment of rent is concerned, property owners should
first make sure they are thoroughly familiar with the local landlord-tenant
laws and regulations. Every jurisdiction has its own rules governing, for
example, the minimum number of days the rent is delinquent before late notices
can be sent out.
The company’s procedures should be to file the papers for a court date in
connection with an eviction as soon as that is permitted by law—whether or not
a payment plan is being worked out with the resident concurrently.
It is important to take action at the earliest possible opportunity because
each step in the eviction process can take time, and it can be at least
one-and-a-half to two months before the resident is evicted. If the resident
appeals, that will cause further delays. And if the property owner wins the
case, it will take at least another 15 to 30 days before the resident is made
to vacate the unit by the marshall.
Follow eviction rules closely
Property owners need to be consistent and regimented in complying with their
companies’ own rent payment rules and procedures, aspects of which may also be
contained in the lease agreements signed by residents. For example, after the
grace period, the notices need to be sent out.
There are absolutely times when residents have genuine and temporary
problems paying the rent. In such cases, the company can deviate from the rule
books and work with them to help them make the payments.
Property owners need to refrain from clearing out residents’ belongings too
early—a common pitfall when a resident skips the rent and moves out. If there
is no court order in place to evict them, the residents may want to be
reimbursed for the items. Landlords can clear the apartment and hold the
belongings in a separate location, but the danger is that things can be stolen.
The other aspect of evictions is collections. The accounts receivable of
residents who leave an apartment, but still owe back rent, may be sent to debt
collectors. The fact is, most property owners may be reluctant to go after
their residents for backrent. A study released by TransUnion late last year
finds that about half of property managers (46 percent) have had renters skip
out on their rents, with 19 percent having had that experience in the past
year. According to the study, which received 476 responses, only 46 percent of
property managers pursue residents who skip out of their apartments and leave
with unpaid rent or damages.
Steve Roe, vice president in TransUnion’s rental screening division, says it
is a mistake for property managers not to try to claim that bad debt. There are
two philosophies with regard to whether the account is turned over to the
collections agency. The first says that “if we have the wherewithal, let us get
a shot at going after someone in the first 30 days. We are not splitting the
recoveries with a collections agency.” The second school of thought says that
“the account should be turned over to a collections agency immediately. There
will be less time spent and aggravation on the part of your staff.”
Property owners can expect recoveries, on average, of 15 percent to 18
percent if the agency is doing its job correctly. The proportion of recoveries,
of course, also depends on the profile of the portfolio. For example, in the
case of affordable portfolios, recovery percentages may be less.
Collection agencies typically do not report to credit bureaus in the first
30 to 60 days of receiving the delinquent account. Individuals are more
inclined to pay if their accounts have not yet been reported to the credit
bureau, as they find it important to maintain their credit files.
Successful recoveries depend on four factors: the applicant screening
criteria of the property management company; the use of nationally licensed
collections agents; how effective the agency is in skip tracing, that is, in
locating the individual who skips out on the rent; and the initial conscientiousness
of the property management company in gathering vital information—such as
social security numbers, emergency contacts and places of employment—from the
resident.
When it comes to choosing a collections agency, it is important that the
company has a national reach. A little over half the states in the country
require collection agencies to be licensed or bonded in the state in which they
operate. So if the agency is not licensed in that state, it would not be able
to contact individuals who have moved there. Larger collection agencies may
also have the resources to pay for, and sophistication to obtain, national data.
Indeed, the reputation of the collections agency is a prime consideration
for the apartment firm. The apartment company should make sure the financial
security of the agency is sound—as there are cases in which collection agencies
collect on bad debt but do not remit the collections to the property owner.
Checking references for collection agencies is also critical.
Apartment companies may also want to make sure the collections agency does
not mistreat its customers. A professional and courteous manner on the part of
the staff yields better responses and results. Also, the apartment company
would “not want to see its names or our names in the papers. You must protect
the image of the agency and the client.
Obtain the information needed by the agency to do its job. And even more
important, get the accounts to the agency as soon as possible instead of
sitting on it.
The Obama administration said on Wednesday that it was soliciting ideas on how to turn the federal government’s inventory of foreclosed houses into rental properties that could be managed by private enterprises or sold in bulk.
The goal, the administration said, is to stabilize neighborhoods where large supplies of empty, foreclosed properties have hurt property values. In addition, the plan is an effort to clear the nation’s balance sheet of real estate holdings that, because they have been difficult to sell individually, have hung over the housing market and stunted sales of existing homes and new construction.
The Federal Housing Finance Agency, the Department of Housing and Urban Development and the Treasury Department are jointly requesting ideas for sales, partnership ventures or other strategies that would help to unload approximately 250,000 properties owned by Fannie Mae, Freddie Mac and the Federal Housing Administration. Those properties account for about half of all properties that have been foreclosed upon and are still awaiting resale nationwide.
As it considers the proposals, the government-sponsored enterprises that now own the houses will continue to offer individual properties for sale, Edward J. DeMarco, acting director of housing finance agency, said Wednesday. But the government says it believes that given the slow pace of those sales, it must find new ways in which properties can be pooled, sold and privately managed as rentals.
Greater flexibility in disposing of the houses will have other benefits as well, Timothy F. Geithner, the Treasury secretary, said. “Exploring new options for selling these foreclosed properties will help expand access to affordable rental housing, promote private investment in local housing markets and support neighborhood and home price stability,” he said in a statement announcing the new program.
While home prices have remain depressed since the 2008 financial crisis, rental prices have not come down. The Joint Center for Housing Studies at Harvard University reported in the spring that more than 10 million households — or one-quarter of all renters — pay more than half their income for housing, a record level.
“We have to find and promote new ways to alleviate the strain on the affordable rental market,” Shaun Donovan, secretary of the Department of Housing and Urban Development, said.
John Taylor, president of the National Community Reinvestment Coalition, said in an interview that an added benefit of such a program would be the creation of construction jobs for rehabilitation of the properties.
The Obama administration and Congress have been working on plans to wind down Fannie Mae and Freddie Mac, which the government took over in 2008 as losses on loans guaranteed by the agencies expanded.
Of the 248,000 homes owned by Fannie Mae, Freddie Mac and the F.H.A. at the end of June, 70,000 were listed for sale, said Corinne Russell, a housing finance agency spokeswoman. The remainder were not yet on the market or the agencies had already received an offer from a prospective buyer.
But it is possible that hundreds of thousands of more homes that are now in the foreclosure process could come into the possession of the federal government in the next few years, housing experts say.
“This is a call for innovation and an opportunity for businesses to not only make money and create jobs, but also provide affordable rental housing for those who need it and strengthen our communities at the same time,” said Senator Jack Reed, Democrat of Rhode Island, who has pushed for such a program.
The FCRA requires you as the potential property manager/landlord to give an adverse action notice to each consumer whose credit report was used to deny their lease application. The consumer is also then entitled by the law to a free copy of their credit report.
What is an adverse action notice?
An adverse action notice informs an applicant that they have been denied credit, employment, insurance, or other benefits based on information in a credit report. The notice should indicate which credit reporting agency was used, and how to contact them.
All consumers are entitled to a free copy of their credit report if:
StarPoint Tenant Screening gives you the ability to print adverse action notices with each credit report. The notices allow the property manager/landlord to check off the reason for the denial. The letter also informs the consumer that they can contact StarPoint for a free copy of their credit report.
