STRATEGIES FOR LANDLORDS
© Copyright 2001-2014 Landlord.com
By Bob Cain
Copyright 2000 Cain Publications, Inc.,
used by permission
A real estate broker I know was complaining
a few years ago about how much he had to pay in taxes. Considering his
personality, the complaint was part complaint and part bragging. Because,
of course, the more money you make, the more you have to pay in taxes. On
the other hand, a good friend of mine, when he heard the complaint replied
"I wish I had to pay a million dollars in taxes." If you had to
pay that much, you'd have a pretty hefty Adjusted Gross Income.
Still, there is no reason
to over pay your income taxes. All we need do is play the game skillfully
to get our taxes lower.
The better your records,
the bigger the deductions you can write off on your taxes. And if you are
audited, the more likely you are to be able to keep your deductions.
First, pay your bills by
check or credit card. That's pretty basic, and you probably do that
already. However, the problem arises when you pay for something for a
property repair with cash from your pocket. After all, that $19.95 isn't
worth writing a check for, you say to yourself. One time won't hurt much,
but once you say "just this time," you set yourself a precedent.
The reason for the check
or credit card is that you have both the receipt and the canceled check or
credit card statement. First, always write on the check what it's for.
Likewise, always write the check number on the receipt. If possible, use
one credit card only for rental purchases. Create a system for keeping
track of your receipts. It doesn't have to be complicated: an envelope for
every month will work fine.
If you can't resist, and
pay by cash anyway, always, always, always write the following on the
receipt: the purpose, the date, the amount, the receiver.
At one seminar I attended,
the seminar leader suggested a shoe box with a slot cut in the lid under
the front seat of your car to stuff receipts into. That way you always
know where the receipts are, and when you get the time you can go through
the receipts and match them up with the cancelled checks and credit card
Just as important is to
create a receipt and deposit system for your rents. The IRS will retrace
all your deposits, if they do an audit of your return. That means they
will want to know where all the money came from and will want to know what
happened to all the rents you received or they think you should have
For example, they will
look at the duplex at 1234 Main St., where the rent is $450 a month. You
show that one side was rented for 12 months and the other side for 11
months. They will track the deposits to see if you deposited 23 sets of
rents, or $10,350. Any perceived deviation (real or imagined on their
part) will get them digging deeper. So the better your records, the less
intrusive the IRS might be.
In fact, if an auditor
sees that you have all your records in apple-pie order and easily
accounted for, he or she might just do a cursory check and then try to
find someone to really pick on.
Tom Napier, a Portland,
Oregon CPA, gives the following advice on his web site. "Final
regulations issued in October of 1998, confirm that you can figure your
deduction for business use of a leased auto by multiplying the number of
business miles you drive during the year by a mileage allowance figure.
This figure is 32 ½¢ for 1998 and the first three months of 1999, but it
drops to 31¢ on April 1, 1999. One main attraction of this simplified
approach is minimal record keeping: all you need to do is maintain a
written record of the time, place, mileage and purpose of your
"By contrast, if you
deduct actual business-connected costs for your leased auto, you also must
keep records of all of your actual expenses (e.g., gas, maintenance and
repairs, lease expenses) and allocate expenses between (deductible)
business costs and (nondeductible) personal driving costs based on
mileage. Before 1998, the simplified deduction method was not available
for leased business autos. You should be aware, however, that the mileage
allowance method may yield a smaller deduction than you'd get by writing
off the business-connected portion of your actual auto costs."
Other Ways to Save with an Automobile
Here are three strategies
for increasing deductions on your vehicles.
Strategy One– Use two
cars for business to get maximum deductions. If you drive only one car for
business, the maximum business-use percentage you can achieve is 100
percent, isn't it? If you drive two cars for business, you could drive one
car 100 percent of the time for business and the other 100 percent for
business. Not very likely, but could you manage 90 percent on one car and
20 percent on another? That would mean a deduction of more than you could
get from just one car.
Remember, it's not the
amount of time you drove, which is always 100 percent, that matters, but
the amount of mileage or usage of each vehicle for business that matters.
For example, if you drove vehicle one 10,000 miles during 1999 and 9,000
of those miles was for business, that would mean you could deduct 90
percent of the mileage or costs. Also suppose you drove vehicle two for
10,000 miles, but only 2,000 of those miles was for business. You could
deduct 20 percent of the mileage or costs.
Figure it out for
yourself. Add up all the car expenses and compare 11,000 miles on one car
to 11,000 miles on two cars. Make sure to include gas and oil, insurance,
repairs and maintenance, licenses, and depreciation. You'll be amazed.
Strategy Two– Deduct the
larger of the actual expense deduction or the IRS optional mileage rate
deduction. Figure it both ways and take the one that allows you to deduct
the most money.
Strategy Three– Identify
supplies and equipment used to maintain your business car. Take a trip
through you garage and basement (or wherever you store tools and cleaning
supplies). Make a list of the items you use on your car. You will probably
find a battery charger, battery cables, and maybe even a battery tester.
Look some more, how about a tire pump, a vise, a buffer, and a sander.
Looking even farther, you get to the tools such as screwdrivers, pliers,
If an item has an original
cost of over $100, capitalize and depreciate it according to the schedule
(many times five years) the IRS has set up. If it is less than $100, it is
normal to expense the item in the year you purchased it.
Chances are you won't have
receipts for all this, but you can take pictures of them as a reasonable
substitute evidence. Incidentally, what you don't use on your car, you may
use for your rental property business, deduct them using the same plan.
Some items you will use both on your business vehicles and on your rental
properties, adding the potential for even more deductions.
Records You Need to Keep
All papers relating to the purchase of the property including closing
statements and contracts.
Any improvements you make after you buy the property.
Property tax statements before and after you bought the property. In
addition, make sure, if the tax statement doesn't already, that you break
out the land value from the structure value.
Any amortization statements relating to the purchase.
A list of tools and equipment you buy to maintain your properties.
Any blueprints a previous owner can give you.
If You Are Audited
The IRS will verify income
and expense. As mentioned before, have a rent schedule and a receipt book
showing who paid, when and how much.
The IRS will ask the following questions:
Did you rent to a relative? If you did, did you collect close to fair
market rent? If the rent was too low, the IRS could limit your losses.
(See a tax advisor.)
If you bought rentals during a year the IRS is auditing, they will want
purchase papers and will ask if you made it available for rent immediately
after you bought it.
If you made repairs before you put the house up for rent, the IRS will not
let you deduct any of the costs of repairs. To immediately qualify for
deductions, run an ad the day you buy the property. Try to get a renter
for it while you are making repairs. They don't have to move in, they just
have to agree to move in.
The IRS will see if you expensed rather than capitalized major repairs.
For example, if you completely re-roofed the property, you might have
expensed it when the rules say you have to depreciate it over 27 ½ years
for residential property. If you just patched, or put on half a roof,
though, you can expense it.
Robert Cain is a
nationally-recognized speaker and writer on property management and real
estate issues. For a free sample copy of the Rental Property Reporter call
800-654-5456 or visit their web site at