You can’t afford to put off learning how to better your rental property taxes and accounting systems!
The TurboTeam partnered with Deltrease Hart-Anderson, a landlord and Enrolled Agent (EA), to help you avoid trouble with the IRS.
The webinar emphasized the importance of staying informed and proactive in managing rental property finances. Understanding the nuances of tax laws and leveraging available deductions can substantially reduce tax liabilities and enhance profitability. For detailed guidance, consult with a tax professional who specializes in real estate.
Fantastic. Well, as I said, welcome, welcome. This is our 10 ways to perfect your rental property taxes and accounting webinar written by Deltrease Hart-Anderson, she is here on the call. We have her here. So we are very lucky today. Before we jump into the learning, I do have a quick poll question for you.
We will pepper these in throughout so that I can get your opinion on everything going on. First off, have you filed your 2021 taxes? From there, I would love to know how many rental units you own.
If you’ve attended a TurboTenant webinar before and if you have a TurboTenant account. So I’ll give you a little bit of time to get your answers in there. I know we’re asking you, you know, four questions right off the bat. So it’s always fun to see these trickle in. We will show the results so you do not have to miss out on the juicy data that we have here. Ada, what a good question. So, no, it is 2021 taxes because as Deltrease has educated me and actually I’ll just let you take it away. You are the expert.
Okay, so thank you for that, Krista. So yes, your 2021 taxes is what you file in 2022. Tax your 2022. So you’re not going to tax your 2022, which is the year that we’re in. Those taxes are not going to be filed until 2023 because you have to tell the IRS about your whole year. So you tell the IRS about your whole year, the next year.
So with this question, we’re just wanting to know, have you filed your current or your last year’s taxes? If that makes sense. Well said, that makes a lot of sense.
Alrighty, let’s end the poll here. And share results. So we’ve got a pretty good spread. A lot of people have already filed or perhaps they were just educated by Deltrease spell if that means. And also a good distribution of different numbers of rental units.
So we have some education for everybody at all levels. If this is your first TurboTenant webinar, you’re one of that 73% welcome or so excited to have you. Just as I said at the top, we hope you want to be here. I saw that in the chat, we will record this and send it out for you so you do not have to click on any sketchy links, you can just register and we will send this to you do not worry I would advise not clicking Sean’s link in the chat just because I don’t know where that goes. And we will send this to you for free.
Also, lots of TurboTenant account holders. So really good to see it. Thank you for being here. If you don’t have an account, you can sign up for free today. It is always there for you. And with that, I will stop chatting because again we have an expert on the line. So Deltrease, would you like to introduce yourself to the audience?
Absolutely. And so I just wanted to, I didn’t take the poll but I just wanted to answer those questions as well. Yes, I did file my 2021 taxes by the extension but for those that have not filed their 2021 taxes, it is not too late. Don’t, don’t stress, don’t fret over it. Just get those taxes in as soon as you can. If you feel or if you know that you don’t owe the IRS any money, then it’s okay that you haven’t filed it yet. The taxes yet because there are no penalties at this point because the IRS owes you money. But if you feel or if you know that you owe the IRS money you want to make sure and get those taxes in as soon as you can because of the penalties for not filing a tax return.
Are much higher than the penalties for not paying your taxes. Okay, so just keep that in mind. And I am also a Turbo tenant user and I think we have 11 doors, if I’m not mistaken, at this 11 residential doors and then one commercial so that’s my polling.
All right. So, a little bit about me who am I, I’m an IRS enrolled agent and what that really is I’m sure you everyone has heard of a CPA right CPAs have state licenses to practice tax and accounting. IRS-enrolled agents are licensed by the IRS the federal government. And so where the CPA took a state test. We took a federal test and we as IRS enrolled agents. Most of us focus on getting people out of tax trouble. Tax preparation tax planning and strategies things like that.
So there’s the difference. I have a master’s and bachelor’s in accounting with a concentration in taxation you probably are aware I love all things tax. I came from the corporate world so I spent a little over 10 years in finance and accounting departments of fortune 500 companies. I am a real estate investor I love love love real estate I love talking real estate, just anything and I feel like a kid sometimes because I’m always learning something new when I talk to other investors so I enjoy that I do consulting with highly successful tax professionals other tax professionals and attorneys because a lot of times with the work that I do, I represent taxpayers before the IRS. A lot of times attorneys they have the credentials to do that work CPAs have the credentials to do the work but they just don’t do that type of work. And then other tax professionals that don’t do that type of work, then they come to me as well so I consult with them. I am an adjunct professor when I can be at local colleges, I present for the SBA and the IRS they’ll call on me sometimes to present topics. I’m a proud Goldman Sachs alumni I throw that in because that makes me feel so official, and I also serve. I’m a governor-appointed board member of South Carolina Board of Accountancy, but none of that really matters.
I am a business owner I’m an entrepreneur I am a real estate investor I’m a landlord just like you. So everything that you see here it doesn’t matter I have the same issues that you guys have. Okay, so just those are my credentials but this is me. Same as you.
Alright. So, how I serve again I keep the IRS out of the pocketbooks wallets and bank accounts of taxpayers so when taxpayers get those nasty grams from the IRS I go in and fight for them. I do tax planning and tax strategy so that once we get everyone all cleaned up with their IRS issues we make sure that they will not have to pay a dime more to Uncle Sam. You don’t want to leave him a tip you don’t want to give him a bonus. You want to keep as much money in your pocketbook as possible.
And I know men you don’t have pocketbooks, or you may, but pocketbooks and wallets. So, I’m going to give you some of the most important things. All right, so, as Chris mentioned we’re going to talk about perfecting accounting and taxes right so I’m going to give you and I think Christa shared already that this is just the tip of the iceberg is so much to talk about when it comes to tax and accounting but I’m going to share with you five accounting essentials and five tax essentials.
So, essential number one when it comes to perfecting your accounting, I want you to be very clear on this. Keep separate bank accounts. Keep your business bank accounts separate from your personal bank accounts. Now, many of you, if you listen to different gurus, different business gurus, different real estate gurus, one thing that they’ll tell you is, oh, you need five or six or seven or eight bank accounts. That’s not feasible for everyone.
It just isn’t. So my suggestion, if you cannot keep all of those bank accounts, you definitely want to have two. One for your operating costs.
So paying your mortgage, paying your materials and supplies and your taxes, all of those things. And then a separate one for security deposits. Now, the reason why I suggest keeping a separate one for security deposits is because that money technically isn’t yours yet. It’s just a security deposit that your tenant gave you and hopefully, if they don’t tear up your property and I’m sure some of you, I’ve experienced it before. So if they tear up your property, then you get to keep that security deposit. But in the meantime, it’s really not yours. So if you just keep that money aside in a separate account and pretend that it’s not yours, then I think that those two accounts, if you don’t want to keep up with a tax account and a maintenance account and operating account, a payroll account, all those other accounts, a rainy day account, just have two.
Okay. And they both, some people might say, well, that operating account, it won’t earn me any interest. Well, if you put it in the right instrument, you can put it, create a money market account. And that money market account will allow you to earn interest, even though you’re writing checks out of that account.
And then the security deposits, I suggest a savings account, unless there is a money market account or some other account that you can put it in that’s going to draw you some interest. Okay, I’m all about making that money. Every piece, every coin work for us.
All right. And number two, know your numbers. I cannot stress knowing your numbers now. As real estate investors, I’m sure many if not all of us, we know certain numbers we know, are I we know the regular cash flow right.
We know how to look at a deal to determine whether that deal is good for us, whether it’s going to make sense, whether it’s going to make money, whether it’s going to cash flow. And that’s fine. And that’s what’s needed. That’s on the front end. But on the back end, you need to know these three is especially these three financial statements, your statement of cash flow or cash flow statement, which is very similar to when you’re looking at just regular cash flow. And many of you probably have like a spreadsheet or you might have software to show you if you’re, or when your property or properties or cash flowing, it’s a very similar statement, but it’s just broken down a little differently. The profit and loss statement and the balance sheet so you have to know those statements and know what goes on each statement. And the reason you want to understand those statements is because it’s going to help you make better decisions when we talk about tax strategies. Okay, so if you don’t know these numbers on a, at least a quarterly basis some I have some real estate investors that will look at these numbers on a monthly basis.
Some look at them every two weeks, very few but some look at them on a monthly basis but at least if you don’t want to look at them monthly look at them on at least a quarterly basis because that’s going to help you pay less money to the IRS, and you’re going to keep more of your money and that’s all it is that’s all for me that’s what it’s about because, again, I’m not trying to give Uncle Sam, and he’s not my uncle so Sam, a bonus or a tip. So, with your profit and loss statement that’s going to you’ll you’ll see your rental income and your expenses on that statement. And then with the balance sheet you’ll see all of your assets so all of your rental properties should show up on your bank statement, everyone, I’m sorry your balance sheet, everyone that you owe is going to show up on your balance sheet, all of your bank accounts will show up on your balance sheet. So that balance sheet and the profit and loss statement they also come in handy, depending on who you bank with so a lender may ask for those financial statements, less lenders asked for the cash flow statement that tool the cash flow statement is a pretty much a tool for you to kind of see your money coming in your money coming out and the different pots where they’re coming in and coming out.
But the profit and loss statement and the balance sheet will be where the lenders will actually look and you want your balance sheet, as well as your profit and loss statement to look very strong, and there are ways to do that legally, and giving the banks. More information or enough information that will help and I say banks but any lenders that could help you cool your new project together, okay, but it also helps you if you know your numbers is going to help you in making decisions about your real estate business. And for those of us that are those of you that may think well, I don’t have a business is real estate.
You have a business, even if you just have one property you have a business. Okay. Number three, keep all receipts. I say this because again, a part of what I do is represent taxpayers when they are in tax trouble, and I have sat in with my clients that did not have receipts. And now we’re sitting in front of the IRS, and they are not as nice when you don’t have receipts. Now, typically no receipt means no deduction.
There are ways to get around that, but no receipt. Can harm you, even if the IRS gives you credit for certain things, they may not give you credit for everything that you’re entitled to, because they just don’t have all the answers they don’t have all the receipts. So if you’re trying to justify let’s say if you have $10,000 in deductions you actually had 10,000 in deductions, but now you’re in an audit.
And you have none of your receipts. The IRS may only allow 5000 in deductions. Now, that’s 5000 additional dollars that you are being taxed on.
And again, we don’t want to leave the IRS tips or bonuses. Now, some people might say, well, I have my credit card statement. I have my bank statement. That’s received enough.
No, it is not. Sometimes your bank statement will have the copies of the cancel checks. That’s a start, OK, because you need those. But the receipts are always going to show the details. So if you have a receipt from the home improvement store and we won’t call any names, but any home improvement store is going to detail everything that you bought. And that’s what you want, because all purchases are not created equally. Some purchases you may have to spread over a few years in order to deduct or several years and other purchases you may be able to deduct immediately. But if you don’t have your receipts, then you won’t know that.
And you cannot be helped. So even if you have a bookkeeper and accountant that’s helping you with your record keeping, they can’t help you unless you have those receipts. You have to have the documentation. And just a tip, scan those receipts in.
So if you see the the graphic and thank you, TurboTenant Krista, I think it was your design team that put together the graphics and and consolidated my information on the slides. But if you notice that crumbled up piece of paper, right? So that paper is going to fade at some point in time because a lot of the receipts are oil based. So if you scan your receipts in, then it doesn’t matter if you throw it away later, but also remember where you scanned it. And I would suggest scanning them and then storing them in at least two spaces. OK, that could be a Google drive for one another could be a flash drive, but just keep those receipts handy. And now Krista, take it away.
Fantastic. Well, time to take a break from the learning and check in with a poll. So two questions for you. Did you know that TurboTenant landlords have access to free document storage?
And secondly, do you wish that you could streamline your rental property accounting? Please answer as you will in the poll. Got quite a few of you trickling in here. Made some mention of these in the chat, but I won’t hold it against you if you are not catching the rapid fire communications that are going back and forth there. It is quite a lively group. We love to see it. And I will give you, let’s say, 15 more seconds and then we can end the poll. OK, things are trickling in.
You don’t see the poll, Beth. Oh, no. Sorry to hear that. Um, if you’re just on your phone, you might not see it, but alas, you can go ahead and end here.
All right. So looks like a lot of you were not aware, but TurboTenant accounts come with free document storage. So as Delteries mentioned, it’s great to have your receipt stored in at least two places, one of those places should be online. So utilize your free TurboTenant account and take up some space, because, like she said, it’s very critical to have all of your ducks in a row when it comes to your taxes. Similarly, we asked, do you wish you could streamline your rental property accounting?
Most of you said yes. A couple of you love complications, which, hey, that’s fun. I get it.
And it gives you something to do. So respectable, absolutely. But if you are looking to streamline your rental property accounting, TurboTenant has a wonderful integration with REI Hub. REI Hub is landlord accounting software.
So specifically designed with you in mind. It has all of the features you might need, whether you’re handling your taxes yourself or you want to hand off a perfectly put together packet to your CPA. REI Hub can help you out. So I’ve dropped a link in the chat for you to learn more about REI Hub, including pricing information. Feel free to check it out. We can’t recommend them highly enough. They make the rental property accounting process so much smoother because we can’t be as smart as DelTree. Not all of us anyway. That alternative over to you.
So Krista has jokes. That’s funny. And just know I do a lot of research, a lot of research. OK. And I have a 50 year old brain, so I have to do research and then write it down so that I can try to remember the stuff. So my notepad has become my memory bank, by the way.
All right. So someone mentioned in the chat I was just going through, which was a very great point, a lot of the home improvement stores now will email you your receipts. And that’s that’s a great point because if you set up an account with them, so set up the account and then you always give them that phone number associated with your account. And that’s a great place to store because it’s always in the email.
You just archive the email. So great point. So number four, when we talk about perfecting your accounting, a mileage log. Now this is I hate, hate, hate. I’ll just be honest with you. I hate mileage logs.
I really do. But it is a necessary evil. You want to keep a mileage log. I don’t care whether it’s a paper, whether it’s a notebook, whether it’s a spreadsheet. You want to keep a mileage log. And then for those tech savvy people out there, there are tons of apps.
I won’t name any. You can Google mileage log apps and five or six, at least five or six will come up. But you need to keep a mileage log. And that mileage log needs to always have the dates of wherever you’re going. The time where you went and keeping up with the time is something that we’ll talk about later when we talk about the tax planning aspect of it. But you want to know the time you spent or how long it took you to get there and how long it took you while you were there. Up where from so a time where from and where to where did you leave from?
Where did you go? That becomes important as well, because the IRS will allow you mileage, a mileage deduction, depending on where you started from. IRS, there is something called commuting. If you are commuting and think of commuting as if you were working a job, if you’re going from your home to that job, that is not that’s commuting. So you will not receive a deduction for that. But if you went from your job to the office supply store, that could be a deduction.
So that’s why it’s important to document where you’re leaving from and where you’re going to and then always keep the odometer readings, the beginning and the end. So there again, it’s nothing that I like to do. I hate it just to be perfectly honest, but it helps me come tax time when I want to write off certain things.
OK, and most of you probably know that it’s an either or situation. Either you can deduct mileage or you can deduct actual expenses. And that is true.
But in order for you to properly deduct either one, you still have to keep the mileage log, by the way. OK. Lastly, reconcile those property management statements for those of you that have property managers, OK? Okay.
Reconcile those statements, please. So I will give you a tip. I have, I had, thank God this is had. I had a tenant that just destroyed one of my properties, right. And I was looking at the property management statement and it said replace smoke detectors.
And I’m like, wait a minute. So I’m looking at my property management statement, but I’m also looking at my inventory of what I knew that was brand new that I placed in the house I rehab the house before I rented it out. I just put smoke detectors in right before that tenant moved in. For some reason, they destroyed the smoke detectors.
So I called up the 10 I said well, I have a date here where you know I installed smoke detectors, and they said yeah but they destroyed them so they took pictures, but that helped me because when I saw that line entry for smoke detectors. Now I have to put on my financial statements. My balance sheet, the new when I actually didn’t put on the balance sheet I put it on the profit and loss statement but in my inventory sheet I had to include new smoke detectors. Okay, but reconcile those property management statements because they have juicy information on it, whether your property manager is paying out HOA fees for you, whether they’re paying the taxes for you property taxes, whether they are rehabbing or fixing or repairing the property for you.
Each line item should be there as it pertains to what they are what you’re paying for so that you can properly document them on those financial statements. Okay, so always reconcile and you might not be able to reconcile them. You might not reconcile them each month, but at least every quarter, and it all depends on the number of properties that you have you might can get away with not reconciling until the end of the year.
I wouldn’t advise that because the name of the game is to understand your record keeping, get that record keeping done on a consistent basis because the more your record keeping is up to date. The more decisions the better decisions that you can make as a landlord as a business owner, and then you can start the tax strategies. Okay, because that’s a lot of people come to me and say, what can I write off and my first answer or my first response to them is, I don’t know. Let’s look at your financial statements. Let’s look at your tax return. Okay, so that is my segue into perfecting your taxes. And when we talk about tax planning. I talk about tax planning and tax strategies, kind of one in the same. So if you hear me say tax strategies, just know that I’m also talking about tax planning. Okay.
All right. So, this is the sixth which is really number one for perfecting your taxes. Know your status and when I talk about knowing your status, knowing whether you are a real estate investor versus a real estate professional that is huge. Okay. The reason is huge is because as a real estate investor from year to year, you have certain limitations on how much you can deduct in any given year, and I’ll go back how much, how much of a loss that you can deduct from year to year.
Okay, now, it is okay. If you cannot be a real estate professional, I’m not a real estate professional and I’ll share with you why I would love to be, but I’ll share with you why in a few seconds, maybe a minute or so. But a real estate investor, that’s the default position or the default IRS code, right.
So everybody defaults to a real estate investor if you are a landlord. So the IRS automatically says, oh, if you’re a landlord, that is a passive activity and any losses that you have, they’re going to be limited to $25,000 based on your modified adjusted gross income. So if you’re modified adjusted gross income and for this webinar, just think of it as a certain amount of income that you make per year. And if you’re modified adjusted gross income exceeds $100,000, then that $25,000 that you could deduct is going to start decreasing. If you reach over $150,000 in modified adjusted gross income, then you will not be able to take any of your losses for that particular year. The losses, even though you may not be able to take them for that year, they’re just suspended. So the IRS just holds on to those losses and keep them in the back of their head and say, okay, if your situation changes in future years, then you’re able to deduct those losses. And if your situation never changes, so if your income goes up over $150,000, then if you ever sell your property, then you can take those losses from years ago and years ago or whatever.
Now, if you are able to become a real estate professional, the real estate professional is treated differently. And I’ll go back one, I’ll give you an example for the real estate investor. So most of you, if you’ve ever had any securities losses, so if you had stocks and bonds that you had a big loss during the year, right? So let’s say you had a $5,000 loss because the stock market tanked on whatever stocks you purchased, right? Well, if you went to your accountant or if you prepared your tax return, you say, hey, I have this $5,000 loss and your accountant is going to say, okay, we can only deduct $3,000 for the year.
And you’re like, why? Because that because the IRS says so. So that’s the same thing with the real estate investor, those passive, because stocks, by the way, that’s a passive activity as well, passive income. So there’s a limit on what you’re able to deduct in any given year.
Later on, so the next year or the next year or the next year, then you are able to or may be able to deduct the rest of the losses, but it’s capped for each year, and that’s just based on tax law. Now, if you are a real estate professional, the floodgates open that in the eyes of the IRS, if you become a real estate professional or if you qualify to become a real estate professional. If you’re a real estate professional, now you have an active law.
So it’s treated just as a regular business, whatever. So, you want to, if you can, or if you have to, some people don’t have losses. So, it’s not, there’s not such a rush to become, or even try to become a real estate professional. But, if you are a real estate professional, or if you’re trying to get to that status, know that the sky is the limit as far as the losses.
That’s the strategy that you can take, right? Now, you must qualify, and this is just two things. So, 50% of the work that you do must be in a real estate related business, okay, in which you materially participate. And, you know, the properties that definitely helps to count towards those hours, but you have to actively participate, actively oversee. And this has to be pretty much your full time job. You have to work more than, and not necessarily because it’s 750 hours, you have to work more than 750 hours in your real estate business.
And that would average to be about 15 hours a week. I think, but you have to actively participate, okay, you can’t just say, well, the property manager takes care of everything. You have to make some phone calls, you have to make runs to the office, the home improvement store, you may have to deal with tenants, you, the record keeping, all of that is a part of qualifying for the 750 hours, okay. So, if you can make it to 50% or more of your work is in the real estate trade, and you actually work over 750 hours in real estate, then you can qualify to become a real estate professional. Now, the reason that I cannot qualify to become a real estate professional is because most of my time is spent in my accounting practice.
So, as much as I would love to be a real estate professional, I just don’t qualify. Okay, and if trust me, if there was any way that I could legally sneak it in, I would do so. But I don’t play games with IRS. So, that’s not what I can do. Okay. All right. Number seven, which is really number two. Don’t forget to depreciate.
All right. This is a huge planning opportunity. And what do I mean by depreciate? So, I call them big ticket items. When you purchase big ticket items, things like houses and condos and whatever else you’re purchasing or the pieces to go into it. So, dishwashers and carpet and cabinets and all those things, you get to write off all of those items, the property itself and the contents that you purchased within all materials, all supplies, right? Now, how you write off those things depends on what type of property it is, what type of asset it is, okay? Certain items like a home, a condo, anything that’s residential, when you purchase that property, you can’t just write it off during the first year, okay? You have to spread that cost over a certain amount of time. And for a home, a condo, anything residential, that’s going to be the 27 and a half years. If you have commercial property, that’s going to be 39 years, okay? But there are some other things like the carpet and the dishwasher and your cabinets and your ceiling fans, things like that. You’re going to be able to write off in a shorter timeframe.
So, that’s the name of the game. Trying to write off as much as you can in a shorter timeframe, that’s going to give you a larger deduction and that’s either going to reduce your tax bill or keep you from having a tax bill at all, okay? Now, depreciation is nothing but a paper loss, which is beautiful. Paper losses are beautiful because you’re really not losing anything. You have an investment property. You’re making money, but for tax purposes, it looks like a loss. So that is a beautiful strategy.
And guess what? It is the most commonly missed deduction. I do not know why, but I’ll get new clients and I look at their tax returns and they’ll say, oh, I’ve been real estate investing for a number of years. And so I’ll look at their schedule E on the tax return and I’ll see income and I’ll see taxes, I’ll see insurance, may see HOA, warranties, and that’s it. And I’m like, oh, how long have you had this property? Oh, I’ve had this property for five years.
I’ve had this one for 15 years. Oh, where’s the depreciation? So you’re missing out on a huge chunk of a tax deduction. So please guys, whatever you do, don’t forget to depreciate.
And if you look on your tax returns, and if in the form it’s 4562, and you don’t have a form 4562 on your tax return, and if you look at the schedule E and you don’t see a space where there’s a number for depreciation, then please get with your professionals or get with an expert that is a, that understands real estate, and you can do something about that so you can kind of catch up that depreciation. Okay. So please don’t forget. And I do want to touch on and Krista, you mentioned CPA so CPAs are not the only tax professionals there are wonderful tax professionals out there everywhere that does that prepare taxes one IRS enrolled agents like myself and not plugging me but I am plugging our, our community. IRS enrolled agents CPAs and there are unenrolled professionals as well that specialize and focus on this stuff so real estate landlords okay. Some CPAs, I have clients that are CPAs, they just don’t touch tax so when you look for a professional you’re going to end. It’s better to have a licensed professional because we have something to lose if I lost my license today I don’t eat, and I like to eat.
So, it’s better that you find a licensed professional like a CPA or an IRS enrolled agent that will prepare your taxes but make sure that they specialize in what your specific industry is. Okay. Now, number eight. Safe Harbor mainstays and when I talk about safe harbor so think of the IRS has this big that. So, I think that’s a really big book and that is not even a book probably just some or their books so volumes and volumes of tax codes right and there’s always an exception to the rule. Okay, so when we talk about safe harbor, safe harbor is like the exception to the rules that the IRS has written but it is the IRS is exception.
So, the IRS says, yeah, here’s our rule, but if you meet certain criteria, then you can by step or overstep our rule and then do this thing. Okay. Okay. So, when we talked about depreciation. I told you there are certain items when you make those purchases for and I’m just going to stick with the residential. Okay, so when you purchase purchase a home for renting out you purchase this house or condo or apartment, and you’re going to get it out right. The IRS says, if it’s a certain item and I’ll call it the dishwasher, you cannot write off that dishwasher in that first year. You just can’t that’s that’s the rule.
But if you reach the safe harbor if you apply safe harbor, then under the de minimis rules for as long as that dishwasher did not cost $2,500, you can write it off within that first year the whole thing you don’t have to spread it over five or seven years. Okay. Now, I have here 2500 or 5000 per item. The reason that’s there is based on the de minimis rules. If you, if you have financial statements that were audited, then instead of 2500 you can write off 5000.
Okay. And that 2500 or 5000 is per item per invoice. So, it’s crazy, but that’s the thing about the safe harbor, you always have to meet certain criteria so for the de minimis rules. If you meet the criteria again remember we talked about saving those receipts invoice receipt. So, if on your invoice, or receipt is spelled out that that dishwasher was $1000 if the refrigerator was $1500. If I don’t know you purchase some cabinets and the cabinets were $2300. You don’t have to wait and spread those items over several years. For as long as it is 2500 or less or 5000 if you have audited financials, you can deduct those items within the first year.
Okay, and you get a choice. So that’s when we talk about tax strategies and tax planning. There’s a choice you can make the choice to deduct these things all at one time but if you don’t need to, if you can afford to spread those items over a five year or seven year time frame then do so. But you have to do what works best for you, because some people don’t need the deductions or that’s another thing, depending on if you’re a real estate investor or if you’re a real estate professional. Then it may not be beneficial for you to take the demand and this rule for the safe harbor for the menace.
Okay. Routine maintenance now that safe harbor says it doesn’t matter what the ticket prices or what you pay for an item for as long as the item is for routine maintenance. Okay, recurring work efficient operating conditions.
Then it doesn’t matter how much it costs, you’re still going to be able to deduct the whole thing versus depreciating that particular item or items over an extended period of time five years seven years 15 years. Okay. Then there’s also the safe harbor small taxpayers.
Okay, and if and yes, there again. This is for real estate investors real estate professionals as well for landlords. The IRS says there is no limit for as long as it is for repairs or maintenance or improvements. Okay. Now there is a size limit there is qualifications based off of the size of your real estate business but if you qualify for the safe, the small taxpayer safe harbor.
It doesn’t even matter about the de minimis or the routines, you just have no limits. Okay. Now, when you talk to your tax professional or your tax strategist about the safe harbor methods. You want to make sure that they understand that you can’t just do some of these things. Some of them you have to have specific rules and guidelines and the proper paperwork in place before you can just say this is what I’m going to do. Okay, because the IRS is watching. And I don’t know that’s one question that I didn’t get and I was looking back and forth.
A lot of times when I do these presentations they’re like oh what about the 86,000 auditors that the IRS is hiring and they’re not hiring all 86,000 auditors but they are hiring a lot of staff and some of that some of the staff will be auditors that will be coming knocking on doors or sending out letters or yeah just wanting to see whether you’re, whether you have the proper paperwork to deduct the things that you’re deducting. Okay.
Well said before we move on Deltri sorry to interrupt. A couple of folks still had some questions about the de minimis. Safe Haven, could you give another example of that.
Okay, so the de minimis. Let’s say you went to the office supply store, and you purchase all at one time. $10,000 worth of materials. Okay, let’s say you purchase cabinets you purchase refrigerators you purchased a stove, but all of those items are on one invoice right.
And that invoice came up to $10,000. Typically, you would have to based off of the regular IRS rules. Okay. Based off of that, you would have to depreciate those items, each item you would have to depreciate. So, if the refrigerator costs 2000 and let’s say everything but let’s say five things cost $2,000 a piece right.
Right. By the regular IRS rules, you would have to spread the cost of those items over either five years, seven years or 15 years depending on what type of item it was right. But based off of the safe harbor de minimis rules, for as long as your invoice showed each item. And for as long as those items weren’t 25,000 over $2,500 I’m saying 25,000 sorry for as long as they were not over $2,500 or 5,000 if you had those financial statements.
Then you are able to deduct instead of over a period of five or seven or 15 years, you’re able to deduct each item within the same year that you purchase the item.
I think that’s a really great example. If there are more questions about it, feel free to throw it in the chat, but Delteries, thank you for revisiting that topic.
Oh, absolutely. And please let me know because I have two screens, so I’m like over here and here. So okay. All right. Oh, and yes, I saw something. It went up quickly about accelerated depreciation. So there are ways to accelerate depreciation, which we won’t be able to get in much today, but you have what’s called your bonus depreciation and section 179 depreciation. So yes, those are actual other ways to accelerate your depreciation. Absolutely.
All right. The next QBI, so qualified business income. Now, if, and this is for a lot of people didn’t know, but you can actually take this for your properties. So what is this?
This is new. This is a new tax deduction, but it’s going away in 2025. So just FYI, if you have a profit, then you’re able to take a 20% deduction on your tax return for that profit, okay, for your real estate. So this is huge.
So just think about it as getting a discount, a 20% discount off of your tax bill. This is major. Now, again, is going away in 2025. And in order for you to deduct it, you must keep separate, a separate accounting for each of your properties, okay? And then in 2023, I don’t know why this came about, but you have to have over 250 hours of service each year, but it’s not per property.
It’s just for all of your properties combined in order for you to take this QBI deduction. And lastly, let’s talk about cost segregation. Now, it’s all about that depreciation. Remember, we talked about depreciation. We talked about those safe harbor rules, safe harbor methods. Cost segregation, this is big as well.
This is another way to accelerate or to fast track your item. So here’s some examples out here. You’re ceiling fans, your carpets, your cabinets, your landscaping, right? When you purchase that home, again, you’re purchasing and I call it home. When you purchase your property and you know that you’re going to rent it out, right? Well, if you purchase that property for $100,000 and I’m not going to give you the spiel about land because you can’t depreciate land. So let’s say you purchased the property for $100,000 and then land was worth $20,000. So now you are depreciating an $80,000 piece of property, right? That $80,000 is going to be spread over 27 and a half years. So you get to deduct $80,000 divided by 27 and a half and that’s how much you’re going to take as far as a deduction each year.
If you got a cost segregation study done, then what that cost segregation study is going to do is say, huh, even though you bought this property and it had a refrigerator, a stove, it had cabinets, it had carpet, it had landscaping, you instead of deducting all of or instead of deducting the $80,000 over 27 and a half years, let’s pick apart these items that are less than 27 and a half years and let’s go ahead and deduct those things sooner, okay? Let’s fast-track or accelerate the depreciation. So we have things that may be five years. You can deduct over a five-year period or a seven-year period instead of having to wait for a whole 27 and a half years to deduct, okay?
And those are some examples that you can see. So just think about it with a cost segregation study that will allow you to put more money in your pocket because you’re deducting more. So if we take taxable income and then we have our deductions, the more deductions that you have, the less taxable income that you have.
And that’s the name of the game. You want as less taxable income as possible because the less taxable income that you have, the less tax that you have to pay and sometimes you will alleviate your tax bill all together. Now cost segregation studies, they’re done by specific engineers, okay? And you do have some software out there that some engineers have built where you can do cost segregation studies on your own through the software. But I want to suggest to you, if you haven’t made it to real estate professional status yet, you’re probably not going to need a cost segregation study because they could cost $5,000, $10,000 just to get these studies. And then you also don’t want to have a cost segregation study on a smaller piece of property. You want to make sure that it counts, okay? So you have to weigh the cost benefits of having a cost segregation study done. Let’s see, any questions?
Oh, we are rich with questions today. All right.
So do you want me to start with the questions that came in first because I can answer some of those from the ones that you sent me?
You know, let’s go with what we have in the Q&A in the chat. We’re not going to get to everything, but as a spoiler, we do have all of Deltrease’s contact information that we’re going to send to you guys after this presentation. So first we’ll answer a couple of questions. I will ask you a couple of questions, and then we will make sure that you can get in touch with Deltris so that you can finish up any lingering queries on your beautiful little minds. So to start off, one of the questions that was really compelling came in from someone whose partner used to handle all of the documentation and the accounting for their business. Well, unfortunately, the partner has since passed away. Do you have any advice on how to start picking up that duty and getting access to those accounts? Absolutely.
So the first thing you want to do, so if that partner was the tax matters partner, you want to inform the IRS that that partner has passed away. I don’t know if you could get a death certificate or either know whomever is the representative of that partner’s estate to actually you get power of attorney or have that representative to contact the IRS and say, hey, this partner is no longer here. And please, everything that of the business should go to please refer to you, whoever you are, and then that should start the ball rolling. You can also contact the IRS yourself if you have a partnership like a true 1065 partnership and you receive a K1 that K1 should also be proof that you are the other partner. Also, if you have any operating agreements in the operating agreements.
A lot of times it spells out what happens in event in the event of a partner’s death. So just start there. You have to alert the IRS and then once the IRS is alerted and you’re able to get access to records, then you can start requesting transcripts so tax account transcripts from the IRS. That’s where I would start if is helpful.
That sounds pretty helpful. Juan, if you’re still in the chat feel free to wait in. Thank you for that, Beltrice. Pick some of these if you don’t mind and fire them your way. Okay.
Let’s see, does the security deposit have to be in a separate account. So no, it doesn’t have to be in a separate account. It’s just better. I recommend it being in a separate account because out of sight out of mind right you don’t want to think that you some some people just look at their bank account to determine if they can spend money, which the financial statements tell the better picture but that’s just how some people are if they see they have 5000 in the bank account they may think all 5000 is theirs. So having that separate bank account is helpful to me, but you don’t have to keep it there. Now if you are a property manager, a licensed property manager has an obligation to keep those funds separate but if you are a landlord and you manage your own properties it’s not an obligation it’s just that it’s how I find it helpful. Okay.
Yeah, well said. And as someone highlighted in the chat some states have different rules where your security deposit has to be in an escrow account. So when in doubt check your local laws because they can vary from state to state. Absolutely.
Does the interest obtained by the security deposit belong to the tenant. No, it does not. That interest does not belong to the tenant and I, you know what I’m going to say with Chris to check your local laws, I know in the state of South Carolina, the interest on those security deposits do not belong to the tenant. Okay, and then you also have to look at, are you a landlord and a licensed property manager, or are you a landlord only, or are you a property manager only, because the laws will come into play different laws come into play, depending on what you are. Okay. Okay.
Here’s one. If my property is not located in the state I live in do I need to use a CPA from that state.
No, not necessarily I and and so here’s something you don’t have to use a CPA at all you just need an a licensed professional that can assist you and that specializes in real estate. Okay, doesn’t have to be a CPA because just and think of it like a dentist, a dentist is a doctor right but if you have an earache, you’re not going to the dentist, you’re going to the ENT person right. Or you might just go to your general practitioner so it doesn’t necessarily have to be a CPA for as long as you have a licensed professional IRS enrolled agents, even some attorneys do tax preparation but you want to make sure you have a licensed professional. You don’t have to have someone in your state but you want to go to someone that if your state has some funky real estate laws you want to make sure and get with someone that has knowledge of your state’s laws as well, but they don’t have to live in your state. We do a lot of tax returns out of our state, but we won’t do any that we don’t know the laws or are familiar with the state laws.
Well said. Okay let’s get at least one more question and then I will ask my final poll here. Let’s see. Someone said. We did extensive remodeling on our rental house in 2020 and 2021 but didn’t start renting the house until 2022. Can we deduct and or depreciate some of the expenses we incurred in 2021 and 2022. Wait excuse me 2020 2021 on our 2022 taxes.
Absolutely so whenever I call it go live. Whenever you place that property in service is when you’re able to deduct those items so as you were doing the renovations in the previous years there was no deduction, but saving the receipts, keeping up with those financial statements from the previous years per property. Yes, you’ll be able to deduct those items in 2022 on your 2022 tax return. That’s a great question. Fantastic.
So I am going to go ahead and launch my final questions for you. Like I said, we will have Deltrease’s is contact information on the very next slide we will also send it out to you so if you have questions for her just want to get in touch with an expert.
I mean she has more than proven herself across this call we’re very lucky to have her. So we’ll make sure that you can get in touch. Remember to I just dropped it in the chat if you’re looking for a free way to track your expenses and manage your receipts. TurboTenant can help create an account today if you haven’t. We offer a bevy of solutions for every stage of the rental process from move in to move out. If you’re looking for something more robust for your accounting try our integration with REI hub.
For a small charge each month you can have your accounts integrated all of your TurboTenant information will transfer automatically to REI hub and they have a plethora of cool reports that you can use to check the wellness of your financial investments. So, look at those those links in the chat. Otherwise, if you have any questions feel free to drop them.
Again, we will circle back with all of the information and I will just end this poll here thank you for voting. And del trees if you want to go to the next slide with all of your contact info. That would be lovely. So, um, don’t trees thank you so very much for sharing your talent and expertise today like I said everyone you can reach out to her directly. We will give you a link in the follow up email with this recording. So, look for that she is an expert. Any final words on your end.
Thank you so much Krista I really enjoyed this I’m so sorry that I could not answer I see a lot of great questions out there, but if you’d like to reach out to me please go to our attacks lady.com backslash landlords. So, in other words, I have a limited amount of availability, but if you schedule there. You can get a free 30-minute strategy session with me. And for those some of you may not want a strategy session up at the top you’ll see where you could just get the 12 mistakes costing real estate investors 1000 so I appreciate being here today it was a pleasure and again just I apologize that I could not answer all of the hundreds of questions and there are great questions out there so if I can answer them maybe in a strategy call I’ll be happy to do so. If there’s someone that has any immediate tax problem so IRS it’s any you those nasty grams feel free to reach out to me at taxhelp at dhard accounting calm. And then I have a podcast that feel free to listen to that and you might get some tips on there as well.
Absolutely, I’m going to go tune in myself. Well thank you everyone we really appreciate you being here to arrange a free meeting once again use the re tax lady.com slash landlords link. We will email that to you along with the recording of this presentation and the deck so you have free resources come in your way. If you need free more free resources check out TurboTenant calm to use our expense tracker document storage and of course our REI hub integration. Thanks again Deltrease and I hope you guys have a wonderful rest of your day. My pleasure to take care.
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