6 Ways to Lower Your Tax Rate by Owning Rental Property

If you just finalized your 2018 Tax Return and you’re now focused on how to “legally” lower your tax rate for 2019, you should read on. There are lots of tax benefits of being a landlord, most all expenses are tax deductible, from finding tenants to fixing faucets. The benefits of cash flow and tax deductions can make owning rental properties worthwhile. 

1. Tax Deductions for Landlords
Many rental home expenses are tax deductible. Save receipts and any other documentation, and take the deductions on Schedule E. Figure you’ll spend four hours a week, on average, maintaining a rental property, including record keeping.
 
In general, you can claim the deductions for the year in which you pay for these common rental property expenses:
 
•Advertising
•Cleaning and maintenance
•Commissions paid to rental agents
•Homeowner association/condo dues
•Insurance premiums
•Legal fees, Accountant fees, Property Manager Fees
•Mortgage interest
•Taxes, including property taxes
•Utilities

2. Travel Expense Deductions
You can deduct expenses for local travel to a rental home for activities such as showing it, collecting rent, or doing maintenance. If you use your own car, you can claim the standard mileage rate, which is 54.5 cents per mile, plus tolls and parking.
Traveling outside your local area to a rental home is another matter. You can write off the expenses if the purpose of the trip is to collect rent or, in the words of the IRS, “manage, conserve, or maintain” the property. If you mix business with pleasure during the trip, you can only deduct the portion of expenses that directly relates to rental activities.

3. Repairs and Improvement Deduction
Another grey area is repairs vs. improvements. The tax code lets you immediately write off repairs (any fixes that keep your property in working conditions) as you would other expenses. The costs of improvements that add value to a rental property or extend its life must instead be depreciated over several years.
Think of it this way: Simply replacing a broken window pane counts as a repair, but replacing all of the windows in your rental home counts as an improvement.

4. Depreciation
Depreciation refers to the value of property that’s lost over time due to wear, tear, and obsolescence. In the case of improvements to a rental home, you can deduct a portion of that lost value every year over a set number of years. In general, you depreciate the value of the home itself (but not the portion of the cost attributable to land) over 27.5 years. You’ll have to stop depreciating once you recover your cost or you stop renting out the home, whichever comes first.
Depreciation is a huge tax benefit, but the calculations can be tricky. Read IRS Publication 946, “How to Depreciate Property” for additional information.

5. Profits and Losses on Rental Homes
The rent you collect from your tenant every month counts as income. You offset that income and lower your tax bill by deducting your rental home expenses including depreciation. If, for example, you received $9,600 in rent during the year and had expenses of $4,200, then your taxable rental income would be $5,400 ($9,600 in rent minus $4,200 in expenses).
You can even write off a net loss on a rental home as long as you meet income requirements, own at least 10% of the property, and actively participate in the rental of the home. Active participation in a rental is as simple as placing ads, setting rents, or screening prospective tenants.
If your modified adjusted gross income (same as adjusted gross income for most persons) is $100,000 or less, you can deduct up to $25,000 in rental losses. The deduction for losses gradually phases out between income of $100,000 and $150,000. You may be able to carry forward excess losses to future years.
Let’s say that for the year rental receipts are $12,000 and expenses total $15,000, resulting in a $3,000 loss. If your modified adjusted gross income is below $100,000, you can deduct the full $3,000 loss. If you’re in a 22% tax bracket, a $3,000 loss reduces your tax bill by $660, plus any applicable state income taxes.

6. Tax Rules for Vacation Homes
If you have a vacation home that’s mostly reserved for personal use but rented out for up to 14 days a year, you won’t have to pay taxes on the rental income. Some expenses are deductible, though the personal use of the home limits deductions. The tax picture gets more complicated when, in the same year, you make personal use of your vacation home and rent it out for more than 14 days.
 
Being a landlord is not for everyone, but those who want a passive income stream, with lots of tax write offs, will prosper.

The Good, The Bad, & the Ugly

The Southern Oregon real estate market has seen some bumps and bruises since the west coast erupted in fires last summer. We began this year with a very slow and weak market and then it exploded.  Here is a quick review of the Good, Bad and Ugly that has been our real estate market since last summer.

The Ugly
We began last year with our real estate market reaching a record number of home sales at record prices.  It was a sellers’ market with few homes for buyers to choose from and prices were increasing at a rapid pace. All was good until the west coast erupted in flames, closing Interstate 5 over and over, burning the Northern California towns of Redding, Paradise, Dunsmuir, and Hornbook and pouring smoke into our valley. Although we were fortunate to have few homeowners lose their homes in Southern Oregon, all the fires did take a toll on our home sales.
 
The Bad
Home sales slowed drastically after all the fires broke out causing home sales in both the last quarter of 2018, and the first quarter of 2019, to decline. Home prices, however, continued to climb; that is, until the first quarter of 2019 where Jackson County saw no increase in the median price of homes that resold.  This is the first time since 2008 that we have seen a quarter go by with no increase in home prices.  All of a sudden, this was getting concerning.
 
The Good
It happed in March – retirees, escapees and refugees from Paradise, combined with first time home buyers, caused a large upswing in our real estate market. Many sellers put their homes on the market early this year to beat any possibility of summer smoke and found they were met by an army of awaiting buyers that greeted the expanding home selection with glee. It’s impossible to know exactly how much this upswing will increase our overall market, but we’re off to a great start. Pending sales as of March 31st were up 14% in Jackson County and up 18% in Josephine County; those are big percentages for a real estate market.
 
Spring looks to be healthy for our market with the decline in interest rates, back down to 4%, and an increasing number of refugees relocating here that were once retired in Paradise, CA. On the rural property front, we’re seeing high demand for large irrigated parcels, 30 acres or more, to fulfill the growing demand for Hemp production and the oils produced from the Hemp flower.  We’re seeing a higher amount of listings come on the market for sale which is helping satisfy all the buyers waiting in the wings for the right property.
 
This year Jacksonville, unlike the rest of Jackson County, has seen their median home price sky rocket, making Jacksonville the most expensive city to live in Southern Oregon. You could see this coming after years of slow gentrification of older eclectic homes and countless publications naming Jacksonville as one of the nicest small towns to live in.   It is truly a magical town to live in and as the Jacksonville Review used to say, “A small town with a big atmosphere”.
 
So, its looks like spring will bring good news to our real estate market and the bad news is behind us and let’s hope we avoid the ugly news.

– Graham Farran

Oregon “First” in State Wide Rent Control 

Oregon enacted, and put into effect, the nation’s first statewide rent control measure on February 28th, 2019, handing a victory to those who say low-income people are squeezed by the housing crunch in many major US cities, and believe rent control is the answer.
On the other hand, landlords and developers argued rent control doesn’t create more affordable housing and argued that to increase affordable housing we need, for cities to lower their system development costs, to set aside lower cost land for lower-income housing, and to add tax incentives to build low income housing.
The Oregon rent-control law limits annual rent increases to 7% plus the change in inflation. New construction, defined as apartments built in the last 15 years, are exempt. This part of the law will affect mainly Portland, which has had a 17.3% increase in rents over the last 3 years. Southern Oregon saw rental prices increase in the last 3 years but at a much slower pace than Portland. What will change is the management of rent increases, and you’re likely to see more annual rent increases instead of increases every few years. 
There are more aspects of the bill that deal with evictions, lease terminations and leases converting from a term to month to month. If you manage your own rental property, we would suggest you consult a lawyer or property management company. Here are all the details of the state wide rent control bill and the 4 areas it changes:
#1 Annual Rent Increase
• Landlords may increase rent by no more than 7% + the change in inflation, as measured by the regional consumer price index in a 12-month period.
• Maintains current law regarding rent increases: prohibits rent increases in first year of month-to-month tenancy and requirement that landlords give 90-day notice of rent increases thereafter.
 
Exceptions:

  • New Construction: A landlord may increase the rent above 7% +CPI in a 12-month period if the certificate of occupancy was issued less than 15 years ago.
  • New Tenancy: If the previous tenant vacated the unit voluntarily or their tenancy was otherwise terminated in compliance with other applicable law, the landlord may reset the rent on the new tenancy without limitation.
  • Subsidized Housing: If the landlord is providing reduced rent to the tenant as part of a federal, state, or local program or subsidy, they are exempt.

 
#2 Eviction Standards
Eliminates the “no-cause eviction” after the first year of occupancy.

  • Landlords can continue to evict for a tenant-based cause (current law – i.e., non-payment, violation of the rental agreement, outrageous conduct, etc.).
  • Adds four new landlord-based for-cause reasons to evict a tenant:
    • Sale to a person who will move in
    • Landlord or family member move-in
    • Significant repair or renovation of the unit
    • Removal of the unit from residential use
  • If landlord uses one of these four landlord-based reasons, they must provide the tenant with 90-day notice and relocation expenses in the amount of 1 month’s rent.

Exceptions

  • Small landlords (4 or fewer units) do not have to pay relocation expenses.
  • Landlords who live on the same property as their tenant (owner occupied, 2 units or less) may still use a no cause eviction at any time.

 
#3 Month-to-Month Tenancies
• For the first 12 months of occupancy, a landlord may terminate the tenancy without cause with a 30-
   day notice.
• After the first 12 months of occupancy, a landlord may only evict a tenant for cause, by using an
   existing tenant based reason or by using one of the four new landlord-based reasons.
 
#4 Fixed-Term Tenancies
• After the first 12 months of occupancy, the fixed-term lease will automatically roll over to month-to-month unless the landlord has a tenant or landlord-based reason to terminate.
 
Exceptions

  • A fixed-term lease might not automatically roll over at the end of the fixed term per landlord discretion if the tenant has violated the terms of the rental agreement 3 separate times during a 12-month period, with written warnings for each violation given contemporaneously with the violation.

 
Enforcement: If a landlord violates the new provisions, they are liable for three months’ rent plus actual damages.

Resources: Please reference Senate Bill 608 on the Oregon State website at
https://olis.leg.state.or.us/liz/2019R1/Downloads/MeasureDocument/SB608/Introduced

Reverse Mortgages – Funding Your Retirement

Most people don’t know what a reverse mortgage is; and, because reverse mortgages are a relatively new idea for seniors in the United States, there is a lack of understanding. The reality is that Reverse Mortgages may be an answer to one of the biggest economic problems facing us in the United States, which is that baby boomers don’t have enough money to retire.

In spite of available 401K plans, the Federal Reserve is quoting that around one-third of the baby boomers have little to no retirement savings and are in danger of not having enough money to maintain their standard of living in retirement. If you are in this situation, 62 or older, you have a second chance with a Reverse Mortgage, which is a unique type of loan that allows homeowners to use the equity in their home to eliminate monthly mortgage payments and/or supplement their income without having to sell their home or give up title.

Unlike traditional mortgages, a reverse mortgage does not require a monthly mortgage payment, it’s the opposite, you can take the equity out of your home in one lump sum; or as long as you remain current paying your property taxes, insurance and home maintenance, you can take it in monthly payments. The loan balance does not need to be repaid as long as one of the borrowing spouses remains living in the home. When both borrowers are no longer living, the home is sold and the amount owed is paid back to the lender. This is a non-recourse loan, which means if the amount owed exceeds the value of the equity in the home, the lender has no recourse. Any surplus beyond the value of the original appraisal will be disbursed to the heirs.

Pros

  1. A reverse mortgage requires no repayment as long as the home is occupied and the borrower remains current on their obligations.
  2. Enables a person to supplement a fixed income with tax-free funds in order to cover daily expenses.
  3. Allows the client to use their equity in whatever way they choose.
  4. If the loan is paid off early, there are no prepayment penalties.
  5. The upfront fees can be financed into the loan to prevent any out of pocket costs.
  6. Requires pre-loan counseling in order to make certain that the borrower is completely informed.
  7. Federally-insured so the borrowers can never owe more than the home is worth due to the non-recourse feature.
  8. Provides flexible disbursement options (i.e. monthly sum or line of credit).
  9. Eliminates any existing mortgage.
  10. Interest rates may be lower than other options.
  11. Could give a borrower the money needed to get off of Medicaid and onto Medicare.

Cons

  1. Depending on the program, the upfront fees can be higher than other types of financing.
  2. Reduces the amount of equity left to your heirs.
  3. Does not allow interest to be taken as a tax deduction until payments are made or the loan becomes due.
  4. Can become due and payable in full if the terms of the loan are not met.
  5. Reverse mortgages are not well understood by many people.

The process of getting a Reverse Mortgage involves choosing a lender, attending a session with a HUD–approved financial counselor to make sure you are completely informed, getting your home appraised and inspected, and if you qualify, your loan will be funded.

Many baby boomers’ biggest asset is their home, and a reverse mortgage allows you to stay in it, rather than relocate elsewhere. There are neither payments involved nor are there any income or credit requirements. Having a reverse mortgage means you are borrowing from your home’s equity. The reverse mortgage lender does not take the title to your home, you remain the owner. While this means that you are still responsible for property taxes and any general costs and repairs associated with home ownership, the loan is simply a lien against the property.

So, if you didn’t save well for retirement a reverse mortgage may be right for you; OR, if you have lots of equity in your home and no heirs, you may want to have some fun with your equity.

Graham Farran

Manager/ Broker

For more details go to Reversemortgage.com