Tooting My Real Estate Horn

I have been around long enough to have seen more than one real estate bubble. Yes there has been more than one, it’s just that this one is really big. And I predicted it and had disposed off all my rental property by 2004. Folks laughed at me saying I was too conservative. Even though I did not time the market perfectly, those folks begrudgingly admit I was right and would have loved to have gotten 2004 prices for their properties!

How did I know? It’s because I stay tuned to the industry, constantly polling my clients and experts in the real estate industry about what they are doing, and what they are seeing, and (without sharing names, of course) I share that information with all my real estate clients.

I call this learning from the “Old Guard” and sharing it with the “New Guard.” By the old guard I mean those seasoned veteran real estate developers, investors, sales agents and others who made a lot of mistakes, learned from those mistakes, made an absolute killing during the bubble, and have made it through the bubble’s burst with the bulk of their wealth intact. I also know you can learn just as much from those that didn’t survive.

Now there is a new guard coming into the market, the folks that didn’t lose their house, made good money at their day jobs and now they have some cash accumulated and they are seeing the same things I am seeing – low interest rates, property values at prices far below the cost to build and it just screams “OPPORTUNITY.”

Do your current financial advisers know how the real estate market works? Do they know to help you take advantage of these opportunities? Do they share their client’s positive and negative experiences with you ? Have they been real estate investors themselves?

I can save you more money in taxes than you will ever pay in fees. Way more.

A Twist on Cost Segregation

A group of doctors own a medical building.  Not an uncommon practice.  Over time the doctors have paid down the loan and pay a lot of tax on the income.  They want more deductions.

In this group, the doctors of mixed specialties, all of whom will see their practices change as a result of Obamacare.  One of the impacts of Obamacare is it has made doctors in certain specialties seek hospital employment to keep their practices viable.  An affiliation assures them of a more manageable income stream without need to maintain a cost structure, which will be beneficial in the anticipation that revenues will be curtailed in the future.

Certain docs in the aforementioned group are choosing to become employees of the local hospital.  As part owners of the building, it behooves them to have the hospital take over the lease on their spaces and they keep their practices intact.

Hospitals must meet certain requirements and if the hospital takes over the leases, the HVAC system needs to be upgraded.  The hospital could pay for the improvements.  Or the docs as landlords can pay for the improvements and the hospital will pay for the improvements through increased rents.  But this increase in rent will put  the doctors further into the black on the building rental and paying even more taxes.  The improvements will have to be made to the whole building, making them 39 year property (meaning it takes 39 years to write it off), unless we do a cost segregation study.  Given the total cost of improvements, such a study is probably too expensive for the savings involved.

But wait, I have a plan.  Let’s have the nonprofit hospital pay for all the tenant improvements on the 39 year depreciation schedule, because as a non-profit, they don’t care about depreciation write-offs.  We’re having the docs pay for the HEPA filtration and positive pressure equipment.  Even though it affects the whole building including non-hospital affiliated docs, the new equipment does does absolutely nothing for care and comfort of the general public, and only affects patient care.  These improvements are indeed specific to doctor patient care and that puts them on the five year asset schedule.

On a commercial rental like this, no part of this new 5 year property qualifies for the IRS Sec. 179 deduction (100% write-off), but, currently this 5 year property does qualify for 100% (or 50%) bonus depreciation, meaning they could write off the whole thing in one year.

In doing this, in splitting what the tenant pays for and what the landlord pays for, we have in effect done a cost segregation.  The doctors will get their full write-off of deductions that would have been wasted had the hospital paid for it all.  Its a nice twist on cost segregation.

New Tax Reporting Rules for Landlords

The recently enacted Small Business Jobs Act of 2010,may affect you if you are an owner-manager of rental property.  Under this legislation, you will be required to send a Form 1099-MISC annually to every vendor (individual, partnership or corporate) who provides $600.00 or more in services for your rental properties.  Think gardener, handyman, etc.  Please note that these requirements are different than and are in addition to the Form 1099 requirements that resulted from the recent healthcare legislation.

 

Starting in 2011 you need to obtain a completed IRS Form W-9 from every service provider you already use. That form will give you their correct name, federal ID# or Social Security number, and address.  And I suggest getting that information right away with any new vendors before they start work.  Do not wait and create a mad scramble to obtain the information right before the deadline.  This is the surest way to end up with incomplete forms.  

 

Beginning in 2012, annually you will be required to prepare a Form 1099-MISC and send one copy by January 31st to each vendor and by February 28, 2012 one copy to the IRS with an appropriate Form 1096 cover sheet.  Presently we do not know if California will require it’s own filings.

 

Prior to 2011 the requirement for filing only applied to businesses (i.e., rental property management companies) and not rental property owners.  If you already are making filings, then no new action is required. 

 

The IRS may assess a penalty for each 1099 with inaccurate or missing information in the amount of $100.00, although the penalty is reduced for quick corrections (before August 1 of the year sent).  That penalty applies even if the bad information is not your fault,so it is important to require all vendors to fully complete a Form W-9 so you can prove you are not responsible for the error.  If there is intentional noncompliance, like not filing a 1099 for a vendor, then the penalty is $250.00 per non-filed 1099.

Schedule E filers may want to obtain an Federal Employer Identification Number (FEIN) for reporting their rental property payments in order to avoid disclosure of their personal social security numbers to vendors.  To be clear about this, the Form 1099-MISC requires all payers to provide an identification number.  In the absence of a FEIN, the only other option will be to disclose to vendors the owner’s social security number on the Form 1099-MISC.  Note – The use of a FEIN will not change your income tax reporting in any way.

Again, because these provisions already apply to businesses, if you are already filing, legislation will not change how you file the Form 1099-MISC.  Obtaining a Form W-9 from all vendors need not wait until next year.  Both the Form W-9 and instructions are available on www.irs.gov.