All Forum Posts by: Scott Vance

@Nathan S.  In my practice as an enrolled agent I work with alot of real estate investors.  It is a big mistake not to have an Enrolled Agent or a CPA on your team to help you very early on in your real estate experience.  So for example on the home office deduction.  The IRS considers 2 key things are required to be eligible to take the deduction;

1. Regular and Exclusive Use.

1)  You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.

2. Principal Place of Your Business.

2)  You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business. You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.

There is a "Safe Harbor" method of calculating this.  Your tax advisor whether an EA or a CPA can calculate this for you and recommend how to maximize it.  

@Jason Wutzke  The money coming out of a 457 would be taxed as earned income.  So to reduce the tax to her I would look at making sure that taking the distrubution does not bounce her into the next higher tax bracket, maybe taking some out now before the end of 2016 and then taking some in 2017 could do that I don't know for  sure you would need to have a tax advisor take a closer look.  Also the possibility of her bunching up some deductions and maybe even some tax credit exists.  Also if you can shield some income from being included in her AGI would be helpful too.  Alot of possibilities but without specifics as to her situation nothing that I can firmly recommend.  

@Mike 

@Mike Parkins  Make sure you speak with a financial advisor who has a true understanding of student loans.  Depending on the type, amount and some other factors how you choose to pay them down could cost you alot of money.  For instance I recently had a client who refinanced her loans, because she refinanced the wrong way she lost eligibilty to have a large amount of her student loans forgiven.   

@Scott Royer  @Justin Fox  Probably won't make a difference.  But I would speak with your tax advisor to be sure.  Depending on your particular tax situation it may make sense to buy it now or push your purchase off to the new year to save money on taxes.  

@Christopher Nerio You will need to file taxes as a business. The income I think based on what you have told me will be taxed as income. The good thing is you can reduce that income by your costs for running the business of having boarders. Establishing an LLC has nothing to do with taxes it has to do with protecting you in case you are sued. Whether you or your wife claim the income doesn't really matter, I assume you are going to file Married filing jointly so both incomes are combined. If you filed Married but seperate you would be hit with alot of taxes that probably would make it very detrimental from a tax standpoint. I am pretty sure, based on what you have written that the "Boarder" income will be treated and taxed "income" as opposed to a traditional rental where you rent a house to a person is treated as "Passive Income". Regarding the income from the boarder, my experience with that is most lenders require 2-3 years of tax returns showing that income to be considered into the DTI ratio. Each lender is different. Make sure you find and speak with an Enrolled Agent or CPA to make sure you are not breaking any IRS rules.

@Jason Wutzke Your mothers 457 plan may have a loan provision that allows borrowing from the balance accumulated in your account. Plan loans, if allowed, are generally limited to 50% of your account balance or a maximum of $50,000, whichever is less, and generally must be paid back within five years with interest.  The key is whether the plan has a loan provision or not.  457's are not required to allow loans from their plans.  Also key to remember is there are significant penalties if you don't pay these loans back with in the 5 year repayment period.  Also keep in mind that if your mom is fired/retires or otherwise leaves her employer the plan will require her to pay the loan back within I think 30 days or the IRS deems that she has received a distribution and that is subject to taxes and penalties.

@Eric B.  There are numerous qualified retirement plans available to you as a small business owner.  Depending on how you are structured and your particular situation will direct you to a certain type of plan.  This is better discussed with a trusted, knowledgeable advisor.  I would recommend you not invest in real estate with your QRP.  Couple reasons; High fees, Tricky rules and if you are already working in real estate you probably shouldn't invest in it as well (The idea of not keeping all your eggs in one basket)  Find a knowledgeable, trustworthy fee-only financial planner to help you.  Also a tax advisor would help as well.  

I am tracking that the expenses you incur before effectively putting your rental into service (Meaning being able to be rented) gets rolled into your basis, generally.  You are able to expense a limited amount of some costs before the property becomes available for service depending on your particular situation.  I recommend you speak with you tax professional to stay within bounds of IRS rules.  

@Ben Kirchner Fellow North Carolinian here. The lenders I have spoken with require 2 years of rental income to include in your DTI ratio.

@Matthew Wright  I have had success using Wave.  It is very similiar to quickbooks but is free.