All Forum Posts by: Tommy F.

@Andrew Shippy When you hold property for personal use and later use it as an income-producing activity, your depreciable basis is the LESSER of two amounts.

1.The fair market value of the property at the date of change in use.

2.Your original cost basis plus permanent improvements or additions less any deductions claimed for casualty or theft losses.

Chances are you’ll elect the original cost because you got it at foreclosure sale, added improvements, but the after-repair value was greater than cost, plus several years of appreciation. Be sure to maintain records to support the basis you elect.

@Isiah Ferguson Sounds like a classic debate of Dave Ramsey vs Robert Kiyosaki. Your wife is following Dave with the paid-off mortgage and you’re in the Kiyosaki camp where good debt is a friend. The forums could go all day debating who is right. What really matters is which is best for your situation. Have you tried to get your wife to look at the benefits of leverage and your house isn’t an asset viewpoint?  Bottom line, happy wife, happy life.  Good luck!

@Isiah Ferguson In my experience the reserves had to be cash and/or cash equivalents, i.e. CD, stocks, bonds, mutual funds. I used my 401k statement. I didn’t have to liquidate, but simply demonstrated sufficient funds that if push came to shove I could liquidate, pay penalty and taxes, and still have plenty for mortgage reserves. Credit card cash advances are just adding more debt to situation.

@April Molina Yes, I rented to a tenant for one year advance and I had an existing tenant choose to pay six months advance. The one year advance was a couple with kids relocating, they wanted to be in the school district, and my house fit their needs. The husband was not employed at the time, the wife was a nurse, and they had cash to pay the advance. They offered the advance to make them a more appealing prospect in their eyes. I was fine with it. They stayed 2 years, no problems at all, the second year rent was paid on time, rarely heard from them except check in the mail. The existing tenant who paid 6 months advance did so on a renewal, he had the money, and wanted to get it of his pocket. Works for me ;-) He and family are still there, great guy, nice family.

Two points to consider: (1) The IRS requires that payments received are taxable income for the year in which it is received. It’s called constructive receipt. So, you could lose on taxes when taking receipt of a year in advance unless you have other passive activity losses to offset with. In other words, the excess income could exceed all your expenses including depreciation thus causing a taxable event. Do the math first before agreeing. (2) Although, you’re likely a cash basis accounting method taxpayer, you’ll want to treat the advance rent on your balance sheet as an Advance Receipt liability or Unearned Income. It may help to segregate the funds from other operating accounts and then sweep a rent payment from that other account to your operating account each month that it’s earned. Good luck!

@Shea Spinelli For most individual taxpayers, the cash receipts and disbursements method is the appropriate accounting method to follow. The cash receipts method dictates that cash or equivalents are taxable income in the year of actual or constructive receipt by the taxpayer or taxpayer's “agent”, regardless whether the income was earned in that year. The constructive receipts doctrine says the income is taxed as though it had been received so long as the amount is readily available to the taxpayer and the actual receipt is not subject to substantial limitations or restrictions. You said the rent was paid to Cozy in December and won’t be available to you until January. Cozy is your “agent” so you meet that receipt test. Are there substantial limitations or restrictions to accessing the money? If no, then you meet that receipt test and it’s likely you should report the income in 2017.  However, if Cozy has holding time requirement for receipts before they make funds immediately available to you that may be considered a "restriction" to disqualify it as a 2017 receipt.  Just my two cents. Good luck.

@Joshua D. Yes, I worked part-time while going to college full-time. I did odd jobs for the leasing manager at my apartment complex, i.e. painting, cleaning, etc.  I worked for a building supply company stocking the warehouse, filling customer orders, driving trucks to deliver lumber, shingles, and sheet rock. I also worked for the university as a math tutor in a learning lab. Several years later, I went to grad school at night while working full-time during the day. Fun times. 

@Abe Macias The bank is likely doing a “table top” appraisal by looking at your build plans, estimating costs, and then estimating the value of the property after construction is completed. For example, very basic, say your land value is $10k, and the cost of the build is $150k, the table top appraised “improved” value is $160k. The bank will give you a construction to permanent loan of $120k which is 75% Loan to Value. In this case you need a $30k down payment (the difference between construction cost $150k and bank loan of $120k). You could shop around banks or ask a mortgage broker to help you find a low down-payment construction to perm loan. If you intend to live in one side of the duplex that may change the dynamics to your favor. Going into a bank and presenting this as an owner-occupied deal versus investor deal could make the difference. Another solution, depending on the land location and zoning, is a modular/manufactured duplex. Lookup Oak Creek Homes in Texas. Your cost may be much lower and the manufacturer may offer financing options. Good luck!

@Kevin Lin  Based on the price, I’m assuming the land is not in a sub-division with covenants and building restrictions already in place that will protect you now and in the future. That being said, the seller still has the duty to disclose to you if the subject property is located in earthquake zones, potential flood areas, or fire hazard areas, but that’s assuming they know. The way around that for the seller is making the contract state "as is" leaving you the responsibility to determine the land's fitness for a particular use. Just because it's zoned for residential doesn't mean you automatically have the authorization to put a house there. One of the biggest problems you may face is waste water. If you don't have public sewer access, then you must rely upon onsite disposal and that can be limited by the soil types on your land, the size of your parcel, onsite well for water, conservation area requirements, set-backs, and the county health department or State environmental department granting a permit for onsite septic. If you do have access to public sewer, then you still have to get a permit from the utility and pay a tap fee which could be expensive.

Another consideration is the path of progress and its impact on the surrounding land. You’re waiting until retirement, not knowing when that it is, the path of progress could bring positive or negative effects to your land in the coming years. For example, consider logging that could change the landscape drastically, or surrounding area rezoned from residential to light industrial or other use.  Some changes could make the land more valuable and you simply sell it, or the changes may disrupt your retirement plans.

Considering the small price tag, you probably don’t need a realtor, the seller isn’t likely inclined to pay realtor commission, and it’s probably not worth a realtor’s trouble. Land in my area represented by a realtor often has a 10% commission. For a 5-10k price, there’s probably not many realtors willing to put in the time to make so little. The title search and insurance should be done and clean title be contingent for closing. Again, the price tag is small, but relieve yourself of headaches down the road. As for a survey, you will easily spend $1000 if not more, especially if the land is out in BFE , heavily wooded, or has other difficult features. The metes and bounds should be on the existing deed registered with the county. Depending on the size of the parcel, you may be able to go there and find the corner markers simply by using the deed description, a metal detector, and estimate the distances with your steps. As for closing costs, you’ll likely be paying for it. For the closing, you can get an attorney to draft a purchase agreement, and take care of the whole process. In the end, you’re likely to be paying several thousand dollars in addition to the purchase price.  Good luck! 

@Joe B. I thought of your question today when I heard this short podcast (about 8 minutes).  I hope this helps you make a decision. 

http://seancroxton.com/quote-of-the-day/294/

@Joe B. You're saving for down payment, but you also need to have some cash reserves, usually 6 months (check with a mortgage broker). The mutual funds will likely fulfill the reserve requirement. However, you also need to save cash for any repairs (unless you find something turn-key) and need a little cash on the side for future repairs. So, either keep saving or tap into the mutual fund(s). Assuming the $40k Vanguard account is a 401k (subject to 10% penalty) you'll blow $4k on penalty and 15% on the long-term gains, and whatever your ordinary tax rate is for the short-term gains. The tax is the tax, pay it now or pay when you're over 59-1/2 and beyond. If it gets you started in REI, then go for it. Four thousand in penalty, and age 27...you have time on your side. Surely you can make-up that $4k. You're sure to get different opinions depending on your audience, but it ultimately boils down to what is best for you and your goals. Good luck.