No, this is not some new fangled material for your three season porch to keep the mosquitoes out!

This is a new technique that some associations are using to manage the flow of tenants into their buildings and neighborhood.  Here is how it works:

• All building owners agree to collective tenant screening.   Occasionally, the association may require this via a covenants or rules change.
• When you have a vacancy, you notify the association.  You still do all the showings and advertising yourself, but when you get a prospective tenant that is interested in your property, this is where things changes compared the typical screening process.
• The prospective tenant fills out an application.  That application is actually sent to either the association management company for the credit, criminal, and housing checks or you do it yourself.
• If you wish to rent to this tenant, that application is then reviewed by an association board that looks at the application to see if the tenant meets the neighborhood standards.
• The board votes if they will allow you to rent to this tenant.

A slick part of this process is that the association keeps a running list of all tenants that have ever lived in the property.  This prevents bad tenants from moving from one building to the next in same neighborhood, which can often happen because the neighboring landlords were not talking or comparing notes.

Additionally, this association group can do a better job of seeing through the tenant application faleshoods.  I have seen this problem frequently, where Jane gets evicted from 1500 Main Street for lease violations such as criminal activity or bad behavior.  Interestingly, Suzie applies for and gets accepted on an apartment at 1520 Main Street, but does not disclose that Jane will be living with her (basically moving the problem down the block).

While this process may not work in all associations, it can be very effective where there are consistent tenant problems.  It can also have a big impact where the density of housing units makes one problem tenant frustrating for all the residents.

Wow.  My last stupid property repairs post was in January.  I am not sure if I have become oblivious to stupid repairs or maybe I am just looking at nicer houses.  Well, nevertheless, I found one in my own backyard about 3 weeks ago and the pictures have been burning a hole in my phone.  I figured I should pull them out of there before these gems get accidentally deleted.

This home is in Mound.  It sits on a hill, across the street from the houses on Lake Minnetonka. Not really an elegant multi-million dollar house like so many in this area, but what it lacks in style, size, cleanliness, color, decor, layout, amenities, and location, it makes up in ultra coolness (cue 1970′s music).

Yup, that’s right, shag carpet on the walls, everywhere.  Plus then you get the creepy basement with carpet all over the walls and the bed on the carpet platform.  Weird.

In a recent court case, Thomas F. Hale v. Commissioner, TC Memo 2010-229 the IRS determined that the taxpayer was not entitled to deductions for his rental properties because of the lack of substantiation.

The taxpayer introduced into evidence approximately 317 pages of uncategorized photocopies of receipts, canceled checks, invoices, and similar documents. He made no attempt to tie that evidence to the IRS’s expenses in question. The taxpayer basically handed the IRS a “shoebox”.

RESULT:

Although the court case addresses other items in the taxpayer tax return, the net result was that the taxpayer owed taxes AND accuracy related penalties of:

Year      Deficiency           Penalty

2003        $17,994             $3,599

2004         19,240              3,848

2005         23,216              3,568

TAKEAWAY:

Part of a taxpayer’s responsibility in running a business is having a set of books and records in a form that is traceable back to the origin of the receipt. Whether it is using an accounting software package such as Quickbooks or cross referencing your receipts to cancelled checks- there needs to be an auditable path to the expense in question.

Circular 230 Notice: IRS regulations require us to advise you that, unless otherwise specifically noted, any federal tax advice in this communication (including any attachments, enclosures, or other accompanying materials) was not intended or written to be used, by any taxpayer for the purpose of avoiding tax-related penalties imposed under the U.S. Internal Revenue Code or any other applicable state or local tax law provision; furthermore, this communication was not intended or written to support the promoting, marketing or recommending of any of the transactions or matters it addresses.

Greg Nelson, CPA, MBT

Olsen Thielen CPAs

www.otcpas.com/blog

Tax Court Case favors the IRS-Taxpayer did not meet real estate professional 750-hour requirement

If you are claiming to be a Real Estate Professional here is another case that points out that taxpayers needs to be documenting their time when performing real estate activities. A recent tax court case held against the taxpayer claiming that he did not qualify as a real estate professional. The Tax Court held that being “on-call” does not count towards the 750 hour requirement (Moss, 135 TC No 18).

SITUATION: The taxpayer was employed full time. The taxpayer and his wife owned a number of rental properties, including four apartments and three single-family homes. The taxpayer was directly involved in the rental properties performing rent collection, repairs/maintenance, and screening/evicting the tenants. For record keeping purposes the taxpayer kept a log detailing the dates he spent performing these activities. The taxpayer neglected to include the time spent but later was allowed to go back and prepare a time summary. The taxpayer’s total hours were 646 and did not meet the 750 hour test (as required to be a real estate professional). NOTE: Not to mention the fact that over 50% of his service must be in the real estate profession.

The taxpayer also argued that he was on-call during his employee time to handle rental issues. The Tax Court took the position that service time must be actual performance of such service. The tax court also rejected the taxpayer’s claim that his calendar reflected only 75% to 85% of his time- failure to provide proof.

CONCLUSION: The Tax Court ruled in favor the IRS and the taxpayer was subject to additional income taxes and accuracy-related penalties.

TAKE AWAY: Taxpayers claiming to be real estate professional need to keep detailed records of their time and services when working on their properties.

Greg Nelson, CPA, MBT

Olsen Thielen CPAs

www.otcpas.com/blog

Fall is a great time of year.  The grass slows down growing, I can open the windows and not have to run the A/C.  Kids are back in school.  I am realizing I like fall because of all the things that I don’t have to do or take care of!  Oh well.

This is also a great time of the year to get in and take a look at your rental properties.  If nothing else, it is an excuse to tell the tenant that you need to do your bi-yearly inspection so you can go in and take a look around at how they are treating your property.  Here are some other items that are worth doing as a preventative maintenance to potentially prevent emergency calls later:

• Turn on the furnace!  I can’t tell you how many calls I get once we have a cold spell from tenants that say their heat is not working.  Often, those calls are at 9pm at night once the temp drops.  Frequently, it is simply someone turned off the electrical switch next to the furnace, not knowing what it was.  Fire up that furnace now, make sure it runs, and more importantly, make sure the tenant knows it runs.
• Change the furnace filter and leave a box of 6-8 more filters for the tenants to change out every 30 days.  While I am pretty realistic that most tenants won’t change out the filters, at least the correct sized filters are next to the furnace.  Then if I ever need to go in for any other service calls, I can simply grab one and throw it in.  You will find that older home and homes that have smokers tend to have full filters much more often.
• Turn off the outside water spicket and drain it.  You do not want that to freeze and potentially flood the basement!  In fact, in many of my multi-family rentals, I simple remove these outside faucets.  There is nothing that a typical tenant needs that outside water for.
• Double check the operation of the front door locks and the garage door.  While this is not a cold winter item, these parts of the building take a lot of abuse.  Make sure they are lubricated and the screws are tight.
• Pour some drain opener down the drains.  Even if there is not a problem, this is an excellent preventative process.  I had to go over to a tenant’s property on Thanksgiving day once to unclog a kitchen sink.  She called me all in a panic because her sink was clogged and company was coming in 4 hours!
• Change the batteries in all the smoke detectors and carbon monoxide detectors.  I can’t tell you how many times I have seen tenants take the smoke detectors down and put them in a drawer because they were either beeping because they burned a pizza or because they were low on batteries.  This way, you insure they have them mounted and insure they will not beep.
• If you are responsible for supplying a shovel and/or sidewalk salt, make sure both are ready to go.  Fill up the salt container or leave another bag.  Better to do this now than when it snows at the end of October and you are running around!
• Winterize the lawn mower by at the very least putting some fuel stabilizers in the tank.  If possible, drain the oil, change the spark plug and air filter and sharpen the blades.

While all of these items may not be necessary for every property you own, getting into your units twice per year (once in the fall and once in the spring), can help you head off other maintenance calls and keep an eye on how your tenants are treating your investment property.

EFFECTIVE JANUARY 1, 2011-

On September 27, 2010, President Obama signed into law the “Small Business Jobs Act of 2010.” The bill contains a number of tax provisions that are designed to give tax breaks to individuals and small businesses.  The bill also includes multiple revenue raisers in an attempt to pay for the tax breaks.  Among the revenue raisers is the expanded use of Form 1099 to rental property owners.

Beginning January 1, 2011 rental property owners will be required to file Form 1099-MISC with the IRS reporting payments of $600 or more during the year for rental property expenses.  Separate 1099’s must be filed for each person providing services of $600 or more during the year.  The taxpayers will be required to provide a duplicate copy of the form to the service providers (painter, plumber, accountant, etc.).  The forms must be filed by January 31 of the year following the expense.    The service providers are required by law to give the taxpayer his name, address, and Federal identification number to be used on the 1099.  Rental property owners will need to include their own information and the total amount they paid to the recipient on the 1099.

Failure to comply with the law will result in increased fines.  Individual violations result in fines from $30 to $100, with the maximum calendar year penalties ranging from $500,000 to $1,500,000.

As with any tax law, there are exceptions.  Taxpayers who are temporarily renting their principal residence, or whose rental income does not exceed an IRS determined amount (which is TBD), will be exempt from the new filing requirements.  For those whom the filing requirement would create a hardship, as defined by the IRS, would also be exempt from filing.

Feel free to visit our Olsen Thielen CPA Blog at www.otcpas.com/blog

Mark Angell, CPA  mangell@otcpas.com

Olsen Thielen CPAs

952.829.3418