According to the Court’s decision, the law as overreaching.  It could be used to violate residential privacy rights and “could become the tool of choice for governments to enter people’e homes”.  The supreme court remanded the case to the court of appeals for further deliberation.

The lawsuit was brought by the Institute for Justice.  Here is the all the details.

A more recent example is one that Kevin Stevensen from The Cleanout People.  I always knew this rule, but never found anyone that missed it and got caught by it.  Kevin sent this message:

Scott

Here is a good fyi to pass on to other landlords, we took a tenant to housing court for non payment of rent. Well she got legal aid and they found that on our lease we have a PO box for the mailing address for rent.  Well I guess as a landlord we cant do that we need a physical address.  

Minnesota state law requires that you have a physical address for you or your rental company on your leases.

504B.181 LANDLORD OR AGENT DISCLOSURE.

Subdivision 1.

Disclosure to tenant. There shall be disclosed to the residential tenant either in the rental agreement or otherwise in writing prior to commencement of the tenancy the name and address of:
(1) the person authorized to manage the premises; and

(2) the landlord of the premises or an agent authorized by the landlord to accept service of process and receive and give receipt for notices and demands.

I am 90% sure that you can still have the checks mailed to a PO box (which can be useful if you have an accountant or business partner doing the books), but you need to list a physical address per the above statute.

Here is how I handle this.  As I mentioned previously, I buy my leases from the Minnesota Multi-Housing Association.  While they cost me about $2 per lease (they are 2 part carbon), they have been approved by the Minnesota Attorney General and all Section 8 programs.  This tells me that I should not get myself into any hot water over anything in that lease.  They have a provision in the lease that handles the above law.

Here is a snapshot of that section of my lease:

I am not an attorney, but the 2nd section speaks to accepting service of process, which can never be done to a PO Box (they need to serve a person).  I am uncertain if I could put a PO box in the first section.  Probably to be safe, I would put a physical address in there and then in the Notes section of this lease write:  Mail all rental payments to:  PO Box 123, Minneapolis.

If you have only listed a PO Box on your leases, you may quickly want to post a physical address at the property and/or send a letter to all your tenants to get into compliance with this Minnesota statute.

The maximum occupancy for a dwelling unit located in in these zoning districts [R1, R1A, R2, R2B, R3] is one (1) family plus up to two (2) unrelated persons living together as a permanent household, provided the family plus unrelated persons shall not exceed a total of five (5) persons.

Ok.  Seems straight forward enough.  So what does this mean?

• Family is defined as:  An individual or two (2) or more related by blood, marriage or adoption, including foster children and domestic staff employed on a full-time basis.
• 6 guys living in a 6 bedroom house do NOT qualify under this ordinance.
• 12 family members living in a 6 bedroom house DO qualify.
• 3 family members and 3 couch sleeping friends, do NOT qualify.

One happened because of faulty wiring in the attic which caught fire.  I passerby saw the smoke and called the fire department.  No one was hurt.

The second one was little more scary:  Tenants go into attached garage.  Smell some gasoline, but don’t think much of it.  They turn the key to start the car.  It sputters and then boom.  Entire garage erupts in flames.  They jump out of the car, run in the house and grab kids.  Everyone makes it out.  Fire department believes the car had a small hole in the gas tank.

In first case, the duplex is completely doused with water, upper unit is destroyed by water and fire department, no flames.  In second case, fire destroys garage (with car in it), the breeze way that connects garage to house and ran inside the attic so much of house is destroyed.  In first case, insurance does NOT total out building.  In second case, building is total loss.

In both cases, the tenants had to move out (in the first case of the duplex, both tenants were lost).  Security deposits had to be refunded.  Not sure about paying pro-rated rent, though.  Lease is automatically broken.  You as the landlord are not obligated to find a place for them to live.

While I am not an expert at this, nor have I personally gone through it, here are some thoughts I have after talking to my customers:

• Make sure your insurance has a “loss of rent” rider that will pay you the rent while it is vacant and being fixed up.
• Recheck your deductible.  A $2500 deductible may save you some money, but it is going to hurt when you have to pay that out of pocket and refund any damage deposits.  Going to a $1000 may not be that much of an up charge.
• Once per year, have your insurance guy send a letter to your tenants encouraging them to buy renters insurance.  This $50-100 per year can provide up to $25k in possession insurance.  All of the above tenants lost a significant amount of their stuff.  Plus, maybe this would be a defense in court if the displaced tenants sue you for damages.
• Understand if your insurance provides for simple replacement of property or restoration of property.  There is a big difference between replacement and restoration of 100 year old 6″ wide oak trim and Home Depot ranch trim.  If your property has historical significance or if some of the appeal of the property is the beauty of the old stuff, make sure your policy will restore it to original condition.
• If you have some type of damage such as tornado or fire or even a police raid, if possible, try to board/secure the property yourself.  A different customer of mine had a situation where the police broke down a door and a couple windows in a medical emergency at his rental property.  The City of Minneapolis assessed him $3,400 to board 2 windows and 2 doors.  My duplex customer above was able to have the time and materials he spent on boarding applied against his deductible.
• When you do a major remodel or upgrade on your property, make sure to document that work so you can show the insurance company that you just put new cabinets in or new carpet.  Then they can’t try to claim that they are giving a reduced amount because of the age of the property.
• If you have a major claim, consider hiring a private claims adjuster.  This is someone that is in your court that pushes the insurance company to pay you every dime you need to restore this property.  They take 10% typically of the insurance claim, but the couple people that I know who have used them say it was great.
• Dryer fires are almost as devastating as a house fire and they occur 15,000 times per year.  The amount of the damage may be just low enough that your deductible won’t cover it or it only slightly above your deductible and is not worth filing the claim.  Can you find another $1000-2500 for repairs on your property for a neglected dryer vent?  Make this part of your fall projects at your properties.
• Do you have 2-3 fire extinguishers in each building?  These can keep a small fire from getting large such as a kitchen grease fire.
• Are your smoke detectors working?  You can replace your building, but you can’t replace lives.

Next time you are at your rental, take a look around and see if there is anything that could cause a fire and fix it.

The IRS also won a case in October of last year against a rental property owner for failure to be organized.  One additional reason to be sure to use a very good CPA that specializes in investment real estate.

Surprisingly, these houses are not always in the city.  I have shown you some townhouses before, but I was in Apple Valley with an investor looking at foreclosed townhouses.  This one was built in 2004.  Nice neighborhood, quiet place.  Here is what we found when we walked in.  I have seen this before, but what parent lets their kids completely color over all the walls?  Even if they were tenants and/or the house was going into foreclosure, why?  At you can see on the last picture that they were practicing their alphabet.

Here is the link to the MN CRP 2010.  This form doesn’t change from year to year so if you did it last year, you are in luck.  Otherwise here are some quick tips:

• When figuring out the totals, do not include any damage deposits, late fees, or other non-rent payments in the total amount.  Also, only include actual rent paid, not rent billed (or accounts receivable).
• Any rental subsidy amounts (including section 8 and other non-profit agencies) should not be included in the total line on the CRP. Only include rent paid by the tenant(s).  In your accounting system remember to mark each subsidy payment in the memo field to make this easier at the end of the year.
• When calculating the total amount, you must divide the total rent paid by the total number of adults in the unit, regardless of how much rent each paid.  Married renters are considered one person, again regardless of how they paid.  You should then send a form to each adult.  This may cause some frustration among roommates, but just tell them you are simply following the instructions.
• If you have many 2009 Certificate of Rent Paid forms to send, I recommend that you fill in a copy of the form with your business information and make copies of that original CRP to save yourself time. With almost 30 rental units, you can imagine how much time this saves me!
• Alternatively, the Certificate of Rent Paid form comes in a PDF format, so I purchased a copy of Adobe Acrobat and opened the PDF in edit mode.  I then entered my business info once and then simply changed the property and tenant info and printed them out (I am faster at typing than writing!).
• Often you will have tenants that have moved out during the year.  Personally, I just wait for past tenants to call me and request the CRP.
• Lastly, make a copy of all of the Minnesota CRPs for yourself.  I will always get a least 2-3 calls in August (when the tenants turn these in for their taxes) from someone looking for a new copy.  It will save you having to recreate the wheel when they lose their copy.

Remember that this form must be mailed to your tenants by January 31, 2011.  I have had the question over the years about what happens if the landlord doesn’t send it.  It could be a $100 fine if a tenant can prove you neglected to send it.  Not sure how they prove that, but you gotta do it, so get it done.

In years past, I have stayed away from any automated software to generate the Minnesota Certificate of Rent form.  The companies usually wanted a couple hundred dollars for their software.  Well I guess they rethought their business model.  CRP Gen now has a pricing model that costs only $1 per CPR (but you must spend at least $25).  Despite the $25 minimum, I may consider that this year.  If you have more than 10 rental units, I would use it to save time.  Check it out here.

You have 3 weeks to fill these out.  If you have many to do, just do it like I do…Turn the music up, get a beer and do 5-10 per night until you are finished.  Makes them go by faster!

I have looked at the other options, but a couple thoughts:

• Most of these apps were overkill for what I needed.  They track the tenant application info, repair history, and long term history of which units of yours this person lived in.  None of that is important to me as I have it in my brain or on paper.
• I just need accounts receivable for each tenant.  All other info (move-in date, phone numbers, tenant names, etc) is on lease or tenant app.  I move contact info to my phone.
• My accountant can take the QuickBooks file and upload it and then pull all the reports he needs to do my taxes.  Doubt he could use the others.
• The Quicken Property manager software (last I checked) is not compatible with regular quicken or QuickBooks.
• QuickBooks is an industry standard small business accounting software that is widely recognized and the IRS would be hard to argue with you about how it does the work.
• Lastly, many of these other software packages are as or more expensive than QuickBooks.

Alternatively, I know several investors that have 5-10 properties and still use spreadsheets.  While this may work well for someone that is highly versed in Excel, there are a few draw backs:

• I don’t know about you, but a couple times in my past when using Excel, I have copied the wrong formula and ended up with a result that was close, but not perfect.  I didn’t realize to much later that it was wrong.  Quickbooks can’t have that issue.
• While you can create reports using Excel, I can simply open Quickbooks and call up a couple dozen financial reports to show me or my mortgage guy how things are looking.
• At the first of each month, my QuickBooks automatically enters all the rents as well as any continuous bills.  Not easily done with Excel.
• It is much harder to show an auditable trail in Excel than in Quickbooks.  See this post for why you need to be set up for auditing.

It is almost the first of the year.  While the learning curve on QuickBooks is pretty steep, think about buying it and making a New Years resolution to get on board.

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

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