Kim describes her thoughts, decisions and fears of her first investment purchase. Listen in as she talks about the time it took to find the property and her fears of making a bad investment.

Cherie Kerr wants out of her home. The 65-year-old comedian and public speaking coach paid $590,000 for a 1,150-square-foot Los Angeles condo two and a half years ago–only to find the construction so flimsy that her upstairs neighbor woke her up by dropping a coin on the wooden floor.

“A defect hell,” fumes Kerr of her newly built abode. She has moved back into a suburban home she still owns and would love to unload the apartment, but housing values have fallen so far that she figures such a move would lock in a $200,000 loss.

The good news is that Kerr is anything but stuck. A real estate agent recently informed her that the condo can fetch $3,300 a month in rent. That’s enough to cover her mortgage and property taxes. So Kerr has decided to lease out her condo until values rebound. While she no longer harbors visions of becoming rich off the downtown L.A. property, things could be a lot worse.

“It’ll be a tax writeoff,” she says.

Kerr has lots of company these days. No less a financier (and former do-it-yourself tax preparer) than Treasury Secretary Timothy Geithner is leasing out his Mamaroneck, N.Y. home after failing to get for it a bid he was willing to accept. If you’re one of the horde suffering real estate buyer’s remorse, you too may be able to turn a modest profit renting out your albatross of a residence. How can that be? Thank the trove of tax breaks for residential landlords.

The first step in figuring out whether renting makes sense is to find out how much your place is worth. A professional appraisal is best, but written statements from a few Realtors will do as long as they agree on the value and stipulate how much is attributable to land and how much to the building. (The appraisal, as you’ll see later, is essential for two separate tax calculations.)

The next step is to see how much the property will fetch in monthly rent and weigh that against the costs and tax consequences. As a landlord, you can’t claim mortgage interest as an itemized deduction on Schedule A of your tax return. Instead, you deduct interest costs, plus property taxes, monthly condo fees, insurance and anything you pay to a property manager (most charge 10% of rent) against rental income on Schedule E. You can also expense travel and other costs you personally incur to look after the property.

The other big tax deduction for landlords is depreciation. The tax code allows you to divide the value of your building (but not the land) by 27.5 and to claim the result as an annual depreciation expense. Here’s the first place that the current appraisal comes in. When you convert to a rental, your depreciation is based on the cost of the property plus improvements or its market value at the time of conversion–whichever is less.

In Kerr’s case she must use the $390,000 fair market value of her condo, not the $590,000 she paid. Assuming that 10% of the $390,000 is attributable to land under her building, the depreciation expense comes to $12,764 annually (and reduces her cost basis by the same amount). Add in Kerr’s other expenses and the total is likely to exceed her $39,600 gross annual rental revenue. Almost any residential landlord with a mortgage is going to be in that boat.

The amount by which expenses exceed rent is a tax loss that can be used to shelter up to $25,000 in other income–say, from your salary–if your adjusted gross income is $100,000 or less. (The same cutoff applies to both singles and couples.) Above $100,000 the break is phased out, and it disappears completely at $150,000.

“It’s the one and only time you get to use a passive loss to shelter active income,” says Sacramento tax attorney Roni L. Deutch.

If you happen to be a real estate professional–defined as someone spending at least 750 hours a year, and at least 50% of his working time, in the business–then your career managing property becomes an “active” one and your losses are fully deductible against other income. If you fail the income test or to qualify as a pro, your rental losses don’t go entirely to waste. The net loss gets carried forward and deducted if and when you dispose of the loser real estate or you have gains from passive investments. These gains could be from selling the property in question at a capital gain or from owning other passive investments, like oil wells.

Note that “passive” is a term of art in the Internal Revenue Code and does not cover portfolio investing (stocks and bonds). So if you collect $30,000 from stock dividends and have a $30,000 loss on Schedule E, you can’t net one against the other. But you can wise up, sell the stocks and use the proceeds to pay off the mortgage. At that point you’re probably out of the loss column on the rental and pulling real cash out of the property. A good part of the cash return will be sheltered from taxes by your depreciation deduction.

How are gains taxed when you sell a converted property? A lot depends on timing. If you lived in the property for at least two years and then rented it out for less than three, you may be able to use the provision that excludes $500,000 in gains from the sale of a principal residence, per couple, from tax. (You’ll still owe gains tax on the amount claimed as depreciation.) If you sell at a loss, the only deductible portion is the loss occurring after you converted the house from personal to income-producing use. The appraisal is crucial here.

Kerr hopes that sales prices will rebound in two years. Assume instead that they slide and she clears only $340,000, or $50,000 less than what her Realtors said her condo was worth when she converted it to a rental. Her tax basis in the property will be $364,500 (the $390,000 minus $25,500 for two years of depreciation). She’d be left with a $24,500 capital loss she can use to shelter taxable gains on other investments. Also, she could then claim any passive losses she couldn’t use before.

Renting does present problems. You must either maintain a property yourself or pay someone else to do it. Tax and real estate experts warn against hanging on to real estate if rent falls far short of your pretax, out-of-pocket costs. In other words, look to the tax benefits to sweeten the deal, not drive it, says tax accountant William Fleming of PricewaterhouseCoopers.

Rent Out Your Home. Cut Your Taxes.

Author: Alex Anderson

Robert Kiyosaki, author of the Rich Dad book series, has said more than once that you don’t have to have money to make money. In “Cash Flow Quadrant” however, he reveals how much money he paid for his first investment condo. What if you want to buy a condo but you don’t have a few thousand spare dollars lying around to make it happen?

You can still make your purchase. The trick is, you just have to think about things a little bit differently.

If you have not seen the movie “Schindler’s List,” you probably should. Not only is it a great bit of social consciousness, its writers did a good enough job on Schindler’s character to give you a glimpse into his business know-how.

The man wanted to build a factory because he knew it could make him a lot of money during the war. Thing was, he didn’t have the capital to build that factory.

But the Jewish community did.

He went to them and presented his idea about how, in return for their investment capital, they could take some of the goods produced and sell them on the black market. He talked to a lot of investors. He raised a lot of money.

You can do the same thing, and indeed a lot of people do. If you see a good deal on a building and you haven’t the spare millions lying around to purchase it, put together a cooperative to buy the property. Even if you receive only 10 percent of the property’s earnings, that will be a nice, tidy sum if it’s the right property.

That is why you shouldn’t content yourself with starting too small.

According to Ken McElroy, who authored Rich Dad’s “The ABC’s of Real Estate Investing,” there is nothing wrong with small bits of real estate. He simply says that there is no reason to relegate yourself to them out of fear that you don’t have the skills to go larger, because it doesn’t really require more skills. You wind up outsourcing a lot anyway.

What a larger chunk of real estate will do, however, is allow you to interest more investors, as they stand to make more money off the deal. A larger piece of real estate will also be very unlikely to slump into zero occupancy.

As McElroy says, if you rent out a single-family unit and that family moves out, you have an occupancy rate of zero, and the property becomes a liability until you can rent it again. If you own interest in a 50-family building and 10 families move out, you still have an occupancy rate of 80 percent. The property is still an asset. You’re still making money. And you know you stand to make more again when you get those 10 units refilled.

All of that doesn’t even begin to take into account the relative ease of getting a bank loan for the purpose of purchasing an investment property. The bank knows they can make money off that property if you default, regardless of your credit history.

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By Oonagh Montague

The days when a woman’s place was in the home are long gone. Nowadays, she’s more likely to own the home, and perhaps a few more besides. Ria Lawlor, a qualified medical doctor, mother of two and full-time investor, is one of the founder members of the ICES Group, (Irish Complementary Education Systems), an extraordinary team of individuals determined to take the fear out of investing for the ordinary man, or woman.

“It all started in 2002 with a game called Cashflow,” says Ria. Cashflow 101, a board game designed by Robert Kiyosaki, author of motivational book Rich Dad Poor Dad aims to teach players how to invest, focusing in particular on property investment.

“When my husband Ian and I began playing the game with Tony Reid and Darrell O’Dea, we knew nothing about investment. We started as a small group playing in a kitchen. As more people joined, we moved to a hotel in Tallaght and, finally, on to Temple Bar.”

The group grew to such an extent that the original four decided it was time to structure the evenings. “We started inviting guest speakers and holding question and answers sessions,” explains Ria.

In 2003 the ICES Group was officially formed and, today, network meetings and events take place nationwide. Guest speakers at ICES meetings explore a range of subjects, such as gold investment, how to make money through property, stocks and shares, or the ever-crucial subject of tax. However, there is even more to learn when the speakers are finished. According to Ria, the questions and answers slot is often the most interesting aspect of an ICES Group event.

“People will ask questions such as ‘I’m looking at a property in Dublin 6, is it a good investment?’ or ‘How do I go about renting my house?’ It’s about shared knowledge and shared information. You might meet someone who tells you about an investment that may not be right for them, but it might be right for you.”

For Ria, this boils down to one simple lesson: “We’ve found that if you increase your network of people, you increase your net worth.”

For Tina Suvanto, a former librarian, the contacts she made through the ICES Group have led to fruitful investments.

“You can’t underestimate the power of meeting with like-minded people. I’ve made long-term friends from ICES Group,” she says.

Education forms the cornerstone of the ICES Group approach. To this end, they run several programmes and master classes. One of these is the Property Discovery Programme (PDP).

Clare Connolly was on a career break from her high-powered job with a pharmaceuticals company when she enrolled in the PDP.

And the outcome? Clare released equity on her home and went on to invest in a property in the UK, two in Eastern Europe, one in New York and she has just closed on a apartment in Massachusetts.

Through contacts made in ICES Group, Clare also now runs a letting agency. “It’s been life-transforming. As a single parent with a 15-year-old daughter, it initially felt like a big risk to take, but I thought, if I don’t do it now, I never will. I’m so glad I did. It’s just where I want to be.”

As Ria emphasises, anyone can become an investor: “It’s important to remember that everyone starts off at ICES on the same footing. None of us learned about money in school.”

In fact, one of the main lessons learned at the ICES Group is about returning to basics. Ria explains: “It’s about those very simple habits that many people have forgotten nowadays; like keeping an eye on your money, like saving. These are basic steps that have nothing to do with how much money you have. What’s important is what you do with it”

 

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Only Men Can Be Property Tycoons?