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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.

These new interactive Web sites give you advice — some better than others — to help you reach goals.

Online financial-planning tools are getting more personal. Plenty of Web sites crank out cookie-cutter plans, but three recent entrants give users more detailed advice. Voyant, SimpliFi and ESPlannerBasic provide something more than a quick-and-dirty look at your financial state of affairs — for free.

These three sites cannot replace the personalized service of a financial planner, but they are helpful to most investors. You can use them to get a general idea of your finances and benchmark your progress without shelling out thousands of dollars for a session with an adviser. Those who use an adviser can treat the sites as a way to double-check their adviser’s plans.

Voyant

Pros: Voyant is the best of the bunch. Its slick interface lets you map your financial goals, such as buying a home or saving for your kids’ college, along an interactive timeline. It takes less than five minutes to enter the information needed to create a graphic display of your expected income and retirement savings.

You can test what-if scenarios quickly without entering much new information. For example, you can easily adjust the growth-rate assumptions of your investment portfolio with a sliding bar on the right side of the planning tool. Most calculators make you plug in a different rate each time you want to test a new scenario. Voyant also supplies a menu of events, such as starting a business or having a child, to see how those decisions will affect your finances.

Cons: But some of Voyant’s premade options are a little too cute. For instance, you click on an icon of a sports car to “plan” a midlife crisis. (If you could prepare for such a scenario, it wouldn’t be a crisis.)

No Web site would be complete nowadays without an attempt at social networking — in this case, a feeble one. Voyant lets you communicate with other users on the site’s forums. A button on the tool lets you contact financial advisers who use Voyant’s planning software. (The site is still struggling to sign up advisers. When I pushed the button, I was told “financial professionals” in my area — Washington D.C. — were not available for an online chat.)

Simplifi

Pros: As the name suggests, SimpliFi is not complicated. The site does a decent job at the broad strokes of financial planning. Spend a couple of minutes entering your data and you get a snapshot of how your goals match up with your savings and investments. An animated guide named Sophie grades your financial well-being from A to F. SimpliFi provides a suggested investment mix for your portfolio and a to-do list for other financial tasks, such as paying down debt or buying insurance.

Cons: SimpliFi’s advice is spotty in some areas. The site makes a big deal about its status as an investment adviser registered with the Securities and Exchange Commission, but its investing guidance is generic. Plus, it recommended that my wife and I buy term life insurance even though we have no children, no debt and more than enough savings to cover a funeral if one of us meets an untimely end.

ESPlannerBasic

Pros: ESPlannerBasic tackles financial planning from a different direction than the other sites. Instead of letting you set your own goals and working backward, the site asks you a series of questions to determine how much you can spend each year without compromising your lifestyle in retirement. The questionnaire takes about 30 minutes to complete. The site then generates annual spending, savings and life-insurance recommendations.

Cons: ESPlannerBasic’s drab interface, similar to Microsoft Excel’s, makes using this tool a chore. Plus, you have to estimate obscure statistics on your own, such as your salary in the year before retirement. (How many Gen Xers know that figure?) Granted, ESPlannerBasic is the bare-bones free version — the advanced copy has more features, including Monte Carlo simulations to forecast various investment scenarios. But after slogging through the basic tool, I don’t want to pay $149 for ESPlanner.

by Thomas M. Anderson

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In a survey I conducted of 200 individuals, who stated they wanted to make the transition from corporate to business owner, the top two things they indicated stopped them were:

• Inability to replace current income
• Not having a stable income

What can you do to counter these top two fears? How can you make it possible to have a stable income that replaces your current corporate salary? Below are the four areas to focus on in order to set these fears aside:

1. What do you really want to do with your income: replace, upgrade or down grade? There are many people who would be content earning less if it meant they could do what they loved. Others may want to keep their current level of income or even gain more. Getting specific with what you truly want and need is essential to be able to create your customized financial plan.
2. Based on what you want to do, how much money can you make? This includes considering tax breaks that may yield you more income than you thought. Even if you can generate enough money to give you what you need, I highly suggest you find other ways to supplement your income. There are many ways of increasing your income streams, the key here is to increase your financial IQ and then find the investment(s) that will work for you.
3. Put together your personal financial plan. Consider things like the consistency of your business and make sure that you are accounting for any fluctuation. What are your short and long term expenses? Talk to someone who’s got a similar business to determine what these might be for you. Once you’ve got this figured out it will help you see what changes need to be made to your business plan in order to pay yourself the salary you desire while investing in your business. This is also an area that supplemental income streams can come in handy.
4. Invest in your nest egg. As your business grows, and other income streams grow, the more money you can put away as a nest egg and the more income you can be generating. The number one piece of advice the most successful entrepreneurs suggest, think Donald Trump, Sir Richard Branson and Robert Kiyosaki, make your money work for you. Build up your nest egg and then have it work for you by providing you the passive income you need to live.

The financial fears you may have now, will dissipate once you develop and execute on a plan to create the income you need. The important thing is to think through what you really need and then get creative on how to make it happen.

Read more from the original source:
Top two fears for people wanting to become entrepreneurs

According to the Labor Department, the June unemployment rate for those 55 and older hit 7%–the highest on record. That’s bad news for seniors who are out of work or being forced to re-enter the work force to make ends meet. The Dolans have some job hunting tips for the 55+ crowd, including good news about some advantages you may have over the younger competition.

Dear Ken and Daria:

Thanks to the investment losses I’ve suffered, I have to come out of retirement and go back to work. Do you have some job hunting tips for seniors?

–Maureen

See the original post:
Ask the Dolans: Tips for unemployed seniors