Category Archives: Business

refusal to pay

How to handle a tenant refusing to pay repairs

Tenants who refuse to pay repairs

I am going to share how I deal with tenants who refuse to pay their portion of repairs.  If you are a landlord long enough, you will encounter tenants who do not want to pay for repairs.  It can be a stressful time.  We alleviate the stress because we have a system to follow when the tenant refuses to pay for repairs.

The Repairs are Completed

One night our tenant called regarding a plumbing issue. They said the toilet was backing up and they could not get it to flush properly.  The next morning we called our plumber and informed the tenant when he would arrive.  Our property manager was there to let the plumber into the house.  The toilet backed up because it was clogged with an abundance of toilet tissue.  Nothing in the piping was defective.  According to our lease in this situation, the tenant is responsible for the first $50 of the service call.  We informed the tenant of the $50 responsibility.  He said He understood was would pay his portion later that week when his rent was due.

The Tenant Refuses to Pay Repairs

The rent came but no late fee included. We reached out to the tenant.  In the meantime he had decided he ‘disagreed’ with our assessment and decided he was refusing to pay the repair.   We informed him of his responsibility.  We followed our lease. We deducted the fee from the rents paid, and sent the tenant a Notice of Late Payment. We told him the $50 was due on the next rental payment.  In the notice, we quoted the section of the lease applicable to this situation.  The next month came and no payment of the $50.  We contacted the tenant who vigorously informed us of his refusal to pay the repairs.

The Escalation and Resolution

We sent another Notice of Late Pay and we reported to the credit agency notice of late/short pay.  The next month’s rent payment came with no additional money to cover the fee.  We followed our process and sent the tenant a Three Day Notice to Vacate, citing the appropriate section of the lease.  Upon receiving the Notice to Vacate, the tenant agreed to pay the money.

Conclusion

If we were to do this again, we would send the Notice to Vacate earlier in the process.  There was no need to drag the process out.  Our outcome was successful because we followed our defined process.

  • Our lease clearly defines the financial responsibilities of all parties with respect to repairs.
  • We go over the lease with our tenants to ensure they understand it.
  • We sent our standard Notices of Late Payment citing the lease and we reported the late payment to the credit bureau.
  • When the tenant did not respond, we sent our standard Notice to Vacate

To be successful as a Landlord, you need the right tools and the right processes.

We use our proven leases and letters and follow a standard process.  We know every tenant is treated fairly because we use the same process for each tenant. Don’t be confused what to do when your tenant refuses to pay repairs.

 

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tenant rent nonpayment

Tenant rent nonpayment- can I deduct the loss

I will discuss the tax implications  of tenant rent non-payment. You will learn what you can deduct and what you can’t.

Depreciation, Maintenance and collection expenses

Depreciation of the property is not affected by a tenant.  You claim depreciation regardless

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whether the property is rented or not.  Expenses incurred to maintain the property are also unaffected by the tenant payments.  Deductions for taxes, insurance and interest are unchanged.  Expenses incurred to collect rent are costs of doing business.  Mailing late notices, trips to the property or bank are all normal expenses to collect the rent.

Loss of Income is not deductible

You may not deduce the loss of profit for non-payment.  The profit would be in the income after expenses.  You never received the money as income so it was never yours to lose.  The money will not show up on the tax return.

Good Samaritan Pitfalls

No good deed goes unpunished.  If you lower the rent below fair market, you may lose your profit motive for owning the property.  If the tenant is a relative or close friend, reduction of rent may be seen by the IRS as converting the property to personal use.  If that occurs, then you lose your deductions for depreciation, maintenance, insurance and other associated business deductions.

You must maintain a business posture throughout the rent recovery process.   Do not let tenant rent nonpayment cause you to lose your tax deductions.

See also Late Rent Payment – three easy steps to resolution and

Collecting rent – three rules you must follow

 

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Obamacare Tax Code

How to Avoid Obamacare Tax: Become a real estate professional

 

Avoid Obamacare Tax: Another reason to become a real estate professional

Avoid the Obamacare tax and save 3.8%.  This strategy has a huge impact on your bottom line.  In my article How to claim Passive Loss Limitation Exemption on being exempt from the $25,000 passive loss limitation, I detailed the process on how to qualify as a real estate professional.  The Obamacare tax gives you another incentive to become a real estate professional in the eyes of the IRS.  Find out how.

Obamacare Tax Safe Harbor

The tax code provides a safe harbor for those who qualify as a real estate professional.  The entrance requirements into the harbor are as follows:

  • You must qualify as a real estate professional, and
  • You must participate 500 hours per year in real estate activities

Being a real estate agent or just owning rental properties is not enough to qualify as a real estate professional.  See How to claim Passive Loss Limitation Exemption on how to qualify as a real estate professional.

Real Estate Business Avoid Obamacare Tax

Here is some more good news.  Real estate professionals who qualified for the above criteria in five of the last ten years are considered to be in a real estate business.  That means profits from your rental real estate business is EXEMPT from the Obamacare Tax.  How about some more good news?  When your sell your property, profit from the sale is also avoid the Obamacare Tax.  Now this is a harbor you definitely want to chart a course to.

More tax advantages for Real Estate Business

Business income is exempt from the Obamacare Tax.  Your business has other tax advantages that are discussed elsewhere.

Subscribe to Jodywallreator.com to get more real estate business tips.  We promote our free offers on Facebook so be sure to like us today.

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residential rehab budget

Four big ticket repairs killing your property rehab budget

Property Rehab Budget

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So you’ve found a 3-2-2 in a trendy area with a good school zone. Now you want to know how

much to offer. The only way to figure that out is by estimating the repair cost. Learn how to estimate big ticket items when preparing your property rehab budget.

Number 1: Does it need a roof?

This is an easy answer. Weathered or broken shingles and decking is fairly easy to spot from on the ground. Where costs inflate is the number of pitches and angles in the roof, and not the total area to replace. There are factors which bloat the cost of repair, such as cedar shake decking, because it’s labor intensive, outdated, and a fire hazard. A good inspection should help you determine the presence of cedar shake.

Number 2: Is there foundation damage?

Diagonal cracks near windows and doorways are a prime tell of foundation problems. Large cracks and uneven concrete in the driveway is another tell. Slab foundations require breaking into the concrete and inserting piers to raise uneven portions of the house. Luckily, most foundation companies offer transferable, lifetime warranties.

Number 3: Cast Iron or Clay pipes?

Homes built before 1979 are at risk for cast iron or clay pipes, and lead paint. Cast iron rots and clogs over time. If you have foundation damage, you can almost guarantee those cast iron pipes have broken. Clay pipes just dissolve and are susceptible to root penetration. When that happens, your sewage quickly backs up. Fresh paint or new dry wall will often satisfy housing requirement codes if you’re looking to rent.

Number 4: H-Vac and Water Heater.

Water heaters more than 10 years old are at greater risk of giving out. So while it might not be an immediate priority, know it might be an issue in 2-3 years. H-Vac systems now-a-days are a godsend, but that doesn’t mean they’re any less expensive than a roof or plumbing. If they’ve not been updated since Obama first took office, or if the previous occupant didn’t know what filters were, that’s another item that needs fixing.

Understanding the need for these costly repairs is essential for your property rehab budget.  Don’t be surprised.  Be prepared.
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late rent payment

Late Rent Payment- three easy steps to resolution

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Your tenant has a late rent payment.

Late rent payment can put you in a financial bind.  The best solution is to have a plan before the situation happens.  We have a three step process for dealing with late rent payments.  It centers on our lease and execution of it.  Rental property is our business and we treat it as such.  Here is how you can deal with late rent payments.

Step 1- Make your tenant aware of the process

Our lease is very specific on when and where rent is due.  It spells out when and the amounts of late charges.  The first late charge of $100 is assessed 4 days after the rent is due.  An additional late charge $25 is assessed each day at 11:59 p.m.  That gives the tenant all day to get the payment to us.  We go over our process when the lease is signed.

Step 2 – Send a notification of late charges

When we have a late rent payment, we send the tenant an e-mail notice of the delinquency.  The e-mail is sent the next morning after the due date.  We quote the section of the lease pertaining to late fees to remind the tenant of the process. Most times tenants respond and the process ends here.  If they get the rent to us before the 4th day of delinquency, they are not assessed a late fee.

Step 3 – Send 3-day notice to vacate

If after 4 days we still have a late rent payment, we report the late rent payment to the credit bureau. We also send the tenant a 3-day notice to vacate.  The notice is sent via certified mail return receipt.  The letter states their obligation and amounts due for rent and late fees.  At this point, the tenant knows we are serious and the rent payment is made.  It is a very rare circumstance that the process escalates.  If we have to move past this point, we already have the eviction process in motion.

Treat your rental property as a business.   You do not live for free and neither do your tenants.  When you have a late rent payment, your personal finances are impacted.  Have a system and stick with it.

See Collecting Rent- Three rules you must follow for the rent collection process.

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older plumbing

Older plumbing risks in Dallas-Fort Worth

Older Plumbing Risks of Cast Iron and Clay Pipes 

Older plumbing is DFW can be a buried time bomb waiting to explode.  Normal home inspections will not uncover the risks.   They say the best mistakes to learn from are someone Else’s. I will give you two examples of when ignorance cost me thousands.  You can avoid the mobile apprisk of buying and older home in DFW.

Home Construction Background

In the early 1970’s builder switched from building homes on pier and beam and went to slab on grade.  That meant water and sewage pipes became integrated into the foundation.  No big deal right?  Wrong.  The materials of construction for pipes used at the time were either cast iron or clay.  Herein lies the problem.

 Cast Iron Rusts

My husband says water eats cast iron like Baptist eat chicken at a church social.  Given enough time, everything will be consumed.  We bought an investment property with some foundation damage.  The deviation did not appear to be a big problem and not too expensive to repair.   The home inspection revealed no plumbing problem.  However when the foundation was brought back to level, the cast iron in the foundation cracked.  The water created a weak spot in the plumbing which gave when exposed to the stress of leveling the house.  That meant digging into the foundation in the bathroom and repairing the leak.  Can you say use up your contingency money?

 Clay Pipes Decompose

A couple of months later we purchased another property.  In addition to the inspection, we ensured there was no cast iron.  We pressured tested the plumbing as well.  We brought the property into service condition.  Part of renovation involved installing a new tile floor.  Everything was great.  Tenants moved in and were happy, until the sewage started backing up into the bath tub. It seems that roots in the front yard had made their way deep into the clay system.  They were thin enough to allow water to flow during the home inspection and pass the pressure test (the roots were actually holding the system together).  Well when the toilet system was used as normal, paper and other material would get caught in the roots and clog.  The remedy was to tear out the plumbing from the city tap, across the lawn, rip up the new tile floor and into the bathroom.  The clay literally fell to pieces when the plumbers tried to lift it out.

Home Buying Solution

All Real Estate agents are not created equal.  There is much more to knowing the neighborhoods than just the school system and the location of the nearest hospital.    Some problems are buried deep and are not revealed by a routine home inspection.  In my particular instances, neighborhoods in West Tarrant County were constructed by builders who used cast iron.  Builders in East Tarrant County were using clay pipes at the same time.  Knowing where these issues are and how to detect them is huge when making a purchase decision. Most can be overcome but you have to know how to deal with them.

 Call Me or an Expert in Your Area

When you interview your prospective Real Estate Agent, make sure you do some digging on your own to ensure they really know the neighborhoods.  Renovating old houses can be fun and rewarding.  Many people want to be like Chip and Joanna Gaines in “Fixer Upper.”  Understand renovation is more than paint and kitchen remodels.  

Contact me for an appointment

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Section 179 Depreciation

Use Section 179 Tax Deduction on Your SUV

Section 179 Tax Deduction Overview

People complain about our tax system.   I actually like our system.  It favors those who know the section 179 vehiclerules.  My favorite tax rule can be found in IRC Section 179 tax deduction.  This section of tax code defines the accelerated deductions available for tangible personal property used for business use.  It is a great way for the government to help you purchase the capital equipment you need to run your business.  Section 179 is part of the stimulus package enacted in 2008 and it keeps getting extended.  You immediately can claim up to $25,000 deduction on a Section 179 qualifying vehicle.

Section 179 Limits

The yearly Section 179 tax deduction limit is $500,000 per year.  You may purchase up to $2,000,000 of qualifying property each year.  The bonus deprecation has been extended.  It is 50% in 2016 and 2017, 40% in 2018 and 30% in 2019.

Business Income Sources

1)     Net income or loss from your business

2)     Net income or loss from the spouses business

3)     Proceeds from the sale of assets from you and your spouse’s business

4)     Interest income from you and your spouse’s business

5)     Net income or loss of your rental property business

6)     Gains or losses from the sale of rental property which qualify for section 1231

7)     And finally, you and your spouse’s other W-2 earned income

That is a lot of income.   I purposefully saved the W-2 income for last.  It is the source of the most confusion (I must reiterate here that I always advise using a tax specialist.  I do not give tax advice.)

Married Tax Payers and Section 179

The IRS treats you and your partner as single taxpayer when you file jointly.  If you file separately, you must declare how you are going to account for the Section 179 deductions.

Section 179 Example

Your business has $10,000 income for the year and your spouse earned $75,000 in W-2 income.  You buy a qualifying SUV for $37,500.  Your total income is $85,000.  You deduct the maximum allowed $25,000 for the vehicle. You are under the $500,000 limit.  Your taxable income is now $60,000.  If you are in the 30% tax bracket, you just saved $7,500 in federal income taxes. 

Section 179 is a rule you definitely want to know, understand and use.  It will help save you tens of thousands of dollars in your business.  

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Do not miss out when I discuss the rules and game plan on how to make these deductions real in your life.

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late rent payment

Collecting Rent- Three rules you must follow

Collecting Rent

Collecting rent is the goal of your property business.  It is the fruit of the labor with respect to renovating and leasing the property.  Being a landlord doesn’t mean you have to be callous. It’s important to be cordial, prompt and exact in every encounter with your tenants. However, there is a difference between being nice and polite, and being your tenant’s friend. Being a friend makes it hard and awkward to collect rent or assess late charges. This is why I follow strict rules and guidelines for all my tenants when it comes to collecting rent.

Number 1: Never accept cash or personal checks.

When collecting rent, personal checks can bounce, and cash doesn’t have a paper trail. For your protection and theirs, only accept money orders or cashier’s checks made out for the exact amount. This way they can never claim payments they didn’t actually make, and the checks can’t be canceled or hot.  You want trace ability of rent payments.

Number 2: Sign up for a P.O. Box.

If you’re like me and have properties spread out over a wide area, you don’t want to spend a whole week driving around and collecting rent. It’s a waste of time and gas. I use a P.O. Box nearby my home and use that address on all my leases, correspondence and instructions. I swing by at 6 p.m. on the due date and if the rent isn’t there, then it’s late. In disputes over when rent was mailed or received, make sure you check the stamp over the postage for a date. The post office marks each envelope with a date when it first goes through their system. If they claim to have mailed a check on the 30th, but the stamp says the 2nd, then you have proof  for court.

Number 3: Use direct deposit.

Collecting rent in the digital age should be electronic.  It’s the 21st century, and while we still need roads to get where we’re going, there are advanced methods of receiving rent payments. You can give your tenant your business account number and they can deposit the rent. Banks are secured, your money is safe, and they don’t have access to your account. This way there is no question about when rent was paid.
Did you find this video on collecting rent helpful?  Please give it a share.

For more advice and landlord training, check out Beware!  Renting to relatives can be a financial disaster.  Also view our video Late Rent Payment- three easy steps to resolution
Thank you.

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house rehab

House Rehab Budget will make your project successful

Create a house rehab budget

Rehab budgets are critical to your success.  At the end of the day the two biggest factors which determine your profit for rental houses are the price you paid per square foot and the price you charge in rent per square foot.
Your cost doesn’t just stop at the purchase of a house but continues on into your rehab budget. In order to obtain a larger Return on Investment,  You either need a larger rent or a smaller rehab budget.   This video we’ll examine a few basic ways you can create and control your rehab budget.
If you haven’t already watched our video on estimating the repairs of big-ticket items, please do that now.

Number one – Control the materials

Contractors are businessmen to they need to find many ways of making a profit.
One such way is including the cost of materials in their quote.  Make sure you ask for quotes that involve labor only and materials decide whether or not it’s  cost-effective to buy items like paint fixtures orr let your contractor do it.

Number two – Maintain the schedule

If you’re acting as your own General Contractor,  then it’s your job to not only make sure the work is done but that is done on time.  Foundation repairs need to sit for a week before you do more work.  The ceiling fixtures go on after paint and paint happens after the floors are installed.  Knowing when contractors need to work in order is key.
Remember hiring one contractor for many jobs can cause your project to run longer.  It’s important to delegate.
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Number three – Know your limit

You might save $1,500 by painting the house yourself but will you save time and a headache? My rule of thumb is that it’s easier and more cost effective to demolition than it is to rebuild. Taking down a fence clearing out clutter and ripping up carpet doesn’t take skill and can be done in a matter of hours.  installing tile and back-splash, painting walls and hanging doors takes patience and precision acquired over years of practice.  Sometimes hiring outside help is the difference between collecting rent next month instead of two months from now.
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tax free

Sell your primary residence with a home office avoiding capital gains

Avoiding primary residence capital gains tax on home office

The primary residence capital gains tax is something you can avoid.  You can even be avoiding capital gains tax when you have a home office.  Your Uncle Sam really favors home owners.  Not only does he allow you some tax free gains on your principle residence.  He also gives you more tax free and deferred cash if you use the home as your office or rental.  You must know the rules and play the game accordingly to avoid the taxes.  It takes some planning but as you will see it is well worth it.  I have been using my primary residence property as a rental for the past 2.5 years.  I will employ these rules to avoid and defer tax liability.  The strategy involves combining Section 121 exclusions with a 1031 exchange

Tax Free Sale of Home with Home Office

You bought a home for $200,000 and sell it for $300,000.  Over that time you have taken $30,000 in home office depreciation, which is 20% of your home.   Your adjusted cost basis in the property is $170,000.  This gives a capital gain of $130, 000.  This is how it breaks out.

The IRS defines the order on which the exclusions are made:

  1.  Section 121 comes first.  It cannot be applied to depreciation claimed after May 6, 1997.
  2.  Tax on gain is imposed on gains over the Section 121 limits.
  3.  1031 exchange is applied to the business portion to defer business tax liabilities
  4.  You add the Section 121 exemptions to the adjusted basis of the new property.
Total Home Office
Basis of Property $200,000 $160,000 $40,000
Depreciation ($30,000)  NA ($30,000)
Adjusted Basis $170,000 $160,000 $10,000
Gain from sale $130,000 $104,000 $26,000
Section 121 exclusion (1, 2) (120,000) ($104,000) ($16,000)
1031 Exchange (3) ($10,000) NA ($10,000)
Gain subject to tax Zero Zero Zero

The example shows that 15% capital gains tax was avoided and the 31% tax on ordinary income.

 If you found this article useful maybe you will enjoy

How to Deduct More Than $25,000 in Passive Losses Per YearTax Benefits of the Home Office How to Deduct 100% Business Entertainment Meals

Make Your Next Sports Utility Vehicle Tax Deductible With Section 179

DISCLAIMER

This article is for training purposes only.  Jody Wall does not warranty the accuracy of the training.  It is not intended to be legal or accounting advice.  Seek competent consultation for your particular situation. Readers assume all responsibility for their decisions.

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