Rental Housing Journal Colorado
August 2015 - Vol. 7 Issue 8
2. Changes to the Treatment of Depreciation Effective With Your 2014 Tax Return 3. Why Work-Life Balance is the Wrong Idea 4. To Social Media Relevance
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The Value of Renters Insurance
his question has been kicked around a lot in recent years: Should you require your tenants to obtain renters insurance? While some property management companies require their residents to purchase renters insurance, the vast majority continue to merely suggest that renters insurance be purchased. Unfortunately, this method of persuasion has done little to convince residents to do so. In fact, according to a survey by InsuranceQuotes.com, six in 10 current home or apartment renters do not have renters insurance. Why not? Lack of knowledge. Many renters simply don’t realize that property insurance obtained by the owner will not cover the loss of their valuables in the event of a disaster (adverse weather, fire, theft, etc.). It will also not cover any loss from an accident that may happen in their home or apartment. Perceived cost. Many people assume that renters insurance is expensive, when in fact, it’s very affordable. Current yearly premiums average between $200.00 and $300.00 annually—that’s less than 70 cents a day. Short of requiring residents to obtain renters insurance, here are ways to persuade your residents to purchase renters insurance:
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continued on page 7
Today’s Online Renter National Study Sheds Light on Changing Prospect Behaviors and Preferences
By Doug Miller
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e just conducted a 2015 revisit of our landmark 2011 “Today’s Online Renter” study. The study addressed questions about how today’s online prospects shop, what drives rental decisions, what impact reviews have, the importance of social media and more. Big picture, transparency and the basics are more important than ever. • Shopping, Rental Decisions, Brand, Trust • 0.1% of apartment shoppers used a smart phone or tablet in their search (26.3% in 2011) and 78.3% visited a property’s website before contacting the office. continued on page 5
Real Estate: What’s In It For Me? Pt. 2 Refer to the July Edition of Rental Housing journal Colorado for Pt. 1
Wholesaling Description: • As a wholesaler, your job is to find a motivated seller who has a pressing need to sell his or her property. You negotiate with the seller and enter into a purchase agreement. Then you find a buyer who will pay a little more than you have contracted for, and you keep the “spread.” There are various valid techniques for doing this, including “buy-don’t fix-sell, buy make minimal or only urgent changes and sell, etc.” The other techniques are beyond the scope of this report.
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Pros: • Minimal money needed – Wholesaling requires very little money, unless you choose to pay for advertising in the hopes of
getting motivated sellers to call you. • Income – This varies, but there is no limit to the number of properties you can wholesale. • No ownership responsibility – Using some techniques, you never actually purchase the real estate, but transfer your purchase rights to the end buyer. • Minimal liability – Your liability is minimal assuming you have a properly written purchase agreement. ** Remember that as a wholesaler you are focused on the CONTRACT, not the real estate itself when you are selling the property. As you have not taken possession you cannot sell the property. Cons:
• Wholesaling is highly regulated in most states – You must know the law in your state and act accordingly. • Time intensive – Since you are a “deal finder,” when you stop working to find deals, you stop making money! • Business not investing – This is a way to make money. You are in the business of being a wholesaler; you are not “investing” in real estate. • No tax advantages – Since you aren’t holding the property and renting it out, you do not get any of the tax advantages of buying and holding rental property. Furthermore, the money you make wholesaling is considered “earned income” and will be taxed by the IRS as such. continued on page 6
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Changes to the Treatment of Depreciation Effective With Your 2014 Tax Return By Heather L. Jackson, CPA | Tax Manager | Kern & Thompson, LLC, Cliff Hockley, President & Heather Hill | Bluestone & Hockley Real Estate Services
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arning: The following article attempts to clarify important changes to the tax code. While pertinent to property owners, no amount of artistry could make this material more exciting. We recommend that readers use patience to digest this complex topic. The federal government recently made major changes to tax regulations with a specific focus on the capitalization of tangible assets. Not only do these changes impact all taxpayers that acquire, produce or improve tangible property, they provides specific rules for buildings versus other tangible property and provide guidance on the application of Sections 162 (a) – deduction, versus 263 (a) – capitalization. To start, the IRS clarified the definitions of different types or property that are important in the decision to write off or capitalize on expenditure. To understand the new regulations, we must first refine what determines a unit of property. According to the IRS, a unit of property is real or personal property consisting of all of the components of
property that, functionally interdependent, comprise a single unit of property. For example, a truck is a unit of property because all the parts are interdependent; however, each building in an apartment complex with multiple buildings is a single unit of property. Materials & Supplies The new tangible property regulations also define the treatment of materials and supplies. Materials and supplies are NOT: a unit of property, acquired as part of a single unit of property, or inventory. Materials and supplies ARE: • Consumed in the taxpayer’s operations • A component acquired to maintain, repair or improve a unit of tangible property owned, leased or serviced by the taxpayer • Items that are reasonably expected to be consumed in 12 months or less • Items with an economic useful life of 12 months or less
• Items with an acquisition cost or production cost of $200 or less • Identified in the federal register or in the irb as materials and supplies Safe Harbor Rules The new 2014 tax changes provide an election to treat certain materials and supplies under the de minims safe harbor rule. The de minims safe harbor rule allows taxpayers to deduct items up to $500 or those with a useful life of less than 12 months. The limit can be increased to $5,000 with an applicable financial statement. (Examples of applicable financial statements are: Financial statements required to be filed with the Securities and Exchange Commission (SEC), independent certified public accountant (VPA) audited financial statement (not a compilation or review prepared by a CPA), and financial statements (other than a tax return) required to be provided to a state government or any federal or state agency (other than the SEC or the IRS)). Safe Harbor can be applied on a per-item, per-invoice
basis but the taxpayer must have an accounting policy and it must be applied to all eligible materials and supplies. For Example: Josh owns an apartment complex with a rental office onsite. The rental office purchased a new printer for $199 and desk for $499 in 2014. Josh makes the de minims safe harbor election on his 2014 tax return. Because of the election he can deduct the full $698, instead of capitalizing and depreciating over the life of the property. This is an annual election. Form 3115 – Annual Accounting Policy Election Josh must elect an accounting policy to do this correctly. As of 2014, all taxpayers that acquire, produce or improve tangible property will now be required to file form 3115 declaring the current accounting method for depreciation. The IRS did grant a reprieve to “small” businesses (which are defined as 10 million in assets and 10 million in revenue) from filing form 3115 for the 2014 tax year. continued on page 8
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RENTAL HOUSING JOURNAL COLORADO
Why Work-Life Balance is the Wrong Idea A Better ‘Balance’ Is Finding The Right Job For Your Purpose, Says Talent Expert
By Brian Mohr
T
he corporate world is susceptible to fads. Work-life balance, a push to properly prioritize work in relation to lifestyle, features the kind of fad-ish thinking that can lead gifted people down the wrong path, says talent expert Brian Mohr. “Think of those who love their job – for them, it’s not exactly ‘work’ as they exercise their capabilities fully toward a goal that they believe in,� says Mohr, co-founder and managing partner for Y Scouts (yscouts. com), a purpose-based leadership search firm. “Finding the right fit – whether an
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organization is searching for leadership or an individual is seeking the right job – is more important than people realize. The problem of worklife balance starts farther upstream. When the appropriate person is aligned with the appropriate goal, balance is natural.â€? A concept like work-life balance is a claim on how we should prioritize our lives, which, if believed, can be confusing. Mohr discusses how an organization’s employees, from bottom to top, can benefit from a more helpful perspective. • Don’t buy into the notion of the “work youâ€? as being separate from the “real you.â€? We spend 8.8 hours of each day working, according to the United States Bureau of Labor Statistics – the largest amount of time spent in any single activity (sleeping is second at 7.6 hours). Work-life balance enforces a strange notion that you are essentially different on the clock than off the clock, which hurts both employers and employees. Who wants this divided personality? Why not be yourself while doing what’s important – providing for your well-being and that of your family? “Costumes are for Halloween,â€?
Mohr says. “In my line of work, I want to offer a leader who is authentic and not some impostor version of who they really are.â€? • Not everyone is working for the weekend. Rather than work-life balance, it’s more helpful to think of your role in a company or nonprofit as work-life symbiosis. Just do the math. Working nearly nine hours in a role that you do not like doesn’t stack up well with two days that quickly pass by – assuming you hate your job. How many years of your life do you want to waste not doing what would make you happier? “Most importantly of all is aligning the right people with the right role,â€? Mohr says. “That means aligning the purpose and values of an organization to the purpose and values of the right people. Everyone owes it to themselves to find the right organization.â€? • Take a cue from your technology. In today’s world, we simply cannot compartmentalize different areas of our lives like people used to. You can communicate with your spouse at any time and know people better through social media than through real-life interaction. And, for work, most
of us carry our work around in our smartphones. If not text messages, then we get emails sent to our phones. “Whether through our technology or the software running in our brains, we don’t simply turn off work when we leave the office,� he says. “We should drop the idea that ‘work’ and ‘life’ are somehow separate. They’re not.� Brian Mohr is co-founder and managing partner for Y Scouts (yscouts. com), a purpose-based leadership search firm that connects organizations with exceptional leaders. Y Scouts operates under the belief that people are the only real competitive advantage in business and the best employer/employee connections start by connecting through a shared sense of purpose and values. Previously, Mohr worked as a talent strategist and in leadership management for major corporations, including P.F. Chang's China Bistro and Jobing. com. He is a graduate of the Advanced Executive Program at Northwestern University’s Kellogg School of Management.
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To Social Media Relevance ON-SITE-NW SEATTLE
Those Seemingly Inconsequential Hashtags are Crucial to Gaining More Exposure for Your Brand because if you are not using hashtags counting re-tweets, only 1,000 peoyou are missing out on exposure for ple will see your posts if you don’t VALLEY, METRO, ARIZONAuse APT. NEWS a hashtag. Add the hashtag, ot so many years ago, many you and your brand. When you are on social media though, and you start picking up people probably paid little attention to that pound sign sites such as Twitter or Instagram, momentum because the post has the on the computer keyboard. You your goal should be to become part potential of being seen by, and reknow, the one that looks like this: #. of the conversation. The hashtag tweeted by, any number of people. A common hashtag, such as #love, Then along came Twitter and what allows more people to find your conwe have come to call the “hashtag,” tributions to that conversation. can position your post to be seen by Feb,marketing Apr, Jun, Oct, Dec Without them, you miss out on lots potentially millions of people. But be and social media wasAug, changed forever. Yet not everyone of eyes that could be viewing your warned. While there are great benetakes advantage of hashtags the way content. For example, let’s say 1,000 fits to hashtags, there also are pitthey should, and that’s unfortunate people follow you on Twitter. Not falls. Hashtags don’t come with exclusivity. Anyone can use them, so a hashtag can become a weapon that works both for you and against you. Critics of your brand, or just the usual assortment of Internet trolls, may attempt to hijack your hashtag, putting you or your business in a bad light. A prime example of a hijacked hashtag happened a few years ago when McDonald’s, apparently hoping for a flattering converVALLEY, METRO, ARIZONAsation APT.about NEWS the restaurant chain, introduced #McDStories on Twitter. #McDStories went viral, but not in a good way as the Twitter world had a field day tweeting unflattering tales of their alleged bad experiences with the restaurant. Don’t let such cautionary tales deter you, though. Jan, Mar, May, Jul, Sep, Nov, March boldly into hashtagging, but 1010 East 62nd Street, Los Angeles, CA 90001-1598 as you do keep in mind these sugPhone: 1-800-624-5269 • Fax: 1-800-624-5299 gestions for getting the most out of your efforts. Octoberp September
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• Use proprietary hashtags. One of the advantages to a proprietary hashtag, such as “Orange is the New Black’s” hashtag #OITNB, is that it is linked directly to your brand. These hashtags typically are not used as widely as a more generic hashtag, but the goal is to brand yourself through the hashtag with the hope it could go viral. • Don’t overdo it. A post littered with too many hashtags can be difficult to read, so your message might become obscured as your followers see what appears to be gibberish. Perhaps you saw the skit Justin Timberlake and Jimmy Fallon once performed in which they spoofed the device’s overuse by lacing their spoken conversation with seemingly endless hashtags. It was hilarious and annoying all at the same time. Twitter itself suggests using no more than two hashtags per Tweet. Certainly, three should be the very maximum on Twitter. A different etiquette exists on Instagram, though, and most Instagram followers will tolerate excess hashtags. Meanwhile, although hashtags can be used on Facebook, there’s little reason to include even one. That’s not the way people use that social media site. • Think geographically. If you are a local company that depends mainly on local clientele, a hashtag that links to your location works well. Hashtags such as #Seattle or #Bangor drop you into numerous conversations about your hometown. Since social media has become such a vital element of any comprehensive marketing strategy, understanding all of the nuances is critical. A hashtag may not look like much, but it’s really a powerful tool that is a double-edged sword. If used correctly it can greatly bolster your marketing reach. Used incorrectly, it can have adverse effects or unintended consequences. With social media, your hashtag is your brand, so use it wisely. Jay York, senior digital marketing strategist for EMSI Public Relations (www.emsincorporated.com), is an internet marketing expert with extensive experience in social media marketing dating back to the early days of MySpace and LiveJournal. Since graduating from the University of South Florida Business School, Jay has worked as marketing coordinator for an international IT training company; business development and branding manager for a startup restaurant management group; and CEO of his own social media management firm.
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Rental Housing Journal Colorado • August 2015
RENTAL HOUSING JOURNAL COLORADO
Online Renter ...continued from page 1 Therefore websites must utilize Responsive Website Designs (as of April 2015 Google boosts rankings for sites with RWD) and HTML5 coding (how Apple products read websites and permits for ideal viewing on smartphones, tablets, laptops).
• The Top Five sources used changed since 2011 [chart], and review sites now a top source. Since 45.4% of shoppers now use review sites, it is critical to manage the resident experience and a property’s reputation. Apartment shopping sources 2015 Total ILS 68.8% Apartment community or management company website 66.5% Driving in desired neighborhoods 59.2% Search engine 50.5% Rating / review website 45.4% Referrals 42.4% Printed apartment guide 21.1% Apartment community or management company social me- 11.6% dia Newspaper advertising 6.1% Source: ©SatisFacts Research (SatisFacts.com) “Today’s Online Renter” study, 2015
• Prospects focus on basics: photos, floor plans, rents, specials, availability, and features / amenities. Reviews are also very important (4.18 on a five point importance scale) because they offer the transparency today’s consumer demands. • The top rated factor impacting rental decisions was viewing an actual apartment home available to lease; this has implications on the market ready process and raises questions about how much to invest in models (ranked #12). Consistent with importance of transparency and the resident experience, perceived quality customer service and unfiltered reviews were rated second and fifth, respectively.
What impacts rental decisions – Top Five [Five point impact scale] Viewing the actual apartment I can lease 2015 Total Perception of quality customer service 68.8% Ability to pay rent online if no convenience fee 66.5% Security, access control features 59.2% Ratings/reviews of community 50.5% Source: ©SatisFacts Research (SatisFacts.com) “Today’s Online Renter” study, 2015
• 24.4% report rental decisions are impacted by the management company brand name; this means 75.6% of decisions are not impacted by brand name. Therefore communities must focus on service delivery and the resident experience as drive their online reputation. • 74.4% trust friends and family. At 67.7%, reviews had the second highest “trust” score; sites offering reviews rank high in Google searches so properties must focus on delivering a quality resident experience and leveraging this feedback online. Residents do not trust ads (second to last, 11.8%) or a property’s social media efforts (ranked last, 7.1%).
What sources do you trust? 2015 Total Friends, family members or co-workers 74.4% Online ratings / reviews / comments 67.7% Company website 32.6% Ads 11.8% Social media 7.1% Source: ©SatisFacts Research (SatisFacts.com) “Today’s Online Renter” study, 2015
• 49.7% do not trust websites where most or all reviews are positive. Because negative reviews are as important as positive ones, resist the temptation to cherry pick reviews to post on those sites that permit this. Ratings and Reviews • 61% were willing to post positive reviews about their community, however only 16% have ever been asked by the property; and a majority reported being “very likely” to post comments or reviews online. This reveals an opportunity, however remember that offering incentives to post reviews violate Federal Trade Commission guidelines.
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Rental Housing Journal Colorado • August 2015
• Residents have strong feelings about properties responding to reviews. 51.7% felt that the staff responding communicates they provide great customer service, and 48.9% felt this shows the staff cares about residents. Only 11.1% said they did not care if the staff responded. Lastly, a majority reported that the staff not responding created a negative impression of the community. Responding presents another marketing opportunity. Social Media • Only 11% reported using social media a “source” when shopping, and social media earned a low 2.27 score on its impact on rental decisions (five point importance scale).
Additionally, as noted earlier, residents do not trust social media as a shopping source. • Renters do not follow communities or management companies on most social media. While 20% reported following a community on Facebook, less than 3% reported following on Twitter, Instagram or Pinterest. Key Takeaway #1 - Transparency • Prospects feel empowered and want transparency so they can make informed decisions. They want to know what it’s really like to live at a community via unfiltered reviews, to tour actual vacant apartments they can lease, and they don’t trust marketing, ads or social media. Key Takeaway #2 - The Basics • Success continues to have its foundation in the basics. And the basics are more critical than ever due to their impact on satisfaction with the resident experience and a property’s online reputation. Doug Miller is founder and president of SatisFacts Research. Prior to creating his own businesses in 1996, starting in the late 1980's Miller was Director of Marketing for several national and regional property management firms. Miller received his B.S.B.A from Washington University (St. Louis) and his M.B.A. from The American University. Doug can be contacted at DMiller@ SatisFacts.com.
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RENTAL HOUSING JOURNAL COLORADO
In It For Me? Pt. 2 ...continued from page 1 Skills needed: • Negotiation – You will need to negotiate with sellers when you are putting the property under contract. Likewise, you will need to negotiate with your buyers. • People skills – These are an important part of your negotiation skills. • Analytical skills – You need to be able to determine what the property will be worth after it is fixed up, accurately estimate repair costs, and determine your maximum allowable offer (MAO). Buy/Fix-up/Sell ÁLSSLQJ
Description: • You are buying a property that is in moderate to bad physical condition, fixing it up, and then selling it— just like on those cable TV shows (except you make or lose your own money, and it’s not “reality”—it’s real!). Pros: • Income – This can be a very lucrative way to make a living. How much you make per house will vary, and every person will have a minimum amount that he or she expects to make before purchasing. • Hands-on – If you are a hands-on type person, this may be for you. • Not hands-on – You can also just
supervise and write checks to contractors, if you wish. This generally results in a lower profit but allows you to leverage the expertise and experience of others. • Creativity – If you like to be creative and solve problems, then this will be up your alley as you determine how to transform a mess into a beautiful finished product. Just remember to focus that creativity toward the tastes of a typical buyer in the masses. Cons: • Hidden costs – Like most repair projects, fixer-uppers often seem to take twice as long and cost twice as much as you expected. When you tear into something, you often find some other unexpected “surprises.” As a result, you may spend much more than expected doing repairs, and your bottom line suffers accordingly. • Contractors – It can be very frustrating dealing with some contractors. They may be juggling different jobs and it can be challenging to keep your rehab project on budget and on schedule. • Cash-intensive – This is one of the most cash-intensive areas of real estate. It takes money to purchase the home, do the repairs, pay the utilities, and pay the insurance/ taxes/mortgage for however long until you can finally sell the home. • Infrequent paydays – If you are
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used to getting paid every week or on a regular basis, you may be in for a shock. You will be doing nothing but spending money for weeks and weeks until you finally sell the home and get one (hopefully) big payday. • Liability – There is a certain amount of liability relating to fixing anything. As long as the work is done properly, you will be okay. It’s when something isn’t done correctly, and someone subsequently gets hurt, that you may be liable. So make sure you are dealing with reputable contractors. Skills needed: • Construction knowledge – You don’t need to know how to do everything yourself, but you need to know how things should be done, how much it should cost, and how long it should take. This knowledge enables you to talk and work with the contractors you hire. • Project management – One of the common pitfalls of rehabbing is when a two-month project takes six months. Suddenly the $20,000 profit is gone and you’re just hoping to break even. • Analytical skills – You must be able to determine the current value, after-repair value, and repair costs relating to the property in order to be successful in this business. Other: • Many cities require that at least some of the repairs, such as plumbing and electrical repairs, be done by a licensed contractor only. • Time-intensive – It depends. You can be a part-time rehabber or a full-time rehabber. Typically this is fairly time-intensive unless you hire a general contractor and turn the project over to him; then you simply spend your time (and more money) managing them. If you get the wrong guy, you’ll feel like you are paying him so you can babysit him. • Cash-intensive – As noted above, this is one of the most cashintensive areas of real estate. It takes money to purchase the home, do the repairs, pay the utilities, and pay insurance/taxes/ mortgage. • Tools – Don’t forget that if you’re going to do some of the work yourself, you’ll need money for tools, equipment and maintenance. • Creative buying and selling – You can use all kinds of techniques to buy and sell houses. We would need a whole new report to deal with all of these techniques. The “short version” on creative transactions includes subjects such as financing, short sales, partnering, buying on lease option or land contract, seller financing, and the like. Most people learn about how to do these things by taking special courses. You can also find out some more about some of them by attending your local REIA meeting.
Discounted Notes and Mortgages Description: • This real estate-related business is often referred to as “buying paper.” Someone who specializes in discounted mortgages purchases an income stream, such as monthly payments on a promissory note (secured by a mortgage) for less than it is “worth.” Folks who cannot or will not learn to use a financial calculator (or certain types of financial software) need to run from this one. This is a real estate-related business/investment that requires a lot of “savvy” and is best left to those at the advanced level. •
•
•
•
Pros No landlording – You are concerned with your Return on Investment (ROI) and how secure your investment is (determined by Loan-to-Value, appraisals, inspections, evaluation of the borrower, etc.). Moderate time involvement – Most of your time is spent at the beginning of the investment doing the due diligence and analysis necessary to determine if this is a transaction in which you want to be involved. Secure – If you do your homework correctly, this should be a very secure way of obtaining an excellent return on your money. It is secure because the income stream should be secured by appropriately evaluated real estate. Minimal hassles – You are primarily in the business of analyzing notes to be purchased and in managing your portfolio of already purchased notes, including making sure that payments are being received as agreed.
Cons: • Cash-intensive? – This may or may not be a cash-intensive business. It is cash-intensive if you are using your own money, because you can buy only as many loans as you have money to purchase. There are ways to do this without your own money, but that is for an advanced class, not this report. • Bankruptcy and foreclosure – One downside of discounted mortgages occurs when the borrower doesn’t pay and/or declares bankruptcy. You may be forced to foreclose on the property and take it back. Ouch. Skills needed: • Analytical skills – Much of the analysis or “due diligence” required for deciding whether to buy a note resembles that of purchasing a property. You need to determine what the property that is securing the note is worth. Additionally, you need to learn the ins/outs of the “time value of money” and the process of discounting notes. Moreover, you need to evaluate the person who originally borrowed the money and whose name is on the note. Rental Housing Journal Colorado • August 2015
RENTAL HOUSING JOURNAL COLORADO
In It For Me? Pt. 2 ...continued from page 6 Private Money or Hard Money Lender Description: • A private money lender or hard money lender is an individual who lends money to real estate investors. Instead of borrowing money from a bank and having to jump through the hoops that they require, it often is much easier and faster to use private money lender. The most common customer of the hard money lender in real estate is probably the rehabber who borrows money just long enough to purchase a home, fix it up, and repay the loan. Folks involved in this type of lending business are normally very experienced members of the advanced group who have made some money in real estate and are diversifying by becoming lenders. Pros: • Higher ROI – If you have money to lend and are willing to do some of the “due diligence” needed
when lending someone money, this may be a good niche for you. It is not uncommon to earn higher interest rates than the bank gets when lending money to investors. • No landlording – You are concerned with your Return on Investment (ROI) and how secure your investment is (determined by Loan-to-Value, your own appraisal and inspection, etc.). • Moderate time investment – Your time is primarily spent at the beginning of the investment doing the due diligence and analysis necessary to determine if this is a transaction in which you want to be involved. • Secure – If you do your homework correctly, this should be a very secure way of obtaining an excellent return on your money. The income stream should be secured by real estate that you feel comfortable owning for the amount you lend the borrower. If the borrower doesn’t pay, you’ll probably foreclose, take the house,
and be the new owner. • Minimal hassles – You are primarily in the business of analyzing the loan, managing your portfolio of loans, and making sure that payments are being received as agreed. Cons: • Cash-intensive – You can only loan out money you have available. • Bankruptcy and foreclosure – As with discounted mortgages, the downside of lending people money is what happens if the borrower doesn’t pay and/or declares bankruptcy. This is typically a long and expensive process. Skills needed: • Analytical skills – Much of the analysis or “due diligence” required for deciding whether to buy a note resembles that of purchasing a property. You need to determine what the property that is securing the loan is worth, in both its current state and its afterrepair state.
Conclusion As you can see, there are many areas of real estate in which you can get involved. Some areas are better for beginners; others are best left for those who have lots of experience. In any case, there is much room in this field for you to involve yourself on a full- or part-time basis. If you are interested in learning more about the real estate business or investing in real estate, we would like to invite you to attend the Real Estate Investors Association in your area. Local REIA groups offer education, networking, and more at their monthly meetings. Our members have varied levels of experience so you can feel comfortable and get the support you need; many members have decades of experience, and many of our other members are just exploring whether real estate is something they want to do. Find a local group at www.nationalreia.com.
Renters Insurance ...continued from page 1 Make it easy. Work with a local insurance agent to provide detailed information about policy coverage and costs, and include that information with the move-in paperwork. For current residents, distribute an informational flyer with their monthly rental invoice or newsletter. Become adept in answering questions about coverage and costs. You can certainly refer tenants to an in-
Rental Housing Journal Colorado • August 2015
surance professional if you do not have the answers, but knowing basic coverage details and costs may help to persuade a resident to purchase insurance. If they don’t receive the answers from you, there is no guarantee that they’ll actually call the insurance agent to get those answers. Hold an ‘insurance information night’ at the property. Invite all of your residents and have a local agent
available to explain the process. Having applications on hand as well may persuade those present to purchase insurance. It might be wise to obtain a copy of the resident’s insurance policy and file it with their lease and other important documents. Be sure to give your current residents time to purchase renters insurance and follow up to ensure that they have done so.
A win-win for both the resident and the property manager, renters insurance allows everyone to have a little peace of mind at minimal cost. By Mary Girsch-Bock propertymanager.com
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RENTAL HOUSING JOURNAL COLORADO
Treatment of Depreciation ...continued from page 2 Initially there was also a $3,500 per property penalty if form 3115 was not filed. For Example: Jake inherited a residential rental in June of 2013. When preparing his tax return in 2013 he didn’t report the step-up as his basis in the rental house. In 2014, Jake realized this mistake and wanted to reclaim the additional depreciation that was missed on the 2013 tax return. Jake can now file IRS Form 3115, changing the accounting method. This will give him the audit protection for 2013 and correct for the missed depreciation in 2014. Capitalizing Improvements The requirement to capitalize amounts paid for improvements to a unit of property depend on the purpose of the improvement. Betterments ameliorate an existing material condition or defect and can include expansions. Restorations assume that the property being restored has fallen into disrepair and is no longer functional or has caused a major component to cease functioning. Improvements adapting the property to a new or different use can also be capitalized. For Example: If the landlord of a manufacturing space decided to convert it to apartments, the cost to
regrade the land would need to be capitalized but the amount paid to clean up the site (which does not adapt the land) does not need to be capitalized. Likewise, if a tenant leased adjoining spaces in a commercial office building, the cost to combine the two spaces would be deductible because it does not adapt the use of the space. Deductible repairs and maintenance are activities not required to be capitalized as tax improvements. However, you can elect to capitalize for tax purposes if capitalizing for book. Routine maintenance and small taxpayers enjoy safe harbor protection. An activity is routine maintenance under the safe harbor rules if the activity is performed more than once during the class life of the (non-building) property. In the case of buildings, the activity is performed more than once during a 10 year period. If unsure whether something can be claimed as routine maintenance, consider the recurring nature of the activity, if it is industry practice, whether it coincides with the manufacturer’s recommendations and whether you have had experience with it at a similar or identical property. Tax payers may elect not to apply
Vi s i t u s a t w w w. R e n t a l H o u si n g Jo u r n a l . co m
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the capitalization requirements to an eligible building property if the total amount paid during the taxable year for repairs, maintenance, improvements and similar activities performed on the building property does not exceed the lesser of 2% of the unadjusted basis of the eligible property or $10,000. For Example: John and Jane own a residential rental which originally cost $305,000. During 2014, they had a plumber fix a leaking pipe for $250, they replaced the home’s water heater for $1,900, and repaired the siding from a wind storm for $1,400. John and Jane filed the small taxpayer safe harbor election with their 2014 return and then deducted the entire $3,550 since it’s less than 2% of the unadjusted basis (cost) of the home. This is an annual election. What’s ahead for 2015? On December 16, 2014, the tax extenders were passed bringing back
the higher Section 179 limits and bonus depreciation at 50% effective January 1, 2014 to December 31, 2014. So as of right now, we are at the reduced Section 179 amount ($25,000) and lower limits ($200,000) and no bonus deprecation for 2015. This makes some taxpayers susceptible to the Alternative Minimum Tax which was permanently fixed a few years ago. With bonus depreciation gone, the tax and AMT depreciation are no longer the same. This may cause someone to fall into AMT where in the past, bonus depreciation prevented this. This article attempts to summarize recent tax changes using examples for clarification purposes only. Every investor has a different tax situation; please consult your tax advisor for your specific situation.
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Rental Housing Journal Colorado • August 2015