Second housing bust on the way

PandaBear · Apr 30, 2009

Originally Posted By: brianl703

Originally Posted By: PandaBear

Do you want your kin to live in such a condition just for tax reason?

It's easy enough to "fix" those things.

Then the rental rate just climb back to the market rate.

Gary Allan · Apr 30, 2009

Quote:

That's not too hard in an audit.

In any audit you're going to pay. Only the amount varies. They will just disallow a few deductions.

PandaBear · Apr 30, 2009

Originally Posted By: Gary Allan

In any audit you're going to pay. Only the amount varies. They will just disallow a few deductions.

Not if they found you intentionally cheating. Like I said, prepare your tax and rental agreement between family members as if you are doing businesses with an outsider. If you can't convince the auditors that you are doing it in a fair and reasonable way, you are expecting trouble.

brianl703 · Apr 30, 2009

Originally Posted By: PandaBear

We are not talking about individual human being here, we're talking about a rental property and they are all pretty close.

No, they are not all pretty close, just like the asking price for a house for sale varies (more widely as of late, around here) due to the condition it's in.

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If the real estate agents can do it, someone in the government (or government's contractor who do audit) could.

The way real estate agents do it is to see how quickly the rental property gets a taker at a given price. If it sits for months with no takers, it's too expensive. Lower the price and see what happens.

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Your property has a price, and it is not unique like your lovely children at home. Get over it.

You obviously haven't dealt with the subjective whims of those who are looking for a place to rent.

PandaBear · Apr 30, 2009

Originally Posted By: brianl703

No, they are not all pretty close, just like the asking price for a house for sale varies (more widely as of late, around here) due to the condition it's in.

Assuming similar condition, area, size, and quality. There is a typical sales and rental price.

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The way real estate agents do it is to see how quickly the rental property gets a taker at a given price. If it sits for months with no takers, it's too expensive. Lower the price and see what happens.

That's exactly how owner rent a property too. When it rent out at about the typical time and similar to the recent rental price of similar properties. If government wants to check for the price, and you have to defend the price, you need to give out why you are renting for below market cost to your family member. (they don't care if your number is off to their favor, or if the rental is to an outsider) If you are IRS you can also check the typical rental revenue that others put in their 1040 schedule E in your area. They know what range it is in. You have to convince them why your rent to your kin is so low if it wasn't in this range because you are being audit when things happen.

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You obviously haven't dealt with the subjective whims of those who are looking for a place to rent.

That's their business, and let them pay a higher price for their dream home, but that doesn't means your property is worth less if there are other people willing to rent it at the price you set. I've been dealing with apartment rental since I was 16 and now I'm 31, so I know what I'm talking about and what you are talking about.

brianl703 · Apr 30, 2009

Originally Posted By: PandaBear

You have to convince them why your rent to your kin is so low if it wasn't in this range because you are being audit when things happen.

Ok, so why would the IRS audit someone because they aren't renting at a fair market price? I have a rental property that I was renting at below market rates for years (for what my mortgage payment is). I was renting it to a family member. The IRS has shown no interest whatsoever in that arrangement. I took the mortgage tax deduction too, AND I put whatever was left over (the amount that went towards principal) as additional income (let me rephrase--I put the entire amount of rental income for the year as additional income and took deductions on that portion which went to property taxes and interest). The IRS seems to be OK with me doing it that way.

Gary Allan · Apr 30, 2009

Originally Posted By: PandaBear

Originally Posted By: Gary Allan

In any audit you're going to pay. Only the amount varies. They will just disallow a few deductions.

Not if they found you intentionally cheating. Like I said, prepare your tax and rental agreement between family members as if you are doing businesses with an outsider. If you can't convince the auditors that you are doing it in a fair and reasonable way, you are expecting trouble.

In the final analysis, they can simply see how much money goes in and out of your checking account and make you justify it. My accountant has stated several times that there is no 100% clean audit. The agent is going to bring home his measure of flesh. He has to pay for his job.

Kestas · Apr 30, 2009

I thought operating a business at a loss was allowed, but limited... something like three years of loss in a row. Then they start asking questions, or disallow it, or something.

ArrestMeRedZ · Apr 30, 2009

Real estate rentals and farm operations are exceptions to that rule. It's typical for real estate to lose money for 15 years, then make a big capital gains windfall to the owner when he or she sells. Farms can and do lose tax deductible money forever. There are other exceptions. If it looks like a hobby, smells like a hobby, and costs money like a hobby, that's where you'll get busted.

PandaBear · Apr 30, 2009

Originally Posted By: brianl703

Ok, so why would the IRS audit someone because they aren't renting at a fair market price?

A typical property has a typical revenue to price ratio. If your numbers don't add up, then it would be in higher probability of audit.

Quote:

I have a rental property that I was renting at below market rates for years (for what my mortgage payment is). I was renting it to a family member. The IRS has shown no interest whatsoever in that arrangement. I took the mortgage tax deduction too, AND I put whatever was left over (the amount that went towards principal) as additional income (let me rephrase--I put the entire amount of rental income for the year as additional income and took deductions on that portion which went to property taxes and interest). The IRS seems to be OK with me doing it that way.

Below market rate for how much is the question. There is a variation of how much market rate is. If you rent a $1k apartment for $750, that's probably ok, but if you rent a $2k apartment for $100 a month including utilities, well, you're going to look like you cheat on taxes.

Gary Allan · Apr 30, 2009

Suppose you and I buy a twin home ..you're in one half ..I'm in the other. This is just to assure, for the moment, equal value and whatnot. We move into the other unit. You own the one I'm living in. I own the one you're living in. I rent it to you for costs (everything). You rent it to me for costs (for everything). We both get substantial increases in write off potential ..for expenses that we would incur anyway ..but not be able to deduct. We both show zero profit.

PandaBear · May 1, 2009

Originally Posted By: Gary Allan

Suppose you and I buy a twin home ..you're in one half ..I'm in the other. This is just to assure, for the moment, equal value and whatnot. We move into the other unit. You own the one I'm living in. I own the one you're living in. I rent it to you for costs (everything). You rent it to me for costs (for everything). We both get substantial increases in write off potential ..for expenses that we would incur anyway ..but not be able to deduct. We both show zero profit.

Rent for cost is not market rate. Like I said as long as you are not getting an audit everything is good, but if you do, good luck explaining that.

Gary Allan · May 1, 2009

Quote:

Rent for cost is not market rate.

Most of the real estate agents that I've known have never owned or purchased rental property for substantial positive cash flow. They've bought it for equity to purchase more property every 5-7 years. Everything that they have is for sale. That is, they typically always walk away from the settlement table with a decent check in their pocket, but they aren't going to make a whole lot of money on the rental vs. costs. They bought at the right price (and took that money at settlement). A serious real estate agent never takes a check book to a settlement. The property has to "carry itself" in borrowed money. If a house pulls much more then the mortgage it can qualify for, it's not suitable as a rental. It's a home for sale (unless substantial increase in value of homes from when the current mortgage was written under has occurred). Tell me what is illegal about what I described ..as unlikely as it is to be done?? I can't see a thing illegal (untruthful, dishonest, etc.). An audit ALWAYS results in disallowed deductions.

PandaBear · May 1, 2009

Originally Posted By: Gary Allan

Most of the real estate agents that I've known have never owned or purchased rental property for substantial positive cash flow. They've bought it for equity to purchase more property every 5-7 years. Everything that they have is for sale. That is, they typically always walk away from the settlement table with a decent check in their pocket, but they aren't going to make a whole lot of money on the rental vs. costs. They bought at the right price (and took that money at settlement). A serious real estate agent never takes a check book to a settlement. The property has to "carry itself" in borrowed money. If a house pulls much more then the mortgage it can qualify for, it's not suitable as a rental. It's a home for sale (unless substantial increase in value of homes from when the current mortgage was written under has occurred). Tell me what is illegal about what I described ..as unlikely as it is to be done?? I can't see a thing illegal (untruthful, dishonest, etc.). An audit ALWAYS results in disallowed deductions.

If you are talking about this kind of cost, well, yes you can say it is fair market value. The cross renting between property owners example you mention earlier is legal, mark to market, but you now have to put in the rent as part of the income, so that you can subtract expenses that you can deduct. I guess you can say if having mortgage interest deduction taken away then this would be a subsidize to the landlord, in exchange for a future capital gain tax as it is no longer a primary residence. You won the argument.

Gary Allan · May 1, 2009

It wasn't an argument. It was a "what's wrong with this?" ..unless you meant "you've made your case"

Shannow · May 1, 2009

Workmate is bemoaning the drop in interest rates that we've seen recently as problematic to him owning three homes...his primary residence, plus two flash places in Queensland that he rents out. Apparently the reduction in interest payments is seriously hurting his negative gearing, to the point that he's going to "have to" find another house to buy to get his deductions back up.

PandaBear · May 1, 2009

Originally Posted By: Gary Allan

It wasn't an argument. It was a "what's wrong with this?" ..unless you meant "you've made your case"

Oops, yeah, I meant "you've made the case".

PandaBear · May 1, 2009

Originally Posted By: Shannow

Workmate is bemoaning the drop in interest rates that we've seen recently as problematic to him owning three homes...his primary residence, plus two flash places in Queensland that he rents out. Apparently the reduction in interest payments is seriously hurting his negative gearing, to the point that he's going to "have to" find another house to buy to get his deductions back up.

So he can pay less for the same thing and he is not happy about it? Was he on variable rate loan or fixed rate loan? If he buy another house right now he is probably going to bear the high interest rate when it eventually rise.

brianl703 · May 1, 2009

Originally Posted By: PandaBear

Below market rate for how much is the question. There is a variation of how much market rate is. If you rent a $1k apartment for $750, that's probably ok, but if you rent a $2k apartment for $100 a month including utilities, well, you're going to look like you cheat on taxes.

In the scenario I was talking about, you'd be renting the apartment for what your mortgage payment is, or more specifically the interest+taxes part of the mortgage payment. That's unlikely to be very much below market rate, and if it is, you probably aren't paying enough interest to make this scheme worth the effort.

PandaBear · May 2, 2009

Originally Posted By: brianl703

In the scenario I was talking about, you'd be renting the apartment for what your mortgage payment is, or more specifically the interest+taxes part of the mortgage payment. That's unlikely to be very much below market rate, and if it is, you probably aren't paying enough interest to make this scheme worth the effort.

You charge your own rent as income, then charge your own mortgage and taxes as expense, so it is a wash. What is the whole point of this if there is no loss and how are you going to get any better than just using your own home without the income = expense? Unless you are writing it as a business expense, then I don't see a reason for this. On top of that you lose your primary residence capital gain advantage, so you are losing out a lot more if you sell your house later at a gain.

Second housing bust on the way

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