Author Topic: Ideas for increasing expenses close to year-end.  (Read 777 times)

supomglol

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Ideas for increasing expenses close to year-end.
« on: October 11, 2017, 07:32:35 AM »
Fellow landlords, I'm looking for any advice or tricks-of-the-trade on increasing expenses near year-end.  We run a pretty lean operation on our 7 doors many times opting to fix things ourselves.  So far this year we have a net income of $21k, I expect this to increase to $26k by year-end.  Also have about $20k worth of capital improvements that need to be re-classified so that will bring the net income up somewhere around $46k.  To reduce, we will have about $23k in depreciation. 

That leaves us with a net income of ~$23k.  Problem is that the owners are currently in high-income tax brackets already and we'd much prefer to defer this income as long as possible (long-term hold strategy).  We have about $15k in the operating account we could spend.  We're also looking at the possibility of purchasing another house or two before year-end (but we'd need to start looking now).  Each house purchase would grant us ~$3.5k in exspense-able closing costs. 

Does anybody have any good strategies or ideas to reduce the net income as much as possible?   Ideally we'd like to show a loss. 

Thanks!
« Last Edit: October 11, 2017, 07:42:18 AM by supomglol »

jwright

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Re: Ideas for increasing expenses close to year-end.
« Reply #1 on: October 11, 2017, 08:27:53 AM »
You have $15k to spend but need to come up with $23k in expenses.  So you'd need to finance a purchase in order to take the deduction?  That seems...off.

I don't let taxes be the tail that wags the dog.  I'd only incur expenses that I would already be occurring, such as pre-paying insurance, making an extra mortgage payment or paying my property tax bill or HOA bill due in January in December. 

Are you tracking mileage/travel to your rentals when you visit them to do repairs or check on them? 

Be careful with closing costs, most need to be capitalized into the cost of the property and loan fees are amortized over the life of the loan.  Some expenses such as taxes and HOA that are paid at closing are deductible.

monarda

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Re: Ideas for increasing expenses close to year-end.
« Reply #2 on: October 11, 2017, 08:32:45 AM »
I assume you've already counted depreciation?

How is the condition of the furnace/water heater? Who pays utilities? If any of those need upgrading it might be good to consider that before the upcoming heating season (not sure where you're located)

Good idea from jwright, to maybe pay January's property tax in December.

MommyCake

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Re: Ideas for increasing expenses close to year-end.
« Reply #3 on: October 11, 2017, 08:55:19 AM »
anything going to be needing replacing in the next year?  If so, I'd go ahead and do it now.... I'd rather pay for these expenses a little prematurely rather than pay more in taxes.  Windows ?  Counters?  Flooring?  With 7 units even small things like replacing faucets will add up. 

I'm not sure about prepaying taxes or utilities... I've never done this.... I would imagine this just creates more income/less expenses for the following year? 

supomglol

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Re: Ideas for increasing expenses close to year-end.
« Reply #4 on: October 11, 2017, 08:58:00 AM »
You have $15k to spend but need to come up with $23k in expenses.  So you'd need to finance a purchase in order to take the deduction?  That seems...off.

I don't let taxes be the tail that wags the dog.  I'd only incur expenses that I would already be occurring, such as pre-paying insurance, making an extra mortgage payment or paying my property tax bill or HOA bill due in January in December. 

Are you tracking mileage/travel to your rentals when you visit them to do repairs or check on them? 

Be careful with closing costs, most need to be capitalized into the cost of the property and loan fees are amortized over the life of the loan.  Some expenses such as taxes and HOA that are paid at closing are deductible.

jw,

Thanks for the thoughts.  I thought the argument of expensing closing costs might come up, but I don't want that to dominate this conversation.   (Our CPA advised us to expense them).  So, for the sake of this exercise, assume they will be expensed. 

Obviously we cannot create $23k expenses with $15k cash, but we could increase our cash-on hand at any time by the owners putting in more cash.  This would be necessary for any house purchases as well.  Even if we couldn't get to 0, we could certainly get lower than we are right now. 

Our insurances and property taxes are paid with mortgage escrows, and pre-paying mortgage amounts wouldn't incur any additional interest expenses.

We have a leased company vehicle so all travel related expenses are already baked into the existing net income numbers I provided.

Thank you for your thoughts!

supomglol

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Re: Ideas for increasing expenses close to year-end.
« Reply #5 on: October 11, 2017, 09:01:53 AM »
I'm seeing a few people mention things like HVAC, water heaters, windows etc.  To my understanding, all of these are capital expenses and will have to be depreciated over X years.  So if we spent $5k on a new HVAC and had to amortize that over 5 years, we'd only be able to claim 3% of the purchase price for the 2 months of 2017 it would be in use.  Such a purchase would reduce our cash on-hand by $5k but only provide a depriciation expense of ~$167. 

CareCPA

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Re: Ideas for increasing expenses close to year-end.
« Reply #6 on: October 11, 2017, 11:42:16 AM »
My overall suggestion is to only spend money on things that are needed anyway. Whether they are costs to repair/replace something, or costs that will get you higher rent in the future.

Even if your investors are taxed at a 50% tax rate, do you really want to spend $23,000 just to save $12,500 in taxes? You're still out the other $12,500 if it wasn't something that needed purchased anyway.

Also, I know you don't want it to dominate the conversation, but you are ultimately responsible for what is on your tax return. If you are expensing costs that need to be capitalized, you are the on the IRS will come back to. If he's advising you to expense these costs, maybe he has some other "creative" ways for you to save.
Always happy to help with tax or accounting questions - feel free to private message me.

I am a licensed CPA in Pennsylvania. However, any tax advice I give should be considered general information and not used in the avoidance of tax. There is most likely information about your situation that I do not know, and thus you should do your own additional research.

Yes, in case it confuses you, I did change my forum name.

supomglol

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Re: Ideas for increasing expenses close to year-end.
« Reply #7 on: October 11, 2017, 12:15:21 PM »
My overall suggestion is to only spend money on things that are needed anyway. Whether they are costs to repair/replace something, or costs that will get you higher rent in the future.

Even if your investors are taxed at a 50% tax rate, do you really want to spend $23,000 just to save $12,500 in taxes? You're still out the other $12,500 if it wasn't something that needed purchased anyway.

Also, I know you don't want it to dominate the conversation, but you are ultimately responsible for what is on your tax return. If you are expensing costs that need to be capitalized, you are the on the IRS will come back to. If he's advising you to expense these costs, maybe he has some other "creative" ways for you to save.

Yes I think you hit on a key point.  We aren't out to waste money, or spend money to save taxes.  What we would be open to ideas on is ways to invest money to save taxes. 
I like your thought process on looking into replacements that will get into a higher rent market. 

Some examples of such creative things I was looking for might just include spending money on things now that were going to be needed regardless.
Such as...
stocking up on US Postage Stamps
buying any tools I anticipate needing next year
restocking or stockpiling office supplies
re-screening all windows to ensure we're in good shape
maybe some re-painting

One idea I've been thinking strongly about is replacing all of the mailboxes, many of them are shabby and I'd really like a nice uniform style to unify all of the properties and increase curb appeal. 
After a few rounds of people smashing the mailboxes with baseball bats, a nice thick steel mailbox could be a worthwhile investment.  It will chew up some cash on the material / install but wouldn't be enough to be considered a capital expense.

waltworks

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Re: Ideas for increasing expenses close to year-end.
« Reply #8 on: October 11, 2017, 01:40:05 PM »
Postage stamps? Mailboxes? What?

Seriously, this is silly. Even if you bought 2 years worth of stamps and envelopes, or whatever, you'd be in even worse shape come tax time *next* year since you'd have bought none. Not to mention the difficulty/effort involved in buying small-dollar items. It's literally not worth your time to be thinking about this if those are your ideas.

-W

jwright

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Re: Ideas for increasing expenses close to year-end.
« Reply #9 on: October 12, 2017, 09:21:11 AM »
You have $15k to spend but need to come up with $23k in expenses.  So you'd need to finance a purchase in order to take the deduction?  That seems...off.

I don't let taxes be the tail that wags the dog.  I'd only incur expenses that I would already be occurring, such as pre-paying insurance, making an extra mortgage payment or paying my property tax bill or HOA bill due in January in December. 

Are you tracking mileage/travel to your rentals when you visit them to do repairs or check on them? 

Be careful with closing costs, most need to be capitalized into the cost of the property and loan fees are amortized over the life of the loan.  Some expenses such as taxes and HOA that are paid at closing are deductible.

jw,

Thanks for the thoughts.  I thought the argument of expensing closing costs might come up, but I don't want that to dominate this conversation.   (Our CPA advised us to expense them).  So, for the sake of this exercise, assume they will be expensed. 

Obviously we cannot create $23k expenses with $15k cash, but we could increase our cash-on hand at any time by the owners putting in more cash.  This would be necessary for any house purchases as well.  Even if we couldn't get to 0, we could certainly get lower than we are right now. 

Our insurances and property taxes are paid with mortgage escrows, and pre-paying mortgage amounts wouldn't incur any additional interest expenses.

We have a leased company vehicle so all travel related expenses are already baked into the existing net income numbers I provided.

Thank you for your thoughts!

Regarding the underlined, I'm going to leave this IRS link here https://www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals/rental-expenses/rental-expenses

As a CPA, I would advise you to be careful with the assumption that all closing costs are deductible.  In my area, the most expensive is typically title insurance, and that's something that has to be capitalized.

YttriumNitrate

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Re: Ideas for increasing expenses close to year-end.
« Reply #10 on: October 13, 2017, 08:34:04 AM »
I'm seeing a few people mention things like HVAC, water heaters, windows etc.  To my understanding, all of these are capital expenses and will have to be depreciated over X years.  So if we spent $5k on a new HVAC and had to amortize that over 5 years, we'd only be able to claim 3% of the purchase price for the 2 months of 2017 it would be in use.  Such a purchase would reduce our cash on-hand by $5k but only provide a depriciation expense of ~$167.
Unless you are putting in a high end tankless water heater, it looks like the replacement could be expensed under the the de minimis rules.
https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations

Blindsquirrel

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Re: Ideas for increasing expenses close to year-end.
« Reply #11 on: October 14, 2017, 08:27:16 PM »
   Get your insurance company to bill you this year for next year. Also, get your county auditor to give you property tax amounts so you can pay this year. However, you will have to keep doing it every year or else you get socked next year. Relace an older window or two, that need it but not a whole house full of windows. Buy pain for rehabs for next year this year but do not let if freeze. Flooring needs?
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Hotstreak

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Re: Ideas for increasing expenses close to year-end.
« Reply #12 on: October 17, 2017, 05:49:20 PM »
Why are you willing to kick the can down the road to next year (spending money today to save on taxes then spending less next year and paying more taxes)? Why are you so certain that next year won't also be profitable? Unless the repairs are necessary or will allow you to increase rent, don't do it.

Blindsquirrel

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Re: Ideas for increasing expenses close to year-end.
« Reply #13 on: October 19, 2017, 06:45:50 PM »
  If you have significant income outside of real estate, increasing your expenses a bit in this year can save you some tax dollars. Do not need to waste money but if you pull forward expenses that you can, it will save you a good chunk of change. If you pull 50k of property tax from next year into this year and have a 30% marginal tax rate  that is 15k in tax savings.  Definitely worth it.   15k (30% of 50k)  at 7.2 % return =30k
Even a blind squirrel finds a nut once in awhile.

Hotstreak

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Re: Ideas for increasing expenses close to year-end.
« Reply #14 on: October 19, 2017, 10:58:20 PM »
  If you have significant income outside of real estate, increasing your expenses a bit in this year can save you some tax dollars. Do not need to waste money but if you pull forward expenses that you can, it will save you a good chunk of change. If you pull 50k of property tax from next year into this year and have a 30% marginal tax rate  that is 15k in tax savings.  Definitely worth it.   15k (30% of 50k)  at 7.2 % return =30k


Saves in the short term.  You know what happens next year?  You deduct zero dollars for property taxes, and have a huge income tax bill.  If the owners are expecting otherwise lower income next year, then maybe it makes sense, otherwise not really.

Dicey

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Re: Ideas for increasing expenses close to year-end.
« Reply #15 on: October 19, 2017, 11:33:39 PM »
I disagree with prepaying taxes, insurance, HOA fees, etc. Once you push forward, you have to do it in perpetuity, but you don't get the boost in subsequent years. If your mortgages are at fixed rates, then your rents will continue to rise, but your payments won't, so the problem gets worse over time, not better. Not really useful in the long run. And postage? You should be doing everything electronically.

Maintenance is another story. Staying ahead of appliances so they don't break, or continually freshening up the property so the house is easy to rent is not a terrible strategy, but if you're in it for the long term, even this isn't all that helpful.

Luckily for us, random things just seem to break. A motorized awning on one of our houses just quit and cost $1400 to repair! A new refrigerator in another house broke while under warranty, so we had it repaired. Then it broke again, just after the warranty expired. The MFR will supply the parts to fix it again, but wants $350 for labor. WTF?

IMO, you're better off having a large cash cushion, so that when shit breaks, you don't lose sleep over it.
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Blindsquirrel

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Re: Ideas for increasing expenses close to year-end.
« Reply #16 on: October 20, 2017, 08:15:18 PM »
However, you will have to keep doing it every year or else you get socked next year

 Like I said, you have to do it every year.  Have done it for 3 years and it has worked thus far. Will pay the piper when W2 income drops.
Even a blind squirrel finds a nut once in awhile.

Dicey

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Re: Ideas for increasing expenses close to year-end.
« Reply #17 on: October 21, 2017, 08:11:35 AM »
However, you will have to keep doing it every year or else you get socked next year

 Like I said, you have to do it every year.  Have done it for 3 years and it has worked thus far. Will pay the piper when W2 income drops.
You do realize that it only gives you a boost once?

The "problem" with this whole FIRE thing is that it's entirely possible that your income won't drop in the future. Plus, there is the opportunity cost of the money you use to pre-pay these bills. Not significant in the OP's case, but perhaps more so with the strategy you outlined.
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sokoloff

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Re: Ideas for increasing expenses close to year-end.
« Reply #18 on: October 21, 2017, 08:32:30 AM »
I disagree with prepaying taxes, insurance, HOA fees, etc. Once you push forward, you have to do it in perpetuity, but you don't get the boost in subsequent years. If your mortgages are at fixed rates, then your rents will continue to rise, but your payments won't, so the problem gets worse over time, not better. Not really useful in the long run. And postage? You should be doing everything electronically.
One strategy that works in some cases is to concentrate expenses into one year if it puts you over a threshold amount.

Probably not applicable here, but works for standard deduction vs itemized deductions for example. Pull some of next year's real estate taxes and an extra month's of interest into year 1 and itemize. Then in year 2, don't do that and take the standard deduction. You might be able to get 14 month's of interest (December, 12 months, and January) into odd years and then take the standard deduction every even year. (I can't think of anything for rental property that would fall into this category, but maybe OP can.)

Timmm

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Re: Ideas for increasing expenses close to year-end.
« Reply #19 on: October 21, 2017, 09:22:46 AM »
One expense we've recently caught up on is tree maintenance. Healthy trees add a lot of property value, but unmanaged growth also risks damage to the property during heavy wind, snow, or fires. Depending on the number of trees and your location, professional trimming and cleanup can cost thousands. It's an easy one to let slip for years, so it might be a smart thing to consider.

Dicey

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Re: Ideas for increasing expenses close to year-end.
« Reply #20 on: October 22, 2017, 07:49:16 PM »
I disagree with prepaying taxes, insurance, HOA fees, etc. Once you push forward, you have to do it in perpetuity, but you don't get the boost in subsequent years. If your mortgages are at fixed rates, then your rents will continue to rise, but your payments won't, so the problem gets worse over time, not better. Not really useful in the long run. And postage? You should be doing everything electronically.
One strategy that works in some cases is to concentrate expenses into one year if it puts you over a threshold amount.

Probably not applicable here, but works for standard deduction vs itemized deductions for example. Pull some of next year's real estate taxes and an extra month's of interest into year 1 and itemize. Then in year 2, don't do that and take the standard deduction. You might be able to get 14 month's of interest (December, 12 months, and January) into odd years and then take the standard deduction every even year. (I can't think of anything for rental property that would fall into this category, but maybe OP can.)
I've done that before. It was the year I bought my first investment property and renovated it prior to rental. I also got orthodontia, which I paid for OOP and in advance. I also had a legitimate home office. That was back in the day where you could buy a whole year of meds on one prescription, so I did that too. Prepaid my taxes. Anything and everything I could think of. Worked great, I paid hardly any taxes.

Couple of years later, I got audited. My accountant wanted $500 for his time, so I decided to go through the audit on my own. I actually had made an error, but it was obvious that I'd just pulled a number from the wrong box on an interest income statement. Fortunately, when I reno'd the house, I'd misplaced an envelope of receipts for things I'd paid cash for. By the time of the audit, I'd located the envelope (in a book, naturally) and I ended up getting $18.00 back. The IRS office was literally down the street from my house, and I had to go twice. Fortunately, one of my customers owned an accounting firm, so he gave me a few tips gratis, which helped immensely. The IRS Auditor was super nice and was very complimentary of my record keeping and attention to detail, so the whole experience was... not terrible. Nonetheless, I haven't been audited since, and I'd love to keep it that way.

Unless the OP is going to divest themselves of the rental property soon, or Trump makes drastic Tax Code changes, alternating years probably wouldn't be the best strategy.
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