Author Topic: Accounting questions for owner occupied multi family property  (Read 4171 times)

Cwadda

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I'm acquiring a 4 unit property soon and will be owner occupying it. I have some questions about how the accounting and some taxes will work:

1. I am setting up a separate bank account for the property. Do I go with a business checking account or personal checking account? I will not have an LLC.
2. Do you recommend getting a credit card for the property? Or just get a debit card?
3. Do I generally write off expenses on Schedule E for 3 of the 4 units? (because I am occupying one of them?) This includes mortgage interest, etc. Does this mean I can only pay 3/4 of the mortgage payment from the new checking account?
4. Should I hold security deposits in a separate escrow account?
5. Do you have any bank recommendations to set this all up?

Thank you!
« Last Edit: May 09, 2017, 01:46:36 PM by Cwadda »

CareCPA

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Re: Accounting questions for owner occupied multi family property
« Reply #1 on: May 09, 2017, 04:39:31 PM »
1. It will be a bank distinction, meaning it doesn't matter for accounting, but the bank may have requirements for one vs the other.
2. Whichever is easier. A credit card gives you an opportunity to do some churning and gives you some breathing room for cash flow.
3. Yes. You can pay the mortgage all in one payment, and just reimburse whichever account you pay it out of for the 1/4 or 3/4 that should come from the other account. 3/4 of the interest and property taxes will show up on your Schedule E (assuming all units are the same, otherwise there may be some flexibility), the remainder will go to your Schedule A.
4. Yes. Check your state requirements. Security deposits must be properly accounted for, and the amount you can hold depends on your locality (i.e. some places you can ask for two months as security, but after a year you can only hold one month and have to refund the second).
5. I do not. Any bank should be able to handle it, from small community banks to large national banks. I would just go to whichever bank you normally use if you like them.

Cwadda

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Re: Accounting questions for owner occupied multi family property
« Reply #2 on: May 10, 2017, 08:04:18 AM »
1. It will be a bank distinction, meaning it doesn't matter for accounting, but the bank may have requirements for one vs the other.
2. Whichever is easier. A credit card gives you an opportunity to do some churning and gives you some breathing room for cash flow.
3. Yes. You can pay the mortgage all in one payment, and just reimburse whichever account you pay it out of for the 1/4 or 3/4 that should come from the other account. 3/4 of the interest and property taxes will show up on your Schedule E (assuming all units are the same, otherwise there may be some flexibility), the remainder will go to your Schedule A.
4. Yes. Check your state requirements. Security deposits must be properly accounted for, and the amount you can hold depends on your locality (i.e. some places you can ask for two months as security, but after a year you can only hold one month and have to refund the second).
5. I do not. Any bank should be able to handle it, from small community banks to large national banks. I would just go to whichever bank you normally use if you like them.

Thanks so much for your response!

live-fi-or-die

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Re: Accounting questions for owner occupied multi family property
« Reply #3 on: May 17, 2017, 09:17:28 AM »
Congrats on the decision to do a house hack!

My wife and I purchased a 3 family property 5 years back and have just finished renovating all 3 units. We have lived in one of the units and rented out the other 2 the whole time we have owned it. We are now planning on purchasing a single family and renting out the 3rd unit as we move out.

Couple of things I did or wish I had done...

1. Purchase the property under an LLC to begin with. I didn't do that and I now regret it. If I wanted to roll it into an LLC now I believe I would need to pay the 1.5% transfer tax. The LLC origination fee is quite small and will provide you with additional protections should you move on and buy more properties in the future (as in my case). Also helps keep things organized from a personal finance perspective.

2. Keeping property and personal expenses separated is really important from an organizational stand point. Setup separate bank account and credit card for the property. I did this and it makes my finances much easier to interpret moving forward. I originally shared my personal credit card with the house and I regret that. Its hard to do your personal budget when you have a ton of home improvement costs mixed in (as in my case renovating the whole house myself). I now have dedicated credit cards and banking accounts for both. Treat yourself as a Tennant. I pay my mortgage and any utility bills via the house bank account and then have an automatic transfer from my personal checking account each month to "pay myself rent". It is important to include a vacancy and repairs retainer, some people recommend 25% of your annual property expense but I consider that a bit high for my case. We live in a desirable town and have managed a total of 15 days vacancy over 5 years between 3 units.

4. Allocate a percentage of the property to personal and investment. In my case with a 3 unit I do 1/3 personal and 2/3 investment. Any expenses incurred for the property as a whole go in as a 2/3 depreciation (whole house systems, yard improvements/maintenance, exterior improvements, etc.).

5. Diligently save/document and expenses incurred improving your unit and the property. When you move out and rent the final unit you can begin depreciating these expenses as if it was day 1. In my example, I have spent $125k on improvements to the property as a whole. Approximately $25k of that was spent on the rented units, $30k on the property, and $70k on my unit. I have already begun depreciating the $25k plus 2/3rd of the $30k, but haven't been able to claim any of the remaining $10k + $70k. That means that when I move out and rent my unit I can add $80k to my depreciation schedule. I track everything in an excel sheet and save all my receipts in annual folders.

Disclaimer: I am not a professional and this is really opinion so please fact check me before making your own decisions.


Good luck, nothing like having somebody else pay your mortgage :)

-Tim



rothwem

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Re: Accounting questions for owner occupied multi family property
« Reply #4 on: May 18, 2017, 06:27:11 AM »

1. Purchase the property under an LLC to begin with. I didn't do that and I now regret it. If I wanted to roll it into an LLC now I believe I would need to pay the 1.5% transfer tax. The LLC origination fee is quite small and will provide you with additional protections should you move on and buy more properties in the future (as in my case). Also helps keep things organized from a personal finance perspective.


Its my understanding that its incredibly hard to get a loan in a new LLC's name, since the bank wants to be protected.  If you're paying with cash, that's a different story, but most people don't house hack with cash. 

CareCPA

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Re: Accounting questions for owner occupied multi family property
« Reply #5 on: May 18, 2017, 07:17:59 AM »

1. Purchase the property under an LLC to begin with. I didn't do that and I now regret it. If I wanted to roll it into an LLC now I believe I would need to pay the 1.5% transfer tax. The LLC origination fee is quite small and will provide you with additional protections should you move on and buy more properties in the future (as in my case). Also helps keep things organized from a personal finance perspective.


Its my understanding that its incredibly hard to get a loan in a new LLC's name, since the bank wants to be protected.  If you're paying with cash, that's a different story, but most people don't house hack with cash.
It depends. Local banks are going to be your best bet. I was able to get a loan on two non-owner-occupied rentals with a brand new LLC through a local bank. I had zero banking history with this bank, too.
Obviously we had to personally guarantee the loan, but you would want to have the basis anyway if you're taking rental losses.

Cwadda

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Re: Accounting questions for owner occupied multi family property
« Reply #6 on: May 18, 2017, 07:45:59 AM »
Would the LLC fly by an FHA loan too? I'm doing FHA 3.5% down.

CareCPA

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Re: Accounting questions for owner occupied multi family property
« Reply #7 on: May 18, 2017, 07:55:19 AM »
I believe FHA needs to be in your name - one of the major limitations of buying in and LLC is that you have to shop commercial mortgages instead of individual options. This often raises your interest rate and limits your options.
If you are going with FHA, I would probably scrap the LLC idea and just make sure you have good insurance. Quit claiming into an LLC is beyond my risk tolerance.

rothwem

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Re: Accounting questions for owner occupied multi family property
« Reply #8 on: May 18, 2017, 09:39:21 AM »
Obviously we had to personally guarantee the loan, but you would want to have the basis anyway if you're taking rental losses.

Why bother then?

CareCPA

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Re: Accounting questions for owner occupied multi family property
« Reply #9 on: May 18, 2017, 09:44:53 AM »
Obviously we had to personally guarantee the loan, but you would want to have the basis anyway if you're taking rental losses.

Why bother then?
We weren't a single-member LLC, it was a partnership.

Midwest

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Re: Accounting questions for owner occupied multi family property
« Reply #10 on: May 18, 2017, 09:55:21 AM »
Obviously we had to personally guarantee the loan, but you would want to have the basis anyway if you're taking rental losses.

Why bother then?

Not a lawyer - LLC's, corps, etc help protect your personal assets.  If the tenant slips and falls and the property is in your name, all your assets are at risk.  If property is in an LLC, it makes it more difficult to get to your personal assets.

live-fi-or-die

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Re: Accounting questions for owner occupied multi family property
« Reply #11 on: May 26, 2017, 05:46:06 PM »
Exactly, the LLC is not about protecting against any type of default. It is personal protection of your personal assets. Having to guarantee the loan would not cross that line I do not believe.

I am not a professional as well, but my basic thought is that if you intend on owning multiple properties, it can be beneficial to silo them off in order to mitigate the risk. Of course, purchasing a shit load of liability insurance could do the same thing, but who likes giving money to those guys...

Not the end of the world, but I do wish that my current property were in an LLC as I am currently in the market for the next purchase.