Common Issues in Rental Property Management – Disposition of Tenant Property Left Behind

For-Rent-SignYour tenant vacates. You start the process of turning the property around but are astounded to find that the tenant has left behind a couple of car loads of his personal property. What do you do? Short answer: Be careful. Be very, very careful. The problem of seemingly abandoned tenant personal property occurs most commonly when the tenancy has ended on less than favorable terms, usually eviction. In my experience, tenants that leave property behind are the most troublesome ones and the most likely to re-appear in your life.

I have seen landlords and their insurance companies have to pay out big bucks to undeserving tenants because the landlord failed to follow the correct procedure for disposing of the tenants’ personal property. The rickety end table and orphan left tennis shoe may look like junk. And the tenant obviously didn’t care much about it. But that won’t stop the tenant from later claiming in his lawsuit that the flea market possessions which he left strewn about your rental property were really worth a king’s ransom. Follow the correct procedure and protect yourself.

The Rental Property Depreciation Allowance Calculation

DEPRECIATIONRental property depreciation (also known as cost recovery) is one of the biggest tax deduction benefits real estate investors enjoy by owning rental properties.

The beauty of the rental property depreciation allowance lies in the fact that it is simply a “paper loss” the real estate investor can write off during each year the rental property is owned without having to shell a dime from out of pocket.

The investor can legally deduct an amount for depreciation as cost recovery each year from the cash flow he or she collected from the asset during the past twelve months of ownership and therein lower his or her tax liability for that past year. But unlike say, mortgage interest (which is also a legal tax deduction), real estate investors never have to fork out any money for depreciation on rental property.

In this article, we will discuss rental property depreciation; including its concept, limits, application, and formula.

The concept behind a tax depreciation deduction is based upon a principal known as “useful life”. The idea is straightforward. That no matter how grand and prestigious a building may be when it’s constructed, any physical structure does have a physical life and will eventually wear out, deteriorate, or become obsolescent. In other words, brick and mortar is finite and realistically can only last for so many years.

Furthermore (as a result of this deterioration), the owner therefore is suffering a financial loss by owning the property (because it is deteriorating) and as such should be granted the benefit to “recover the cost” from his or her income taxes as a result of the property’s diminishing useful life.

This is the purpose for IRS form 4562. So an owner of rental income property can claim a tax depreciation deduction on any rental properties that he or she has owned for the past twelve months.

Fair enough. So let’s consider some of the limitations the IRS has in place for real estate investors who attempt to get this tax deduction for the rental income properties they own.

In order for a taxpayer to be allowed to take a rental property depreciation deduction, the property must at least meet the following requirements:

 

  • A taxpayer must use the property in business or in an income-producing activity (a personal residence doesn’t count).
  • The property must have a determinable useful life of more than one year.
  • The property cannot be placed in service and disposed of in same year.

 

Likewise, the tax deduction for depreciation only applies to the physical structures (called “improvements”) of the property, not to the land. There is no cost recovery allowance for the value of the land.

What’s more, the depreciation begins when a taxpayer places property in service for use for the production of income (i.e., takes title) and ceases to be depreciable when the taxpayer has fully recovered the property’s cost or other basis or when the taxpayer retires it from service (i.e., transfers title); whichever happens first. In other words, you will not get a tax depreciation deduction for your income property past its “useful life”, nor after you sell it.

Okay, so what does “useful life” signify?

Useful life is a term used by the IRS to specify the number of useful years it attributes to rental property in order to arrive at the depreciation deduction allowable. The useful life is strictly used for tax purposes only, however, and does not necessarily imply the actual physical life expectancy of the physical asset. In this case, the tax code currently regards the useful life for residential property as 27.5 years and for nonresidential property as 39 years.

For instance, a building that derives all or nearly all (80% or more) of its income from dwelling units such as single-family homes, multi-families, apartment buildings, condos and so forth is residential and thus can be depreciated 27.5 years. Property that derives its income from non-residential sources such as offices, retail space and industrial tenants is nonresidential and thus depreciated 39 years.

Here’s the computation.

For our purposes, we will refer to an annual depreciation allowance and ignore what the tax code calls the “mid-month convention.” This convention applies to the year the asset is placed into service and whatever year it is disposed and states that you are allowed to take only one-half of the depreciation normally allowed for whatever month the property is purchased and then subsequently sold. We are dealing only with the depreciation tax allowance taken annually during the holding period in between purchase and sale.

First, determine the depreciable basis. This is essentially the original value of the rental property improvements (remember, you cannot depreciate land). Then divide that depreciable basis by what the current tax code attributes to the rental property’s useful life.

How to Promote Your Rental Properties Online

rental-property-imageOnline marketing has greatly revolutionized the way products and services are sold to consumers. If you are a vacation rental owner, why not grab the advantages offered by online rental properties promotion. Here’s how you can do this.

Your Own Website

It always pays to have a dedicated website. It might be costly to your thinking, but you can actually develop your own rental property website through free services. There are templates you can use guiding you from scratch to finish. The traffic it gets may not be that great at first, but with your efforts, it can be a great reservoir of potential tenants. Enrich the site with great information regarding the property for rent. Enhance it with blog entries, photos of the properties, sponsored property listings, and newsletters.

Listings

Probably one of the best avenues to promote your vacation rental property is through online listings. A lot of them are available from free to costly. Many listing sites allow you to build additional links to your rental property website. It is a good way to harvest potential tenants too.

Craigslist, a free listing site can be set to reach potential tenants that are within your community. Pictures, descriptions, and relevant information about the property for rent should be provided. Take note of when your advertisement will start to show and when it will expire. You have the option to renew the ad when expiration date is reached.

Newsletters

A lot of vacation rental property owners think that newsletters are costly considering the newsletter itself and the channel to distribute it to everyone in your address book. This thinking is certainly wrong. With basic computing and layouting skills, you can make a professionally-looking newsletter through a desktop publishing software. Incorporate useful information. Then, you can send it to potential tenants through your very own mailbox. To save time, you can use mailing list software. Some mailing software offers sending your newsletter or any email message for free when you have less than 2000 contacts in your list. Corresponding prices apply to larger number of contacts.

Social Media

The interconnection of social media platforms to each other created a good venue to advertise your vacation rental property. You can start by creating a fan pages. Establish user curiosity by providing insightful posts about the property. You can upload pictures with focus on its beautiful parts. You can then connect your campaign and let it be seen by your Twitter followers. there are picture-driven social networks which can also help you establish the presence of your property for rent.

Article Submission Platforms

These sites are not really advertisement sites. But with good content submitted, they can be potential tenants’ farm for your rental property. These days, clients have become wiser to seek relevant information first. Provide compelling information such as nearby attractions, restaurants, and shopping sites. Good examples include this site where you are reading this information.