Tips For Keeping More Renters

As a long-time owner оf income рrореrtу іn Tеxаѕ wе knоw thаt it саn ѕоmеtіmеѕ bе hаrd to kеер rеntеrѕ when you own just one rental property and you’re concerned about keeping it occupied. 

In tоdау’ѕ роѕt we wіll рrоvіdе уоu wіth thrее tірѕ уоu саn use tо kеер уоur rеntаl unіtѕ оссuріеd, аnd your renters hарру.

Tір 1 – Uрdаtе Yоur Rental Properties

Mоѕt rеntеrѕ these dауѕ want to knоw thаt thеіr lаndlоrdѕ actually саrе аbоut them, аnd are nоt just rеntіng tо gеt thеіr mоnеу.

You can kеер your renters happy bу updating уоur rental units.

Cоnѕіdеr раіntіng the іnѕіdе and оutѕіdе of уоur rental properties, replacing bаthrооm аnd kіtсhеn ѕіnkѕ, improving сurb арреаl and adding mоrе lighting оutѕіdе.

Tір 2 – Make It Eаѕіеr Fоr Tеnаntѕ to Cоntасt Yоu

Offеr your renters more wауѕ to соntасt you іnсludіng bу уоur mоbіlе рhоnе оr email.

Most renters won’t bе саllіng, texting оr еmаіlіng уоu 24-7, but they will lіkе tо hаvе thе соnfіdеnсе іn knоwіng they саn rеасh you should thеу hаvе a question, соnсеrn оr рrоblеm which needs tо be resolved.

It’ѕ also іmроrtаnt tо соnѕіdеr оffеrіng уоur tenants thе аbіlіtу to рау their rents оnlіnе vіа уоur website оr a 3rd раrtу рауmеnt рlаtfоrm ѕо you саn ѕрееd uр thе рrосеѕѕ оf gеttіng раіd аnd won’t have to deal with thе age оld рrоblеm оf соllесtіng сhесkѕ from уоur tеnаntѕ.

Tip 3 – Offer Perks Fоr Tenants Whо Renew Thеіr Leases

Lаѕt оf аll, уоu ѕhоuld consider оffеrіng реrkѕ tо tеnаntѕ whо are соnѕіdеrіng renewing thеіr lеаѕеѕ.

Sоmе реrkѕ to consider оffеrіng аrе: 3-6 mоnth gуm mеmbеrѕhірѕ, rеѕtаurаnt gіft саrdѕ, basic ѕаtеllіtе TV or Wі-Fі fоr 6 mоnthѕ оr free rеnt fоr one month.

At Vеѕtрrо wе knоw that sometimes уоu dоn’t hаvе thе tіmе оr еnеrgу tо fосuѕ on kееріng уоur tenants ѕаtіѕfіеd and that’s whеrе we come in.

Wіth our full ѕuіtе оf rental services we саn help уоu run аn еffісіеnt рrореrtу mаnаgеmеnt business.

Contact Vestpro Residential Services

For mоrе іnfоrmаtіоn on the rеntеrѕ ѕеrvісеѕ wе саn оffеr уоu contact uѕ today bу calling (832)  971-1841 оr сlісk hеrе tо соntасt us thrоugh оur wеbѕіtе.

Post-Hurricane Harvey – Does the Houston Area Hold Opportunity for Investors?

By Vestpro Residential Services

There’s no doubt that Hurricane Harvey was one of the worst hurricanes that the Houston area has ever seen and one of the top natural disaster to strike the United States.

Now that it’s almost been one year since Hurricane Harvey it’s the perfect time to look back on the effects of the disaster and ask if the Houston area hold opportunity for investors? The answer is yes.

Hundreds of Millions Being Spent on The Houston Area

Investors large and small are snapping up thousands of properties flooded by Hurricane Harvey. From billion-dollar Wall Street funds to mom-and-pop flippers, they’ve already purchased at least 5,500 flooded homes, often for dimes on the dollar.

 In the process, they are transforming some Houston neighborhoods into block after block of rentals. They’re interrupting county plans to buy out flood-prone properties. And they’re leaning on the taxpayer-funded National Flood Insurance Program to protect them from future floods.

 “All we’re doing is perpetuating a cycle of flooding,” said Harris County Flood Control District operations chief Matt Zeve.

 Small and mid-sized private companies have dominated the post-Harvey market so far, some sending in executives from California, Colorado and Las Vegas. But now institutional funds, which woo wealthy investors with promises of double-digit returns, are dipping their toes in the water, too.

 The $4.6 billion Tricon Capital Group, of Toronto, wants to spend $600 million in Texas before the end of next year, according to area brokers trying to persuade the company to buy flooded homes in Houston. A $30 billion New York City private equity firm, Cerberus Capital Management, has picked up at least a dozen flooded homes among 980 it purchased after Harvey. A California firm, B&P Investment Group, is looking to spend $400 million, targeting homes flooded by the release of water from northwest Houston’s Addick’s and Barker reservoirs.

 “Four hundred million is a lot of money,” said Ryan Pina, president of the Orange County-based B&P. “We’re looking to go in and essentially rehab the city of Houston, bit by bit.”

Get Property Management Here

For property management in the Houston area contact Vestpo Residential Services at (832) 971-1841 or click here to connect with us online.

3 Things to Know About Investing in Houston Texas Single Family Homes

 

By VestPro Residential Services

Are you planning on investing in Houston Texas Single Family Homes? If so, you’ve come to the right place!

Now is a great time to invest in rental properties in the Houston area because mortgage interest rates are still historically low while demand for rentals is high.

If you’re ready to make an investment in single family homes, this article will provide you with tips you can use to do it effectively.

Know your investing criteria first

With any investment, be it stocks, bonds or real estate, you need to know what your objectives are. If you’re focused on safety and security, consider exploring low-risk investment homes that generate steady, reliable yield. An example of this may be a more expensive investment property in a good school district. You’re going to get a lower yield, but you may see better downside protection and less volatility. If you have a longer-term horizon or you’re seeking higher returns, you may want to take on a little more risk. Often, lower-priced homes will be riskier, but you may get higher yields and potentially higher long-term returns.

Don’t limit your investment property search to where you live

Consider this: If you lived in Atlanta, you wouldn’t buy Coca-Cola stock simply because its headquarters are local. The same principle applies to real estate investing. If your primary residence, income property, and job are all located in the same area, you have a lot of concentrated risk and are more vulnerable to the swings of the local economy. At my company Roofstock, an online marketplace for buying and selling leased single-family rental homes, we encourage people to spread risk by investing in markets outside of where they live. (Hiring a local property manager is key here.)

Diversification is just one reason to expand your investment property search. Another is access: If you live in an expensive urban or coastal area with relatively high home prices — the San Francisco Bay Area, for instance — finding an income property that’s cash-flow positive is going to be challenging, to say the least. You won’t be able to find a great income property for $100,000 in Seattle, Denver, or Oakland, Calif., but you can if the focus on the Midwest, South, and Southeast.  

Separate investing from operations

One of the appeals of investing in single-family rental homes is you can hire strong local property management firms to handle day-to-day management tasks of rent collection, repairs and maintenance, and leasing. Over the past several years, property managers have adopted new technologies and business processes to manage homes more effectively for owners.

While some people do choose to self-manage, hiring a property manager can save you a lot of time and potentially money in the long run. While property management companies typically charge between 7% and 8% of the rent, they manage properties for a living and can work to ensure the property is leased, in good condition, and the tenants are happy. Additionally, using a local property manager effectively allows you to buy properties outside of where you live, as self-managing is difficult if the property is not nearby.

Get Property Management Here

For effective property management contact Vestpro Residential Services at (832) 971-1841 or click here to connect with us online.

 

Has Your Rental Property become A 2nd Job? Hire A Property Manager Today

By VestPro Residential Services

Did you recently purchase a rental property but found that it’s turning into a 2nd or 3rd job? If so, instead of continuing to overwork yourself and staying frustrated with your rental property why not hire a property management company instead?

A Property Manager Will Save You Time and Money

Hiring a property management company will save you the time, money and hassle of managing your rental property yourself.

Our team of experts has skills in every major field including maintenance, rent collection, tenant placement and customer service to ensure that you and your tenants always receive the very best service on a monthly basis, for a great price!

When you hire us to be your Property Manager you can count on us to provide you with a full suite of property management services including:

Tenant Screening

Tenant Placement

Rent Collection

Customer Service

Maintenance

And More!

Imagine no longer having to take calls from tenants at night, or on weekends! When you hire us to be your Kingwood Property Manager you can count on us to provide you with reliable service at excellent prices every time!

Get Back to Enjoying the ROI from Your Rental

As a top property manager in the Houston Texas area, our primary goal is to get you back to enjoying the Return on Investment (ROI) from your rental property once again so you can relax and have the time to grow your portfolio of rental properties.

To learn more about the services we can offer you contact us at (831) 498-0016 or click here to connect with us online.

What Is The Snowball Affect? How Can You Use It To Buy More Rentals?

Are you planing on buying your first rental in the Houston Texas area? If so, you’ve come to the right place!

In this article we will explain the importance of the “snowball affect” and how you can use it to grow your portfolio of rental properties

What Is The Snowball Affect?

Metaphorically, a snowball effect[1] is a process that starts from an initial state of small significance and builds upon itself, becoming larger (graver, more serious), and also perhaps potentially dangerous or disastrous (a vicious circle), though it might be beneficial instead (a virtuous circle). This is a cliché in cartoons and modern theatrics and it is also used in psychology. – Wikipedia

Snowball Effect Explained

The “snowball” affect was coined by Berkshire Hathaway CEO Warren Buffett in his 2008 book called The Snowball which is about his life and investments which enabled him to build a network of well over $72 billion dollars.

Snowball basically refers to the principal of buying and holding onto your investment over time and then using your return on investment to invest more money to build your portfolio.

Snowball Effect in Real Estate Investing

Let’s say that you’re able to buy two Houston Texas Rental Properties and after expenses both properties will net you about $500 each per month, or an additional $12,000 of cash flow per year.

Now instead of spending that cash flow from your investments like most people will do you should consider saving the cash flow from your rental properties and within two years you will have enough money saved to put down on another Houston Texas Rental Property.

How the Snowball Effect Benefits You

One of the great things about the snowball effect is that if you follow this approach you would be able to buy a new rental property once a year, instead every two years, grow your portfolio, and have significant amount of cash flow coming in by the time you approach retirement.

Buy Houston Texas Rental Property

For more tips on buying Houston Texas Rental Property, or to speak with us about our property management services, contact Vestpro Residential Services, LLC today by clicking here or calling us at (832) 498-0016.

Did You Just Buy Your First Houston Texas Rental? Click Here For Property Management Tips

There’s no doubt that owning a Houston Texas Rental Property is a great investment, especially over the last four years as Houston has been one of the fastest growing cities for relocation in the United States.

If you own Houston Rentals, getting started as a landlord can be tough because there’s so much to learn. Thankfully, you can cut down on the learning curve by following these tips.

1. Screen Tenants

Don’t rent to anyone before checking credit history, references, and background. Haphazard screening and tenant selection too often results in problems — a tenant who pays the rent late or not at all, trashes your place, or lets undesirable friends move in. Use a written rental application to properly screen your tenants. For more information, see How to Screen and Select Tenants FAQ.

2. Get it in writing.

Be sure to use a written lease or month-to-month rental agreement to document the important facts of your relationship with your tenants — including when and how you handle tenant complaints and repair problems, notice you must give to enter a tenant’s apartment, and the like. For what to include in a lease or rental agreement, see Ten Terms You Must Include in Your Lease or Rental Agreement. Not sure which to use? See Whether to Use a Lease or Rental Agreement.

3. Handle security deposits properly.

Establish a fair system of setting, collecting, holding, and returning security deposits. Inspect and document the condition of the rental unit before the tenant moves in, to avoid disputes over security deposits when the tenant moves out. For more information, see Leases and Rental Agreements FAQ.

4. Make repairs.

Stay on top of maintenance and repair needs and make repairs when requested. If the property is not kept in good repair, you’ll alienate good tenants, and tenants may gain the right to withhold rent, repair the problem and deduct the cost from the rent, sue for injuries caused by defective conditions, and/or move out without needing to give notice. For more information, see Repairs, Maintenance, and Entry to Rented Premises.

5. Provide secure premises.

Don’t let your tenants and property be easy marks for a criminal. Assess your property’s security and take reasonable steps to protect it. Often the best measures, such as proper lights and trimmed landscaping, are not that expensive. For more information, see Criminal Acts and Activities: Landlord Liability FAQ.

6. Provide notice before entering.

Learn about your tenants’ rights to privacy; see Repairs, Maintenance, and Entry to Rented Premises. Notify your tenants whenever you plan to enter their rental unit, and provide as much notice as possible, at least 24 hours or the minimum amount required by state law. For state-by-state information, see Chart: Notice Requirements to Enter Rental Property, State by State.

7. Disclose environmental hazards.

If there’s a hazard such as lead or mold on the property, tell your tenants. Landlords are increasingly being held liable for tenant health problems resulting from exposure to environmental toxins in the rental premises. For more information on lead, see Lead Disclosures for Rental Property FAQ. Check your state law for other landlord disclosures. – Learn more here!

Most Important Tip For New Landlords

Besides the excellent tips mentioned in this article, the most important tip for new landlords is to invest in property management sooner, rather than later.

Hiring an experienced property manager will save you the time, money and hassle of managing your rental properties yourself.

To learn more about the professional property management services we can offer you contact us today by calling (832) 971-1841 or click here to connect with us online.

How to reduce late payments at your Houston Texas rental property

By Vestpro Residential Services

There’s no doubt that late payments will hurt any owner regardless if they’re just getting started with owning rentals, or they’ve owned them for years.

The truth is that most owners rely on the rent that they receive from their tenants to pay their mortgages so when a tenant is late paying their rent this means that the owner will have to pay their mortgage out of pocket.

What’s the solution to the problem?

Owners must reduce their late payments and getting started with this is easy especially when the steps listed in this article are followed.

How To Reduce Late Payments

Enable Electronic Payments

We’re a big fan of software that allows residents to make payments online, such as many property management software solutions. In this day and age, we’re all busy. Having to physically write a check, track down a stamp, and trek to the post office to mail a payment is a hassle. Some will certainly prefer to make payments that way; but if you want to collect payments on time, leveraging electronic payments will make it easier for you to do so.

Improve Your Resident Screening Process

There will always be one-off cases of residents paying late. However, if you find that multiple residents are making late payments more often than not, it could mean that your tenant screening process is in need of a few tweaks. Be sure that you’re calling landlord references, confirming proof of employment, setting guidelines for minimum income required to lease, etc. This should help to ensure that you’re choosing high-quality residents who can afford to make their payments each month.

Hire a Property Manager

If you’re struggling to collect rent payments and dues, or you simply don’t have the time or energy to track down late payments, consider hiring a property manager. Hiring an experienced property manager can help you to implement a stronger payment system to ensure consistent cash flow moving forward, and can provide valuable expertise on these kinds of situations in the future.

Get Property Management Here

For professional property management contact us today by calling 832-971-1841 or click here to connect with us online.

 

late payments
Avoid late payments at your rental property when you work with Vestpro Residential services!

Enjoy The Tax Benefits Of Renting Your Home During Special Events

 

Are you planning on going on vacation this year? If so, you might want to wait to go on vacation during an annual event in the Houston area.

You may be able to rent your home for more money while a special event is in progress like Comicpalooza because more people will be in town during the week of that event and willing to pay higher rental rates.

Could Be Tax Free Income

Homeowners go on vacation and make tax-free income while temporary tenants rent their home. Homeowners can benefit from a little known provision in the tax code that does not require taxpayers to recognize the income derived from renting their home for less than 15 days per year. See Plan Ahead for Tax Time When Renting Out Residential or Vacation Property- special rules.

This situation can particularly benefit homeowners where there are large sporting events nearby like golf and tennis tournaments, championship games or other high attendance venues. The demand for a private residence can be more attractive than staying in a hotel which makes the price go up.

Obviously, there are challenges with personal belongings and damage but getting a premium rental rate and not having to recognize the income could be worth it. You’ll certainly want to discuss this with your tax professional prior to making this decision. You’d probably also want to get some help from an experienced real estate professional.

Source – In Touch Weekly

Get Houston Texas Property Management

For professional property management in the Houston Texas area contact us today by calling (832) 971-1841 or click here to connect with us online.

 

 

5 Tips for a Low Stress First Rental Property Investment

Tip #1: Advice is OK, but Do Your Own Research

Take courses, read investment books, go to a seminar, or any other learning process that helps you to gain confidence to make decisions. I suggest that any books, courses or seminars be about how to select locations, value properties and evaluate the rental market. Your success will be based on your due diligence and most of all buying right in the right area.

Your first rental property investment is best done in your area of residence, where you know what’s going on economically. You want to know that the economy will support today’s decision into the future, as this isn’t a short term strategy. Understand who the major employers are, what drives people to move in or move away, and if things look good into the near future.

Tip #2: Don’t Just Rely on Real Estate Agents

Sure, now and then you can work with a real estate agent who handles foreclosures and get a good deal. Remember though that these will be “listed” foreclosures on the MLS, Multiple Listing Service. You and all of your competitor investors have access to the same information, so competition will likely drive up your cost of acquisition.

If you do your own marketing and locate motivated sellers, you have a greater chance of negotiation a good deal. Another approach is to work with an experienced real estate wholesaler. They are investors too, but they are experts and finding great deals that they can flip to rental property buyers at a below-market value price. Just check their references out and be sure they do know what they’re doing.

Tip #3: Know What Will Rent and for How Much

Check with property managers who handle single family homes. Go to the classifieds and check out what homes similar to the one you’re considering are renting for. Are the owners offering incentives like free months? This is usually a sign of a soft rental market or heavy competition, so you may want to try another neighborhood or property type.

Call on ads, drive around, talk to landlords as if you’re a tenant. The most important thing for you to know before the next tip is what you can reasonably and conservatively expect for rental income and low vacancy.

Tip #4: Get the Right Financing & Cash Flow

You need to know all of your costs, including estimating repairs and other maintenance costs. But, the mortgage is going to be your largest cash outlay, so it is your most important cost consideration. You’ll need to put 20% down or more in most cases. For a rental unit you may also pay a slightly higher mortgage interest rate. A great credit history helps in this regard.

Get a firm handle on all of your costs, then see what your mortgage payment with taxes and insurance escrowed will be. Let’s use an example of a $150,000 home with a $32,500 down payment and closing costs. If you can manage to clear even $250/month over cash out of pocket, your return on the actual cash invested is going to be around 9%.

Tip #5: Lock in Equity at the Closing Table

NEVER buy at retail market value. If you can’t get the home at a 10-20% discount to its current market value, don’t do the deal. You want to leave the closing table with that equity as either future profit or a cushion should you have to sell before your initially planned liquidation date.

If you’re going to work with a wholesaler who you may meet at a local investment club, be clear that you’ll want to see their valuation calcs and you’ll check them with your own. You give them your requirement. If it’s 15% below market value, then they will know what they have to deliver.

You’re in control here, and you don’t have to make a deal until you know it’s going to be a great investment.

Get Property Management Here

For professional property management in the Houston Texas area contact Vestpro Residential Services at (832) 498-0016 or click here to connect with us online. 

What tax impact will disasters have for Houston rental property owners?

Once it’s finished, 2017 will be remembered as one of the toughest years in recent memory especially thanks to Hurricane Harvey which formed on August 17th, carving a path of destruction in Houston and along the Gulf Coast until it dissipated on September 3rd.

What Tax Impact Will Natural Disasters Have For Property Owners In Houston?

When a major disaster occurs, the IRS normally tries to help the victims out by extending tax deadlines. After all, no one wants to have to worry about making tax payments or filing returns while their property is underwater or destroyed by a fire. For example, victims of Hurricanes Harvey, Irma, and Maria will not be required to make most types of tax payments and filings until January 31, 2018.

The IRS automatically identifies taxpayers located in a covered disaster area and applies the extended deadlines. Thus, to benefit from the extended deadlines, your rental property simply has to be located in a federally declared major disaster area. There is no need to ask the IRS for a deadline extension. You can determine if an area has been declared a disaster area by checking the FEMA website.

Deducting Losses from a Disaster

Insurance is always the first line of financial defense when disasters occur. However, not all rental properties are fully covered for losses due to natural disasters. Some types of losses may not be covered at all. For example, losses due to floods, hurricanes, and earthquakes may not be covered unless the property owner has obtained a supplemental policy. Even if a loss is covered, the property owner may still have to pay for part of the cost of repairing or replacing the rental property.

Fortunately, any uninsured casualty losses are deductible by rental property owners, subject to certain limitations. A “casualty” is damage, destruction, or loss of property due to an event that is sudden, unexpected, or unusual. Deductible casualty losses can result from many different causes, including (but not limited to):

  • Earthquakes
  • Fires
  • Floods
  • Government-ordered demolition or relocation of a building that is unsafe to use because of a disaster
  • Landslides
  • Sonic booms
  • Storms, including hurricanes and tornadoes
  • Terrorist attacks
  • Vandalism, including vandalism to rental properties by tenants
  • Volcanic eruptions

One thing that all of the events in the above list have in common is that they are sudden—they happen quickly. Suddenness is the hallmark of a casualty loss. Thus, loss of property due to slow, progressive deterioration is not deductible as a casualty loss. For example, the steady weakening or deterioration of a rental building due to normal wind and weather conditions is not a deductible casualty loss.

The Role of Insurance After a Disaster

A rental property owner may take a deduction for casualty losses only to the extent that the loss is not covered by insurance. If the loss is fully covered, there is no deduction. A property owner can’t avoid this rule by not filing an insurance claim. Indeed, a timely insurance claim must be filed, even if it will result in cancellation of the property owner’s policy or an increase in premiums.

The amount of the claimed casualty loss must be reduced by any insurance recovery received, or reasonably expected to be received if it hasn’t yet been paid. If it later turns out that the property owner receives less insurance than expected, the owner can deduct the amount the following year. If the owner receives more insurance payments than expected, the extra amount is included as income for the year in which it is received.

Amount of Casualty Loss Deduction

How much a rental property owner may deduct depends on whether the property was completely or partially destroyed.

If the property is completely destroyed (or stolen), the deduction is calculated as follows:

Adjusted basis – salvage value– insurance proceeds = Deductible loss

Adjusted basis is the property’s original cost, plus the value of any improvements, minus any deductions taken for depreciation or Section 179 expensing. The adjusted basis for rental buildings, land improvements, and landscaping are each determined separately. Adjusted basis should be easily found from a rental property’s depreciation schedules and/or tax returns filed for the property. Salvage value is the value of whatever remains after the property 
is destroyed; in cases of total destruction, this is often nothing.

If the rental property is not completely destroyed, the amount of the casualty loss is the lesser of 1. The property’s adjusted basis or 2. The decrease in the fair market value of the property due to the casualty, minus any salvage value and insurance proceeds.

An appraisal can be used to determine the reduction in fair market value of partly damaged property, as well as salvage value. Alternatively, the cost of cleaning up or making repairs after a casualty can be used as a measure of the decrease in fair market value if all of the following conditions are met:

  • The repairs are actually made
  • The repairs are necessary to bring the property back to the condition it was in before the casualty
  • The amount spent for repairs is not excessive
  • 
The repairs are for the damage only
  • 
The value of the property after the repairs is not greater than its value before the casualty

The amount of a casualty loss to rental property must be calculated separately for each item that is damaged or destroyed. This may include a rental building, landscaping, and other land improvements apart from the building. However, it is not necessary to separately deduct personal items inside a rental property, such as appliances.

Example of Casualty Losses

John’s rental building suffered wind damage due to a hurricane. The hurricane not only damaged the building, but damaged his landscaping—trees and shrubs—as well. John must separately calculate his casualty loss for the building and
 the landscaping. The adjusted basis of the building is $566,000. The trees and shrubs have an adjusted basis of $10,000. John hires an appraiser who determines that the fair market value of the building immediately before the hurricane was $700,000, and was $650,000 immediately afterwards. The fair market value of the trees and shrubs immediately before the casualty was $4000, and afterwards was $500. John’s insurance did not cover hurricane wind damage, so he expects to receive no insurance proceeds.

John calculates his casualty loss for the building as follows:

  • Adjusted basis of rental building before hurricane: $566,000
  • Fair market value before hurricane: $700,000
  • Fair market value after hurricane: 
$650,000
  • Decrease in fair market value: $50,000
  • Amount of loss (line 1 or line 4, whichever is less): $50,000
  • Insurance reimbursement: 
0
  • Deductible casualty loss = $50,000

John separately calculates his loss for the landscaping as follows:

  • Adjusted basis of landscaping before hurricane: $10,000
  • Fair market value before hurricane: $4,000
  • Fair market value after hurricane: 
$500
  • Decrease in fair market value: $3,500
  • Amount of loss (line 1 or line 4, whichever is less): $3,500
  • Insurance reimbursement: 0
  • Deductible casualty loss 
= $3,500

Deducting Losses in Federal Disaster Areas from Prior Year Taxes

Casualty losses are generally deductible in the year in which the casualty occurs. However, if a deductible casualty loss occurs in an area that is declared a federal disaster by the president, the property owner may elect to deduct the loss for the previous year. This will provide a quick tax refund, since the owner will get back part of the tax paid for the prior year. If the owner already filed the tax return for the prior year, an amended return for the year must be filed.

Casualty Gains

It’s quite common for a rental property owner to have a casualty gain rather than a loss. This occurs when the insurance reimbursement an owner receives exceeds the adjusted basis of a property that has been completely destroyed.

Example of Casualty Gains: Part 1

Sheila owns a rental building with a fair market value of $500,000. After years of depreciation deductions, its adjusted basis is $250,000. The building is totally destroyed in a fire. Sheila receives $480,000 in insurance proceeds. She has a $230,000 casualty gain.

A casualty gain is taxable income. However, the property owner need not pay tax on the gain the year it is received if the owner replaces the destroyed property and the cost exceeds the insurance recovery. Instead, the gain is postponed until the replacement property is ultimately sold or otherwise disposed of. The basis of the replacement property is reduced by the amount of this postponed gain.

To qualify as replacement property, the new property must be similar or related in service or use to the property it replaces. However, the rules are more liberal if the destroyed property was located in a federally declared disaster area. In this event, any replacement property acquired for use in any business is treated as replacement property. Moreover, the replacement property doesn’t have to be located in the federally declared disaster area.

To avoid paying tax on a casualty gain, the property must replaced within two years after the close of the first tax year in which insurance proceeds are received. However, if the property is located in a federally declared disaster are, this period is increased to four years.

The property owner doesn’t have to use the insurance proceeds to acquire the replacement property. Rather, the owner has the option of spending the money they receive from the insurance company for other purposes, and borrowing money to buy replacement property.

Example of Casualty Gains: Part 2

Assume that Sheila uses her $480,000 insurance proceeds to construct a new rental building. The new building cost $600,000. Sheila need not pay any tax on her $230,000 casualty gain since she reinvested her entire gain in replacement property. However, the basis of the new building is reduced by $230,000 to $370,000. This way, tax on the gain will have to be paid when Sheila ultimately disposes of the replacement property.

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