A member of the Southern California News Group papers
●Los Angeles Daily News ●Daily Breeze ●San Bernardino Sun ●Redlands Facts
●Riverside Press-Enterprise ●Pasadena Star-News ●San Gabriel Valley Tribune
●Whittier Daily News ●Inland Valley Daily Bulletin ●Long Beach Press-Telegram
Trump tax law gives landlords 20% tax break
By Jeff Lazerson
What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.
Rate news summary
From Freddie Mac’s weekly survey: The 30-year fixed averaged 4.45 percent, unchanged from the last two weeks. The 15-year fixed rate also remained unchanged, holding at 3.88 percent.
The Mortgage Bankers Association reported a 2.7 percent decrease in loan application volume from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $484,350 loan, last year’s payment was $86 lower than this week’s payment of $2,440.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages at a zero point cost: A 15-year FHA (up to $431,250 in the Inland Empire, up to $484,350 in Los Angeles and Orange counties) at 3.625 percent, a 30-year FHA at 3.75 percent, a 15-year conventional at 3.75 percent, a 30-year conventional at 4.375 percent, a 30-year FHA high-balance (from $484,351 to $726,525 in L.A. and Orange counties only) at 4.125 percent, a 15-year conventional high-balance (also $484,351 to $726,525) at 4.0 percent, a 30-year conventional high-balance at 4.50 percent, a 15-year jumbo (over $726,525) at 4.25 percent and a 30-year jumbo at 4.75 percent.
What I think:
Talk about a mother lode of savings.
Starting with your 2018 federal tax return filing, and so long as you meet certain criteria, you can deduct 20 percent of your real estate rental profits right off the top before calculating your taxes.
So if you made, for example, a $10,000 profit, taxes owed would be calculated on an $8,000 profit.
Last week, the Internal Revenue Service clarified section 199A of the 2017 Trump tax overhaul that offers a plethora of taxpayer benefits to landlords.
Clearly, this is not all-inclusive. Consult your tax advisor for your specific situation.
Even with this new guidance, you first need to deduct what you previously have been entitled to deduct.
There are a few caveats: You are adding up your total annual rents and subtracting your payments and expenses to determine your profits. For example, the interest portion of your mortgage payment is deductible but the principle you pay down is not deductible.
The IRS allows you to depreciate the structure of your rental over 27.5 years on a residential property and over 39 years for a commercial property, according to CPA Warren Hennagin, partner at Marcum LLP. This could boost your deductions.
Typically, your property appraisal will itemize the structure value. A rental in a high-density area on a small lot will have more structural value. Conversely, land value is much higher when it comes to beach-area properties, for example.
Hennagin points out that you also can accelerate depreciation through “cost segregation” studies, which breaks down a property’s value by component.
“Online cost segregation studies are available for as little as $300 for single-family residences,” said Hennagin. “You can accelerate the total depreciation as much 20 percent in the first five years.”
Purchase financing provides for as little as 15 percent down should you be thinking about buying a rental or two. You can even do a 15 percent down interest-only loan to increase your cash-flow and bottom line profit. (Remember principle is not deductible).
In my mortgage originator experience, higher priced Southern California properties typically require 25 or 30 percent down to break-even on newly purchased traditional long-term rentals.
For short-term rentals, a.k.a. Airbnb, if you work it right, you can realize an immediate profit with substantially less down.
As your rentals season over time, profits tend to be much easier to come by. This is because property values and rental rates tend to rise. Your mortgage payment tends to be stable or may decrease as your loan balances decrease on adjustable loans.
Jeff Lazerson - Mortgage Columnist since 2011