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How to Approach Buying Your First Investment Property

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You’ve probably heard that investment properties can provide a stream of passive income. While that may sound like easy money, there’s actually a lot of work involved in property investments. Before diving in headfirst, find out what you should do below.

Consider the Work Involved

Owning an investment property takes just as much work, if not more, than having your own home. If you choose to rent out the property, you’re responsible for covering just about everything a landlord covers when they rent out an apartment. If you aren’t prepared, the amount of work can quickly overwhelm you.

For that reason, many investors choose to hire a professional management company. A good company will offer local support whenever you need it, in addition to handling every aspect of running the property. By outsourcing your management, you don’t have to worry about routine home maintenance and dealing with tenants.

Beef Up Your Savings

If you currently have your own mortgage, then you already know how expensive it is to own a home. Even though you hope your investment property will generate some extra income, there are still a lot of expenses.

To start, you have to make a substantial down payment. Lenders usually want at least 25 percent down, which is a lot more than the standard 5 percent minimum for primary residences. So if you’re buying a second home in White Plains, you could easily have to put down more than $100,000 with home sales averaging $462,000 in the area.

If you have the cash needed to buy a home outright, you won’t need to worry about financing the purchase. However, there are still operating expenses. It’s a good idea to build a strong financial cushion to cover things such as routine maintenance and unexpected repairs. Having a good budget and a strong understanding of your cash flow is critical.

Start Small

It’s all too easy to bite off more than you can chew with your first investment property. For example, buying a home that needs major repairs can seriously hamper your ability to make money quickly.

There’s no rule against buying a fixer-upper for your first investment, but you have to think about how long it will take to get the home move-in ready. According to the House Flipping Academy, it can take three months to fix cosmetic repairs throughout the whole house, and up to one year to do a complete renovation. Consider the fact that you’ll be missing out on any potential rental income for that period of time. When you’re just starting out, it might be better to get a home that only needs one or two updates.

Choose a Property Wisely

When picking a home, be sure to think about your long-term goals. Will you hold onto it until you can sell it for profit? Or will you rent it out to families or vacationers? There are pros and cons to each decision. A residential rental property will need to be located in a neighborhood that attracts families or young professionals. A vacation property, on the other hand, should be in an area where people are going to actually want to book short-term rentals.

If you’re thinking about getting a vacation property, be aware that some cities are cracking down on the short-term rental industry. Always check local regulations before making a decision. And keep in mind that laws may change, potentially killing your idea for a successful short-term rental property.

If done right, property investment can be incredibly profitable whether you choose to rent out the home or sell it for profit at a later date. By having enough financial cushion, having a management plan in place, and choosing a property with a lot of potential, you’ll greatly improve your chances of success.

How to choose the right tax accountant

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A quality tax preparing accountant saves you time and money. In today’s post, we look into how you can pick the best accountant for your business or personal tax needs.

Ask For Recommendations

Many of your peers have accountants. Ask them where they go. Why?

Because, like any professional, most accountants have particular niches. They might specialize in helping freelancers with their taxes or focus on sorting the finances of a larger corporation.

Asking your peers is the easiest way to sort through the clutter to find an accountant. Imagine you wanted to find a doctor for your foot pain. You likely want a doctor that specializes in foot pain instead of one that specializes in hands.

It’s no different with accountants. Ask around; the best recommendations come from satisfied customers that have a similar set of needs as your own.

Prioritize Location

You want someone who understands your tax situation and can handle everything you may throw at them.

This is easier if you can communicate with them face to face. Sure, you could work with someone remotely and they might be able to help you figure out your taxes, but especially for freelancers and those in similarly complicated tax situations

Find Out If They’re Qualified 

So how do you find out your potential accountant’s qualifications?

Start by asking for a Preparer Tax Identification Number. Anyone who prepares or assists in preparing federal tax returns for money must have a PTIN. Not only does this help you determine your potential preparer’s qualifications, but also, that number is required in order for the accountant to file your taxes on your behalf.

Now, it isn’t that hard to get a PTIN, so you’ll want to ensure that your potential tax preparer has one of the following qualifications:

  • CPA – Certified Public Accountant

  • Law license

  • Enrolled agent designation

Be sure that your accountant, at a minimum, has a Certified Public Accountant (CPA) license. Even though it is technically not a requirement, the process of getting a CPA license is reasonably strict and requires that your accountant have a bachelor’s degree to even sit for the exam. If you happen to get audited, you’ll need a tax preparer with one of the above qualifications  for them to represent you if you get audited

Beyond the  PTIN number, degrees, and certification, you’ll also want to know how many years of experience they have filing taxes.

If you have a simple return, you require less experience. For those with complicated or unclear tax returns, you’ll want someone who has been navigating the system for longer.

Find Out How Much It’ll Cost You  

The average accountant can cost between $100 and $175 an hour.

That can be a lot for a small business owner or freelancer. There are some things you’ll want to ask about before meeting with an accountant. In 2018, the average fee for preparing a tax return including an itemized Form 1040 with Schedule A and state tax return was $294.

Most of the best accountants charge an hourly rate but will look over your prior year’s taxes for free, or offer you a free consultation to start. Take these offers, as they will help you select the right fit for your tax needs.

Also, note their hourly rate if you get audited. You can expect to pay a qualified accountant $150/ hour to represent you if you’re audited.

Ensure They’ll E-File  

This is simple. Every accountant should be e-filing at this point. The IRS requires any paid preparer to e-file if they do more than 10 returns. If they aren’t e-filing, maybe they’re not as experienced as you would like.

Should you itemize this tax season? Some important things to keep in mind for 2020.

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Should you itemize this tax season? That is a common question for many taxpayers this season. Are you holding off seeing an accountant because you aren’t sure whether or not you will need to itemize?

I’m sorry to tell you, the only way you’ll truly know whether or not you should itemize is to ask a tax professional. But since (good) accountants charge by the hour, you might want to prepare the proper documentation before you step foot into an accountant’s office.

That’s understandable. We’ll help you navigate the big questions of deductions and whether or not you should itemize your tax return for the 2019 tax season. Then we’ll instruct you as to what types of documentation you’ll need to collect if you do decide to itemize.

Should you take the standard deduction? 

For the 2019 tax season, the standard deduction is up to $12,200 for a single person. This means most taxpayers are going to take the standard deduction.

Here is a chart breaking down both the standard deduction for the 2019 tax season (the taxes you’re currently prepping) and the 2020 tax season (next year’s tax return).

Status

2019

2020

Married Filing Jointly

$24,400

$24,800

Head of Household

$18,350

$18,650

Single

$12,200

$12,400

Married Filing Separately

$12,200

$12,400

If you’re wondering what makes this number change year to year, you can blame tax changes (the 2018 Tax Cuts & Jobs Act bumped the standard single person deduction from $6,000 to $12,000) and inflation.  Congress adjusts the amount of the standard deduction to accommodate inflation.

The big boost in the standard deduction means that anywhere between 85 and 95% of taxpayers won’t need to itemize. We’ll help you determine if you’re part of that approximately 13% that the IRS estimates will itemize for the 2019 tax season.

How do you know if you should itemize? 

You’ll have to add it up.

Check your filing status (and the filing status of a spouse or any dependents). Find out what the standard deduction is for your status. Then add up all your expenses and see if you come in under, close to, or over the standard deduction.

A good accountant would help you maximize what you can write off, but you can get a gist of what you’ll need if you prepare ahead of time.

Start by finding out if you can itemize these 4 major deductions:

  • Charitable contributions

  • Medical Expenses

  • Mortgage interest

  • State and local taxes (think property and sales tax)

Medical expenses and mortgage interest alone might be high enough to put you over the threshold.  If you haven’t made it over the approximate $12k yet, continue by assessing how much you can deduct from these expenses:

  • Casualty, disaster and theft losses

  • Business expenses

  • Tax preparation fees

  • Investment interest

  • Mileage on a vehicle

  • Home office deductions

This covers a lot of areas where you might commonly receive a deduction.  The business deduction point will be a particularly tricky one if you aren’t strict about your record-keeping.

Remember, you don’ t need to get an exact count, you just need to get a rough idea of what you’ll need. That way you spend less time in the accountant’s office and more time doing what you do best.

Who might want to itemize? 

If you aren’t into adding up all the numbers, here are some categories of person who might want to itemize:

  • You run your own business – You have to spend money to make money, which means you’re making less money than it looks like on paper.

  • You have a high-interest rate on your mortgage.

  • You had a lot of medical expenses in the past year.

  • You pay for your own healthcare out of pocket.

If you’re even questioning whether or not you meet the threshold to itemize, its time to schedule a meeting with an accountant. This post helped you determine whether or not your tax situation might warrant itemizing deductions, now talk to your local tax advisor to find out for certain.

 

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.