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5 Tax Advantages of Owning Real Estate

4/25/2023

 

Summary

There are many pros and cons of owning real estate that we discuss on Better Life + Finance. Some of our favorite pros to investing in real estate are the tax advantages! We were amazed in our first year of owning our first multifamily property how much our taxes were positively impacted just by owning our home. This article discusses 5 advantages to owning real estate.


Owning real estate can provide several tax advantages, including:
  1. Mortgage Interest Deduction: If you have a mortgage on your property, you can deduct the interest paid on the mortgage from your taxable income. This deduction can be significant, especially in the early years of the mortgage when most of the payment goes towards interest.


  2. Property Tax Deduction: Property owners can also deduct property taxes paid on their real estate from their taxable income. This deduction can also be substantial, especially in areas with high property taxes.


  3. Depreciation Deduction: Another tax advantage of owning real estate is the ability to take a depreciation deduction for the building and improvements on the property. Depreciation is a non-cash expense that reduces your taxable income and can provide significant tax savings over time. This only applies to income producing properties, you cannot depreciate your primary residence. Residential properties are depreciated over 27.5 years - which means that your total basis - or investment - in the building (not the land) gets divided by 27.5 and that amount is deducted from your taxable income each year. For commercial real estate, the timeline is 39 years. 


  4. Capital Gains Tax Exclusion: If you sell your primary residence, you may be eligible for a capital gains tax exclusion of up to $250,000 for an individual or $500,000 for a married couple. This exclusion can be used once every two years, and can provide substantial tax savings.


  5. 1031 Exchange: A 1031 exchange allows real estate investors to defer paying capital gains taxes on the sale of one property if the proceeds are reinvested in a similar property within a specific timeframe. This can provide significant tax savings and allow investors to grow their real estate portfolios without incurring large tax liabilities.


Overall, owning real estate can provide significant tax advantages, but it is essential to consult with a tax professional to understand how these tax benefits apply to your specific situation.

+ Better Tip
When we purchased our first multifamily home, we were referred to a local accountant who works with many real estate investors and owns real estate themselves. We have been working with this CPA ever since and continue to refer our friends and clients to them. We learned that once you add real estate into the mix, personal taxes become a lot more complicated and the opportunities to miss crucial deductions greatly increase. We have peace of mind knowing that a professional is handling the annual documentation of our rental property activities and it is completely worth the cost of the tax service. We keep track of our expenses and income throughout the year and then hand that data off to our CPA and let them work their magic. Our Better Tip? Leave tax returns to the professionals and enjoy your day! 

The Pros and Cons of Renting vs. Buying a Home

4/24/2023

 

Summary

This article discusses the benefits and potential disadvantages of both renting a home and buying a home. ​Renting a home and buying a home each have their own advantages and disadvantages, and ultimately the decision between the two depends on your personal circumstances and priorities.


​Pros of Renting a Home:

  1. No Maintenance Costs: When you rent a home, you're not responsible for any maintenance costs or repairs. This can save you a significant amount of money over time.
  2. Lower Upfront Costs: Renting a home typically requires a lower upfront cost than buying a home. You generally only need to pay a security deposit and first month's rent to move in.
  3. Flexibility: Renting a home gives you more flexibility in terms of moving. If you need to move for work or personal reasons, you can do so relatively easily since you're not tied down to a specific property.

​Cons of Renting a Home:

  1. No Equity Building: When you rent a home, you're essentially paying someone else's mortgage. You don't build equity in the property and you're not building an asset that you can sell in the future.
  2. Lack of Control: When you rent a home, you don't have as much control over the property as you would if you owned it. You can't make major renovations or changes without the landlord's approval, and you may not be able to decorate or personalize the space as much as you would like.
  3. Rent Increases: Rent prices can increase at the end of each lease term, making it difficult to budget for the long term.

​Pros of Buying a Home:

  1. Equity Building: When you buy a home, you're building equity in the property as you pay off the mortgage. This means that you're investing in an asset that you can sell in the future or use to secure a loan.
  2. Control Over the Property: When you own a home, you have complete control over the property. You can make changes and renovations without needing anyone else's approval, and you can decorate and personalize the space to your liking.
  3. Tax Benefits: Owning a home can come with tax benefits, such as the ability to deduct mortgage interest and property taxes from your income taxes.

​​Cons of Buying a Home:

  1. High Upfront Costs: Buying a home typically requires a significant upfront cost, including a down payment, closing costs, and other fees. This can be a barrier to entry for some people.
  2. Maintenance Costs: When you own a home, you're responsible for all maintenance and repair costs. This can be expensive and time-consuming, particularly if something major needs to be fixed.
  3. Lack of Flexibility: When you own a home, it can be more difficult to move since you need to sell the property or rent it out before you can move on. This can be particularly challenging in a slow real estate market.

Overall, the decision to rent or buy a home depends on your financial situation, lifestyle, and priorities. It's important to carefully consider the pros and cons of each option before making a decision.

+ Better Tip
List out your personal and financial goals for the next 5 years. Analyze your current financial situation. See how your goals would either be supported or negatively impacted by the pros and cons of owning or renting. It doesn't hurt to talk to a mortgage loan officer to get a good idea of where you currently stand in terms of mortgage qualification, and certainly discuss if purchasing a multifamily is a possiblity if that would support your financial goals. 

Why I chose to incorporate my small business as an S-Corp.

6/3/2022

 

​Summary

This article discusses the events that lead to me seeking the advice of a CPA (certified public accountant) and deciding to structure my small business as an S-corp. The article also shares the S-Corp benefits that informed my decision to incorporate. Lacking any real business, management or accounting education, earning a small income and being in debt, I failed to make proper quarterly tax payments to the IRS. After two years of poor tax management, I sought the advice of a CPA and learned the benefits to becoming an S-Corp.

by Christian Scully
​

In 2012 I graduated from college with my BFA in advertising photography. Art school is a great place to explore your chosen medium, but tends to not prepare graduates to own and operate their own businesses, which most will attempt to do as freelance artists. The less-exciting details of running a day-to-day business are completely ignored until either the artist finds themselves in trouble, or until the artist decides to do something crazy like apply for a mortgage and they realize some things aren't so simple. My failure definitely applies to anyone starting a business, not only artists. Discuss the following issues with your CPA to avoid my mistake:
​

I started my business with no business, management or tax training.


​So when I started my own business, Design Imaging Studios, little more than a year after graduating, I was not fully prepared. Granted, I had elected to take some courses outside of the photography college on marketing and professional selling. Ironically, I had the foresight to sign up for a business tax course, and after 3 painful classes and 1 demoralizing exam I swiftly replaced that course with something more bearable. Had the course been an approachable run down on the basics of small business tax, perhaps it could have saved me some future trouble. 

Entering 2014 I began operating as a sole proprietorship with a DBA (doing business as...), meaning I could accept payments and market myself as the business name. That first year was a grind, I met with as many potential clients as possible and was managing to make some sales. I was fairly quickly earning more than I was at the one studio job that I had after graduation, but still living week to week. With $50,000+ in student loans, and sporadic income as some months were better than others, and some clients were paying in 30, 60 or 90 days, the money that came in got used up and I failed to make estimated quarterly tax payments. I didn't think much of it, and assumed I would just have to pay a small amount come April 15. ​​
​

I couldn't afford my tax bill and had to initiate an IRS payment plan.


​As April 15 neared, I filed my taxes myself online. I was shown a whopping tax bill (for a 24 year old in debt), including a lovely underpayment penalty. And as I was living week to week and didn't know what I was doing, I did not have a pile of cash set aside for this payment. So I was forced to get on my first payment plan with the IRS. This had me paying the IRS monthly until that debt was cleared (which would take years). The following year I moved to a new city, with a new apartment, trying to do a little better than the year before. While my income increased, so did my expenses. I managed to improve my tax paying skills slightly, but ultimately ended up underpaying for the second year in a row and had my payment plan with the IRS adjusted. This was not sustainable and I knew I needed help. So I reached out to a CPA (certified public accountant).
​

I asked around for a referral to a local CPA, and became an S-Corp.


The CPA recommended that I incorporate the business under Subchapter S of the Internal Revenue Code: an S-Corp. An S-Corporation is a corporation designated as a "pass-through" entity, meaning the corporation does not pay income taxes but the income is "passed through" to the owners. After reviewing the benefits, it seemed like a great solution for my personal and business needs.
​

I now use a payroll company to issue myself paychecks, and taxes are paid out automatically.


Alright Tax-Man! I'm paying automatically. I incorporated in January of 2016, gradually paid off my past due taxes on a monthly basis, and now look forward to April 15 now because I never have an issue. It feels good! I was directed to Gusto by my CPA and it works great for me. The monthly cost is reasonable, it's all online and they file all necessary tax forms on my behalf automatically every year. Other than making sure my information is up to date (particularly my state tax rate), I don't have to do much other than click "Run Payroll" when it's time to pay myself. I'm on my 6th year using Gusto and highly recommend it. If you are looking to change your payroll company, or are working with your CPA to incorporate and need to sign up with a payroll service, you can use this link to sign up with Gusto and receive a $100 Visa card. ​
​

S-Corp status provides limited liability protection, much like a regular C corp or an LLC.


​Having limited liability protection means my personal assets are separated and protected from the claims of business creditors. I feel assured knowing that my business and personal life are separated on paper, and if an issue comes up in the future, I have some protection already in place.
​

S-Corps are taxed as a "pass-through" entity.


​Whereas C-corporations can be subject to "double taxation", when income is taxed at the corporate level and at the shareholder level, income and losses from S-corps are only passed through to the owners. This means the owners pay their fair share of tax on business profits, the business itself doesn't pay any income tax.
​

Owners of S-Corps can take income as both salary and dividend payments, with significant savings.


This benefit is a big one. Owners are expected by the IRS to take a "reasonable" salary from the business, that salary amount depends on your industry, job, etc. It is going to be different for everyone, and is clearly subjective, though the IRS ultimately keeps an eye on it to make sure the salaries are legitimately "reasonable". In addition to this salary, owners can take direct distributions from the business. These dividends are not subject to self-employment or standard payroll taxes. If I were still a sole proprietor I would be paying 15.3% self employment tax on all income. As an S-Corp employee of my business I pay standard payroll taxes on my salary, and then only pay income tax on my dividends. The savings can be significant. ​

​+ Better Tip
Like all things, there are some disadvantages to becoming an S-corp, and it won't be the right choice for all business owners. There are corporate fees and taxes, some annual paperwork with your local Secretary of State's office, and you'll likely need to use a CPA. While I personally view using a CPA as an advantage, it is an added expense for sole proprietors to consider, if they aren't already working with a CPA. I highly recommend working with a CPA in general, especially as your personal finance, real estate and business endeavors grow over time. We can't all be great at everything, I know I can't keep everything straight and ensure I'm paying the correct amount of tax, and not missing any deductions. I also value being able to reach out to my CPA with questions throughout the year, they are a part of my team. If you are in Rhode Island and need a referral for a great CPA feel free to reach out. The annual fees, taxes and paperwork filing requirements depend on your state and business. Consult a CPA to determine which business structure is right for your needs.

$1 Million in Retirement Funds is Easier to Reach Than You Might Think

5/21/2022

 

Summary

Education about investing for retirement does not happen soon enough, if ever for many people. The math of retirement investing is simple, so simple that if educated early enough on the subject, more Americans could live comfortably in retirement. Saving $1 million is very attainable, this article explores how. ​

by Christian Scully

When I was growing up there was never any talk of retirement. Retirement was a far off place where I knew something called Social Security existed and that employees were taxed now in order to ensure monthly payments later. Other than that, there was no discussion of retirement accounts, what purpose they served and how they worked, or what the proper steps were to ensure a comfortable lifestyle after working year were over. 

I knew the word millionaire, and that was a magical word. It definitely didn't feel a real possibility, but I knew millionaires existed and as I got older I could certainly take a guess at who might be a millionaire. 

Though I'm almost certain many of my guesses would have been accurate, I've come to learn that you never really know what the state of someone's finances are behind the curtain. When we began our personal financial freedom journey I read a frequently recommended book, "The Millionaire Next Door". The author surveyed and compiled data on millionaires in the United States and created a profile with simple, easily copied attributes that lead to their financial success. It revealed to me the lifestyle differences between appearing rich and truly being wealthy. I also highly recommend this book to everyone to define a realistic lifestyle target for growing wealth, you can find this book here.
​

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5 Ways to Build Credit Without a Credit Card

4/15/2022

 

Summary

Navigating credit scores can be confusing and frustrating. Even if you have a low credit score or no credit history, there are ways to build your credit without obtaining a regular credit card. You should seriously consider these options if you have a history of late payments or your employment is not secure. It is too easy to get a credit card and quickly rack up a balance and fall behind on payments, which will only hurt you financially and emotionally. This article shares several ways you can build or improve your credit score without a traditional credit card. ​

​by Christian Scully

Credit reports are unfortunately a flawed and necessary evil we have to deal with. They are confusing, can change for no apparent reason, can go down when you think you've done something good and certainly cause a lot of stress for people in today's world. Because financial education is mostly not taught in school and the bulk of that education needs to come from parents and mentors, most kids don't understand the importance of a good credit score. I would argue that most kids don't even know what a credit score is. At least I like to think that because I certainly didn't! 

Like a lot of young people with no concept of personal finance, I destroyed my credit score in college, borrowing money to pay for living expenses without a thought of how I was going to back the money back. By the time I first started learning about personal finance and began working towards buying our first house, my credit was in the low 500's... not good. It took about 18 months to get the credit score to above a 620 to qualify for a decent interest rate on a government backed mortgage. 


A lot of people will be in this category and will need to commit to digging their way out of the bad credit hole. Another group of people, however, will have never opened a credit account and thus won't even have a credit score. I've had borrowers seeking my help with applying for a mortgage with no credit score. In this case, there are things you can do to get the credit bureaus to calculate a score for you and to start building a good credit history. The following are a few of the best ways you can either build credit from scratch without a credit card, or to start repairing bad credit. 

Remember that if you are recognizing that your credit score is less than ideal, and you are motivated to improve it, you are already ahead of the game! So many people never even think about it and just continue missing opportunities or struggling due to poor credit. It takes time to improve, but not as long as you may think! Stay focused on your goals, know why you are trying to improve your personal finances and credit rating, and you will keep doing better every day. 

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What is an appraisal gap and what solutions do borrowers have available?

8/13/2021

 

Summary

This article defines the appraisal gap and outlines possible solutions for the home buyer to discuss with their realtor and loan officer before submitting an offer. Being prepared in the event of an appraisal gap puts the borrower in the best position to get an accepted offer or successfully close the purchase if a shortage arises.

​by Christian Scully

I've found that the most helpful topics to discuss on BL+F are questions that I am often asked by either borrowers or realtors. Appraisal gaps have always been an issue, but their instances have exploded in the past couple years. Home values have grown massively nationwide. Buyers are often paying in cash above asking price and waiving all contingencies. This sets the stage for a home selling for greater than a licensed appraiser can value the property. The difference between the selling price of a home and its appraised value is called an appraisal gap or an appraisal shortage. 

For example if a home sells for $250,000 and the appraiser values the home at $225,000 - there is a $25,000 appraisal gap. A typical purchase and sale agreement would state that the contract is contingent upon the home appraising for at least $250,000. When the buyer applies for a mortgage it will be based on the sale price of $250,000, which combined with their down payment will dictate their loan-to-value ratio. A conditional approval from the lender based on these terms would state that the loan approval is subject to the appraisal of the property at or above $250,000. 

There are five important options for a buyer and their realtor to know about preparing for and solving an appraisal gap. The chosen path completely depends on the buyer's goals and finances. 

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Common Borrower Mistake: Why you shouldn't trust online mortgage interest rate ads or attention grabbing rate news headlines.

6/3/2021

 

Summary

Interest rates are the subject for confusion, excitement, disappointment and panic. They truly touch on nearly every emotion. Online ads, sponsored-content articles and news headlines contribute to the confusion among borrowers. These publications and platforms don't make it clear that borrowers can't simply get the lowest possible rate. There are factors that impact their qualifying rate, and therefore borrowers should ignore the hype and learn from this article. We'll discuss what impacts a qualifying interest rate and how to be prepared for the application process.

​by Christian Scully

As we witnessed in 2020, news headlines and online advertising are enough to stir up excitement and send borrowers shopping and applying for refinances. 2020 even saw some interest rates under 2%! What those news headlines often forget to mention is the $10,000+ in discount points you'd be paying to get a rate under 2%. 

Sometimes borrowers will start a conversation with me by inquiring about the current interest rates. This is not a black and white question. Those advertised rates are generally the best rate you could possible qualify for under perfect conditions. However, in the process of applying for a mortgage, other details about the transaction are filled in. Those details can trigger a "loan level price adjustment" or LLPA. 

LLPA's can add or subtract a small amount to the interest rate for various reasons. The most recent newsworthy example of this would be the half-point (0.5%) fee that Fannie Mae and Freddie Mac added to all refinances after 9/1/20, named the "Adverse Market Refinance Fee". In most cases, this would cause the interest rate to increase simply for the fact that the loan purpose is a refinance. 

Other details that will affect a borrower's qualifying interest rate include their credit score. For example, if the borrower has a 580 credit score, their interest rate will increase more than if the borrower as a 660 credit score. If the borrower is applying for a mortgage on a primary residence, the interest rate will be lower than if it is a second home. Interest rates for investment properties are significantly higher. Interest rates for multifamily properties will be higher than for single family properties. Rates for 5% down payment will be higher than 20% down payment.


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Why Combining Our Finances Was The Right Decision For Our Family

5/11/2021

 

Summary

Combining finances as a couple can be a big decision. There are pros and cons, of course, and couples can find success on either path as long as they communicate and have clear goals and a clear plan. In this article, I share our experience with combining finances after marriage and what we have learned since. ​

by Christian Scully 

When Brittany and I were married in 2016, we immediately decided to combine our finances, thinking that was the more logical choice for us. After nearly 5 years of marriage, and so much change along the way, we can reflect and consider how combining our finances has affected our relationship and our family.

​We can definitely say that our finances and financial goals are fluid and evolve over time, quite frequently in fact. Communication is key, and regular communication is even better. There are three great results that we got from combining our finances. These may not be the same for everyone, but there are lessons you can take from each, even if you and your partner might want to keep your finances separate.
​​

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Can You Use Cryptocurrency as a Down Payment on a Mortgage?

5/4/2021

 

Summary

With more people investing in cryptocurrencies like Bitcoin and Ethereum, governments are beginning conversations on how the currencies will be regulated. Big decisions on regulation and taxation are to be expected in the future, but in the meantime decisions have been made on everyday uses like using cryptocurrency in qualifying for a mortgage. This article with explore the requirements set by US government agencies for using cryptocurrency in a mortgage transaction, and will discuss how a borrower can prepare their crypto finances for a mortgage application.
. 
by Christian Scully

Cryptocurrencies have reached new levels of popularity with individual investors and institutions around the world. Amid a record breaking bull run, with currencies like Bitcoin and Ethereum gaining a combined total of nearly $1.5 trillion, it is estimated that over 15% of American adults hold some amount of cryptocurrency in their investment portfolios. 

With decentralized finance, or DeFi, projects gaining more steam and attention, bringing real use cases to market, more than simply a buy-and-hold asset, the future of financial technology is poised for exponential breakthroughs in the next decade. 

Since central governments have generally not yet made major policy decisions regarding regulation and taxation of cryptocurrencies, critics argue the high volatility and lack of current uses make cryptocurrency a poor investment. 

When it comes to uses, some investors - while buying and holding crypto for long term gains - would like to at least know they can use their crypto gains for something as generic as buying a home. After all, what good are major gains if you can't use them? 
​

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Hodling The Long View: Anxiety Medication in the Age of Meme Stocks

5/2/2021

 

Summary

Short term investing, viral meme stocks and gambling have become part of a big conversation. Experienced investors believe it a sign of an economic cliff, while others call it a movement to take on the wealthy few on Wall Street . Those often not discussed are people who fear investing because of the risk of losing everything, or those who have lost everything and who's appetite for investing has been squashed. This article will discuss this story and examine how having a long term outlook is the answer for most people.

​by Christian Scully

Let's begin by noting that if you have no idea what "meme stonk" means, you live in perhaps a more peaceful existence already. Several forces boosted by the Covid-19 pandemic of 2020 brought meme stonks, or trendy, often highly speculative stocks, into the mainstream.

Groups like Reddit's r/WallStreetBets rose to the top of media popularity with their cult-like efforts to bring down the hedge fund giants who dared to place heavy short positions on beloved corporations like GameStop and AMC Theatres. The result was a storybook rise in stock value, experienced and inexperienced FOMO investors alike stacking bets on top of one another in such numbers that one hedge fund, Melvin Capital, lost 53% in January 2021. 

These trendy meme stocks, rising to such heights due to a mix of speculation and social media published theories on options contract expiration dates, were bound to come crashing down hard, draining millions from investment accounts of thousands of young investors who hopped on what was marketed to be a rocket ship to the moon. 

The vast majority of the diamond handed "hodlers" saw their investments wiped out. Some early investors did manage to ride to the moon, hopping off the ship towards the peak and sending it crashing back down to earth. Stories spread of people that lost their life savings, all for a chance at hitting it big and joining the millionaire club. 

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    Thoughts, ideas, lessons-learned, inspiration, how-tos and more from a journey in small business, to owning and investing in real estate, helping borrowers navigate the mortgage process as a licensed loan originator, in an ongoing pursuit to fund the life and retirement that is chosen, not accepted.

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​Christian Scully is a licensed mortgage loan originator (NMLS 1864693) in Rhode Island, Massachusetts, Maine and Connecticut and is available to help borrowers seeking to purchase or refinance a home.

Copyright © 2023 Better Life and Finance. All rights reserved. All content, including text, images and video are sole property of Better Life and Finance and it's creators. 

​Disclaimer: The creators of Better Life and Finance are not certified financial advisors and are not attempting to give general financial advice. The information is from personal experience and shared freely. Consult a professional financial advisor when making financial decisions. Christian Scully is a licensed mortgage loan originator and is qualified to answer your home loan questions.
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