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publickman

Tax deduction for cost of house bought for rental

Lars
3 days ago

My brother and I bought a house in Cathedral City last July with the intention of renting it as a STVR (short term vacation rental) to provide additional income, since I am now fully retired from steady work. About three weeks after we closed, CC imposed a moratorium on any new STVRs, and we do not know when it will be lifted, although my real estate agent said that he expects it to be soon, and I had heard that it was not supposed to last beyond the beginning of this year, but it is still in effect. I told my agent that we wanted a house for short term rental, so that we could use it part of the time and rent it at other times, and he told me that the house we bought would be rentable, and it would be if not for the moratorium.

I took out a substantial amount from my 401K to help pay for the house and to avoid having another mortgage, and of course the IRS and state of California deducted about 20% of this for taxes. I was not concerned at the time about this because I expected to be able to deduct the cost of the house and renovations we did from my income tax, since we intended to rent the house. Since we were not able to rent it, is the intention to rent enough to justify it being a business expense? My sister is a lawyer and owns several rental properties herself in Texas, and she thinks that intent to rent should be sufficient, but she is unsure about this.

What can I deduct from my 2019 income for what I have spent on this house? I co-own it with my brother, and I wonder if he can also deduct from his income tax. Since April, my main income has been social security plus savings that I have, which are now dwindling. I am expecting to start new work by next month, but that is also somewhat tentative at this point, as it will be freelance and therefore unpredictable.

Have you had an experience like this? I will be consulting with a tax preparer in the next month or so, if it will be possible for me to take the deductions. Otherwise, it would be better for me to do my taxes myself and save the expense of hiring someone to do it for me. If itemizing will not help, then I should do my own taxes, which I have been doing through TurboTax in the past.

Comments (59)

  • Lisa

    If you were under 59 1/2 years old when you took the distribution from your 401(k), you may also have a premature distribution tax of 10% in addition to regular Federal and state income taxes. If so, make sure you mention this distribution to your accountant.

  • arcy_gw

    If I own a rental property and it is empty due to lack of renters--it is still a business. A failing one, but still a business. The question is if the moratorium makes it illegal for rentals to start up, if what you have is an official rental. Are there permits or business licences one needs and will proof of be required for deductions? If you never got to that point--it isn't a rental. Your verbiage confuses me. "...and he told me that the house we bought would be rentable,..." What property is not suitable to rent? ANY property can be rented.

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  • watchmelol

    My family and relatives have held various rental properties over the years for decades. I have never seen anyone take deductions for "intent to rent". There are some deductions for "start up expenses " but I fail to see how you would show them as that since the moratorium on STVRs pretty much negates that. Maybe there are loopholes for multi family dwellings but not a single family home. The IRS requires a rental to be in service and you must show rental income to claim deductions on a property. Here is what the IRS pages say. There are also stipulation if you live in it part time or allow family members to use it. Lots of helpful links here. https://www.irs.gov/newsroom/know-the-tax-facts-about-renting-out-residential-property

    Lars thanked watchmelol
  • bry911

    First things first, I am a CPA, but not a tax CPA. However, I do own rental property and have owned rental property for almost 30 years now, and have passing familiarity with my own rental property tax treatment. There are lots of responses that I am struggling with so will add some input for further thought, which is not giving advice so much as adding to the discussion at hand.

    Whether or not you are a legitimate business and when is largely a moot point. The tax code applies on a per property basis. Expenses are deductible in the year incurred once you make the property available for rent.

    That "available for rent" is somewhat confusing, but the tax code uses another term almost interchangeably, "placed in service." (Note: there is a safe harbor exception for de minimis expenses). I have seen landlords try to advertise a property with no intention to actually rent it, this doesn't usually hold up under scrutiny. Significant repairs made after the property was advertised but before rented are still considered prior to being placed in service. Nor does placing it in service later in that same tax year matter.

    Here is an example from the CFR (it isn't perfect for your situation but it will help):

    In Year 1, M purchases a building for use as a business office. Prior to placing the building in service, M pays amounts to repair cement steps, refinish wood floors, patch holes in walls, and paint the interiors and exteriors of the building. In Year 2, M places the building in service and begins using the building as its business office. Assume that the work that M performs does not constitute an improvement to the building or its structural components under § 1.263(a)-3. Under § 1.263-3(e)(2)(i), the building and its structural components is a single unit of property. Under paragraph (d)(1) of this section, the amounts paid must be capitalized as amounts to acquire the building unit of property because they were for work performed prior to M's placing the building in service.

    There is a de-minimis safe harbor rule that you can look up yourself, it used to be $500, but in January 2016 it moved to $2,500. The intent is that it be used for small items depreciated separately to relieve the administrative cost of tracking depreciation, and I would question its use on wholesale improvements prior to placing the asset into service. I feel sure that they would need to be grouped into depreciation classes prior to treatment, but I am unsure.

    ------

    As for the moratorium, I don't know. A moratorium is different than making something illegal. We know that expenses incurred before licensing of businesses that require licensing are allowed, but under any strict interpretation those businesses would have been illegal before licensing. So I don't find the idea that the city has placed a moratorium to be absolute evidence that those costs wouldn't be deductible. Furthermore, the pertinent question might be what will you do if the moratorium doesn't lift in a reasonable time. As Elmer notes, actions taken after the tax year do work to demonstrate intent during the tax year, so if the moratorium doesn't lift soon will you move into the property or rent it out for a long term rental? That distinction may matter.

    At any rate, I suspect you need a competent local preparer experienced in rental real estate.

    Good luck.

    Lars thanked bry911
  • Lars

    Lots of good advice here, and I will definitely go to see a tax CPA, and I will ask questions before hiring one. I looked at the link to the IRS site (special thanks for that), and it looks like it is more complicated than I can figure out on my own.

    I do have the option of renting the house on a longer term basis, i.e., more than 30 days at a time, and so if someone wanted to rent it for five weeks, that would be legal during the moratorium. I don't know what regulation apply to renting something for long term, and so I will have to look into that as well.

    I will not be holding my real estate agent responsible for telling me I could rent the house (it is not a condo and does not have HOA expenses) because when we bought it, the moratorium was not in effect - that happened about three weeks afterwards, but I did not find out about it until a few months later when I mentioned it to the man I hired to replaster the pool.

    When I first bought the house, it was rentable; i.e., repairs were not absolutely necessary, but if repairs had been necessary, it would not have been rentable until those were done. The bathrooms were functional but not pretty, and the pool did need to be replastered, although that could have waited for another year or so. I chose to do it earlier rather than later.

    We do not intend to live in the CC house as a primary residence, but for now, I guess we are living there part time, however briefly, such as long week-ends or perhaps a week or ten days at a time, especially when we are doing work on the house. While we could rent it now, there are a few superficial improvements we are still making, and we would have rushed to do these earlier if the moratorium had not been in effect. While we are there, we are making improvements, and so I think that puts the time we are spending there in the renovation stage rather than resident stage.

  • bry911

    I would strongly suggest familiarizing yourself with Publication 527 even if just to know the pertinent questions to ask a tax professional.

    Lars thanked bry911
  • Lars

    Thanks! I've bookmarked that link so that I can look at it later. Today I have to meet with my design collaborator, as I am planning to do some freelance work, since I am not getting rental income yet. This week-end we are going back to Cathedral City to do a few more repairs, largely to do with the front security door and the gate to the back yard from the driveway, but also to repair a some plantation shutters.

  • chisue

    Is there a market for renting the house long term? I know STRs are often more profitable, but you'd have income while you ride out the moratorium.

    If you're allowed 'long term' status for only 30+ nights, that could work well. I wish I could rent our Maui condo long term, but long term there is 180+ days. I wouldn't owe county and state taxes, and I'd save on cleanouts. My RE taxes would be reduced from triple the homeowner status.

    Do you have a STR business licence? Would advertising it prove rental status? Vrbo is about $500/yr. Craig's List?

    Lars thanked chisue
  • Lars

    I do not have an STR business license yet - I would apply for that after the moratorium is lifted. Right now I am forbidden from advertising as STVR, but I could advertise for a longer term rental. I don't know whether that would help me now for 2019 taxes, but maybe. It might help prove intention if not successful rental.

    I do not want to rent very long term; i.e., by the year, as we do intend to use the house occasionally, and it is also fully furnished. I don't know how many people would rent fully furnished houses. I am also concerned about having children in the house, if we offer it for a long term rental, as we would have to completely childproof the pool, I think. If we rent through VRBO, we can restrict occupants by age, but not if through AirBnB. Many VRBOs in CC require that all occupants be at least 25 years old, and I think this also cuts down on noise from parties. There are also quite a few residences that require renters/owners to be at least 55.

    BTW, I'm over 67, and so I do not have any penalties for taking out money from my 401K at this time. I felt that real estate would be a better investment for my money than the stock market, if I could get rental income.

    I think there is a market for long term rentals, possibly for a two month period during the winter/spring, which is the peak season for Coachella Valley, but rents do go down during the summer, even though some people actually prefer to go there then. I loved it in July, August, and September, even though I did not think that I would. I definitely did not need to heat the pool, as it was 87° naturally, which I think is ideal. Also, because the air is so dry in the summer, the heat does not feel that bad, and I could even feel cool coming out of the pool in 100+° weather.

    Taxes are high for STRs, but that is added onto the rental price, which is much higher than long term rent. I'm a bit leery of using Craig's List, but a lot of people do list real estate in Palm Springs there.

    BTW, personalitywise, I am an ENTP, according to the Briggs-Myer test, which makes me the exact opposite of an accountant. I'm very good at math, but when it comes to accounting, my brain tends to shut down. Accountants often don't know what to make of me.

  • Bestyears

    We own two STR's, and I empathize with your predicament. One of our properties is on a lake that runs through a number of towns and cities, including Austin, TX. Just before we were looking for this property, the city of Austin banned all STR's -didn't even offer a grandfather clause; just banned them. So we were careful not to buy property in that section of the lake, but it also gave us a heads up that, crap, ANY town or city could do that after we buy property. As it turned out, a place we made an offer on, but didn't end up purchasing, DID ban STR's recently. So far, both of our properties are still in towns where STRs are legal, but it feels like a constant threat, as both cities have spent a lot of time over the last year discussing the status of STRs. In one case, (and in the case of Austin), it is clearly because of the greedy, foolish owners who rent without respect for the neighborhoods they are in. Imagine owning a lovely home in Austin for years, and suddenly, the house across the street is the setting for a bachelor party every weekend. Ugh. But in one of our locations, the trouble is coming from the hotels, who have felt a serious decline in their business as the popularity of STRs has taken off. In the case of Austin, if you check VRBO, you'll see that there are still plenty of STRs available. So I'm not certain how that works. My guess is that the ordinance banning them gives the police the teeth to close down a raucous rental, but they close their eyes to ones that aren't problematic. If you have any connections to anyone on the planning commissions, city council, etc. in CC, you may be able to get some info as to when and if the ban is likely to be lifted. In our case, we use property managers for both properties, as they are keenly interested because of course this affects their livelihood, so they keep their ears to the ground. Wish you all the best....

  • Elmer J Fudd

    Be careful before going too far with personality stereotypes. I worked for a large firm and we did more high level consulting and advising than you'd find as the daily fare for a local accountant in a strip mall or converted residence. When the office management group of over 50 I was in did a Myers Briggs exercise, we found all personalities present and many people were hybrids of the types rather than starkly this or starkly that.

    Mousy, introverted worker bees who want an orderly predictable existence do exist but are more the exception than the rule in the higher levels of the profession. Same is true in most white collar professions.

  • lisaam

    If your local hospital hires traveling nurses they can be a good option for medium term leases, say 3 months or so.

    Lars thanked lisaam
  • Lars

    Elmer, your last post sounds like the exact opposite of something I would say. Generalizations have their value, but I never consider them to be absolutes. My first rule is that there are exceptions to all rules, including this one. My second rule is that everything is also its opposite and that contradiction is the only true truth.

    That should give you an idea of how my mind works.

    Hospitals in Coachella Valley may hire traveling nurses, since the population of the valley increases in the winter.

  • Elmer J Fudd

    " your last post sounds like the exact opposite of something I would say "

    I don't see the world or people in it as easily categorizeable so if you found my comment suggested a particular cubbyhole, I'd say you decided on your own that you'd found something you wanted to find. There are no rules, however cute or clever you think expressing something that way may be. My favorite generalization is that generalizations are generally false and misleading, that generalization included.

    I thought the Myers Briggs an interesting model to use in thinking of personality tendencies but far too facile for the reality of personality types and perhaps your comment is of a similar nature.

  • bry911

    @Lars

    I am getting close to the edge of my comfort zone here, and as Elmer has already pointed out that there are some real gray areas in tax compliance.

    Having said that, it does seem like you are chasing the rent ready thing down a rabbit hole. No matter what you do in 2020, the rental property would not have been placed into service in 2019. I believe any costs would have to be capitalized rather than expensed, other than those that fall into the $2,500 de minimis safe harbor rule, which I just don't see as all that applicable to the things you mentioned.

    As for my opinion on renting it in 2020, if you purchased the house as an income producing property and so long as you are acting in good faith to continue on to income producing property you are OK. Whether that is STVR or medium term rentals is really not a distinction the tax law makes. So long as it is placed into service in a reasonable amount of time and remains in service for a reasonable amount of time, I suspect you will be fine.


    I think it helps to remember the golden rule for tax cases: Thou shall not structure a transaction primarily for the purpose of tax avoidance. You are where you are, and your transactions and decisions were what they were.

    Lars thanked bry911
  • 1929Spanish-GW

    Lars - I have a friend renting a room to traveling nurses and I’ve had other friends rent fully furnished apts. Both have had excellent experiences. The friend renting a room did it for three months and the. The nurse extended, which works for both of them. She did get some advice not to extend if you want to Insure a consistent renter, but I don’t think that’s what you want.

    Lars thanked 1929Spanish-GW
  • Lars

    I would want repeat renters, but I guess that's not the same as a consistent renter.

    At this point, I will just have to wait to see what a CPA tells me when I go to see them. I don't have all my documents yet, as I am still waiting for the W2 form. I might try doing my taxes without trying to make deductions and see how much I can get back on my own.

  • CA Kate z9

    Lars, I just received this from my CPA in CA:

    Just a reminder that if in the course of operating a business or rental property during 2019, you paid over $600 to a service provider and would like assistance preparing the required Forms 1099-Misc please let us know. Please contact our office as soon as possible if you need assistance. The forms are required to be filed no later than January 31, 2020. In order to meet that deadline, we MUST have your information ASAP.

    I remember that you said you had hired others to do professional work, so I thought this might pertain to you.

    Kate

    Lars thanked CA Kate z9
  • jlhug

    I’m an Enrolled Agent and the owner of a STR. Hubby and I have owned and managed rental property for over 35 years


    Whomever you choose to do your taxes, be sure they understand and have experience with rentals.


    There Is an ongoing discussion whenever tax pros talk about STRs. Some believe STRs are rentals and others believe they are a business with the income possibly subject to self employment tax.

    Lars thanked jlhug
  • Elmer J Fudd

    " There Is an ongoing discussion whenever tax pros talk about STRs "

    Really?

  • Elmer J Fudd

    Kate, there are a number of exceptions for when 1099s need not be prepared. Passing along the info as you did isn't really helpful. You might suggest someone check, which is quite different than telling them they need to act. Also, failure to prepare and submit 1099s when required triggers a penalty but it's pretty nominal. I'm not advising anyone to not follow the rules but in a small business or passive rental activity situation, non-compliance is pretty high.

    If your adviser chooses to scare clients, too bad. That's unfortunately common but it's their choice. They too should be asking rather than making blanket statements.

    Lars thanked Elmer J Fudd
  • Lars

    Kate, yes I did hire a contractor to do work in the house, and it was definitely over $600. I guess I will have to start looking for a CPA earlier than I thought, if there is a deadline of Jan 31, 2020. I'm not exactly sure what a service provider is. Does that include contractors? Having the pool replastered cost about $13K, I think, but I have to check my records to make sure. I have kept all receipts and invoices - as many on my computer as possible in PDF format.

  • Elmer J Fudd

    Lars, if any of these providers works through a corporation (as most do), a 1099 is not required.

    Lars thanked Elmer J Fudd
  • patl8

    Kate I think it was helpful to bring this up. Many contractors are not incorporated and are supposed to get a 1099. We have no idea if Lars worked with corporations or not.

    And yes, compliance may be low, and the IRS surely does not have the resources currently to look too closely at them. That doesn't mean we disregard the rules. Your CPA's message, (intended to be read by people they already do business with), makes total sense as a CPA worth his salt is going to try to ensure their clients comply with the law. The new CPA will be happy Lars comes in before the deadline if it is found that he needs to file some.

  • bbstx

    I haven’t read everything, so this may have been raised already. Were people who already owned STR properties grandfathered in? If so, is there any possibility that you would be grandfathered since you bought the property before the moratorium went into effect?

    Lars thanked bbstx
  • jlhug

    Elmer, the discussion is based on 26 CFR 1.469-1T(e)(3)(ii). That section is about passive losses and exceptions to the rules for rental property. It states that if the average rental period is 7 days or less OR the average rental period is 30 days or less and significant personal services are provided, the property isn't a rental.

    Some pros take the position that if the property isn't a rental for passive losses then it is a business.

    I can see making the argument that a STR where the average rental period is 2 or 3 days is more like a hotel than a long term rental. Some of the classes I've taken have suggested that this is one of the things the IRS may be addressing in the near future.

    Personally, we always have a winter renter in our STR who stays for several months to be sure our average rental period is greater than 7 days.

    The other interesting discussion is whether or not rental property qualifies for QBI.

    Edited to add: QBI stands for Qualified Business Income. Thanks Elmer for pointing out my oversight. I apologize to those who aren't familiar with the term.

    Lars thanked jlhug
  • Lars

    Bbstx, yes, the people who already had STVRs were grandfathered in, but I doubt that since I bought the property before the moratorium that I would also be grandfathered in, since that only applies to people who already had been approved by the city and had their licenses.

    I don't care whether I am considered a business or a rental service as long as I can declare that I bought the property to use for income. I expect that the CPA will be able to help me with that.

  • Elmer J Fudd

    jhug, the topic is outside of the area I spent most of my time but the temporary Treasury Reg (has it been temporary for decades?) seems to not be a statutory reg and seems to extend beyond what the law says.

    If it indeed is that old, it addresses a world when VRBO and Air BnB didn't exist. It was trying to help clarify the difference (coming from the other direction) between an apartment and a hotel/motel to excuse the latter from the passive loss limitation rules. I'd say it needs some freshening because to me it's a stretch too far to consider the (mostly) small time real property activities conducted by so many owners in this way who are hundreds and often thousands of miles away as being other than passive.

    As a tip for you, using acronyms and abbreviations not in general use that you haven't previously defined isn't a helpful way to communicate. Assume people may not know what you're referring to with technical abbreviations and err on the side of being a little more careful to avoid jargon. Instead use common language. I knew what you were referring to but I suspect most others didn't. Every undertaking has acronyms and common shortcuts, better to not use them when communicating with others not in that biz.

  • jlhug

    26 CFR 1.469-1T(e)(3)(ii) is one of those temporary regulations that has been temporary for years.

    I agree that the IRS regulations need to be amended to address STRs especially in light of Qualified Business Income (QBI). Thanks for the suggestion on not using acronyms. I was typing fast on my phone and completely forgot to tell everyone what I was talking about.

    There are multiple tax court cases that identify real estate rentals as a business even if you hire someone else to manage the property and do all the work. The introduction of QBI into tax code has resulted in many tax pros doing quite a bit of research on what constitutes a business as per the IRS and Tax Court.

    I feel like this discussion is straying away from the OP. I apologize for taking this off subject.

    Lars thanked jlhug
  • Lars

    If the contractors that I hired have an active business license in California (which is required for jobs over $500), does that mean that I do not have to have a 1099 form? How do I know whether they are corporations or not? The pool company is definitely a corporation, as they have Inc. in their name, but the contractor does not. Does this mean that I need to create a 1099 for him? Am I considered a small business?

  • nicole___

    I don't create 1099 forms for "anyone" and I have an LLC. Your also not considered a business unless you declare you have a business.....since you have NO income from this property....yet.

    Lars thanked nicole___
  • nicole___

    I should give an example. My husband sells photos. He can call the income a hobby...or a business. As a business he can depreciate the camera equipment and lenses. He can claim travel, gas, food, lodging as a cost of doing business. On the other hand, our car insurance is not valid for business travel.

    If sued...you want your business separate from your personal wealth. It's best to list an LLC for "each" rental property. Each property would be it's own business.

    Edited to say: You can lose everything no matter what you do, per the following example. My motto is have lots of insurance, paperwork....do ALL you can do...then...live your life.

    Ie: My neighbor was riding a bicycle, was hit by a car. The woman who hit him had 3 rentals. She lost EVERYTHING. These people went from barely making it to millionaires. They can't stop shopping! He thinks it was a "gift from God" and found religion. He just quit his job. He says he never needs to work ever again.

    Lars thanked nicole___
  • Elmer J Fudd

    Lars-

    Whether a service provider does or doesn't have a business license is irrelevant to you. Business licenses are simply a way for local governments to levy additional "taxes" to raise money. They have no consequence for income tax purposes.


    To have adequate information to know if a 1099 submission is required, the payer needs to ask recipients to complete and provide to them Form W-9. The information on that form includes entity type and tax ID number (whether a Social Security number or an Employer ID number that corporations of various types, partnerships and trusts have). From the W-9 info, you'll know if a 1099 is required for payments above the minimum threshold. .


    I'll reiterate what I said before, in my experience few people in your situation complete 1099 forms, even though they may be required. Do as you choose is right for you.

    Lars thanked Elmer J Fudd
  • Lars

    Thanks, Nicole - I will definitely look into that and discuss it with my sister. I sent her a link to this thread, and I hope she reads it all.

    Elmer, I'll send the contractor a request for a Form W-9. Is he required to give that to me, or is it at his discretion?

  • Elmer J Fudd

    Nicole, you're a tad misinformed. A corporate entity like an LLC can shield owners from liability beyond the assets of the entity, for activities that happen within the entity. For someone who owes money for whatever reason (losing a lawsuit for damages beyond insurance coverage as an example), that person's assets (often excepting a personal residence) can be used to satisfy their liability. In the case of the under-insured driver with 3 rental properties, if each were in a separate LLC or in one, those shares owned by the bad driver would be assets of the individual that could be attached by the person owed money. No difference how the title is held, for liabilities of the individual outside of the businesses of the entities.

    Anyone with questions of this kind should speak with a lawyer.

  • Elmer J Fudd

    Lars, don't get out into the weeds.

    As far as the rules go, payments to a recipient who refuses to submit a W-9 are subject to what's called backup withholding and the rate is 24%. You've already paid them presumably so it's too late to withhold.

    Don't go there, I've never known an individual or small business owner to take that step. . I think some of the well intentioned but not always well informed comments here have stirred up a hornet's nest in your mind. Were I in your shoes, I'd just move on for now and drop the 1099 issue.

    Lars thanked Elmer J Fudd
  • nicole___

    Elmer, I see your point. An umbrella policy of one million per property is suggested for good measure. An LLC for each property is suggested for other types of law suits. The one I mentioned, with the bicycle.....your right.....I was unclear.....I should amend my statement and say...."You can lose it all no matter what you do."

    Lars thanked nicole___
  • bry911

    The best example of when there is some advantage for putting rental properties in LLC's or Corporations is when there is an attractive nuisance on the rental property (e.g. pool). You can shield personal assets from attachment by operating rental properties as an LLC. Insurance is, of course, your first defense but if there is a shortage the LLC will offer some protection. We have been down this path before so I don't want to go down again.

    Having said that, putting things into an LLC is often insufficient. You must actually operate as an LLC. So putting three rentals in three LLC's should mean three different sets of books and probably three different bank accounts.

    Lars thanked bry911
  • Elmer J Fudd

    If you want to protect you assets, a starting point is to have as much coverage as you have assets. I don't think $1 million is enough for anyone with a small business or rental property activity, Personal injury lawyers are more numerous than urban rats and their activities usually occasion insurance settlements rather than trials for most things. They want to get as much as possible with as little work as possible as they work for a percentage of the outcome and not on hourly rates.

    Umbrella policies are pretty cheap. When getting one, make sure there's no gap in your coverage. An hypothetical example, you may have $250K of liability coverage from your auto insurance but the umbrella may only kick in on obligations over $500K. That leaves the gap ($250K) to you, a problem resolved by upping your auto liability coverage.

    Lars thanked Elmer J Fudd
  • patl8

    Yes, yes to an umbrella policy!! Very cheap and they cover that thing you think won't ever happen-but it does-I am living it. I purchased an umbrella policy and within a year I had something happen that potentially can be WAY higher than my normal underlying limits. I don't know how it is going to turn out but I am sleeping at night knowing I have that coverage.

    Besides seeing the CPA have a meeting with your insurance provider. My broker said there were different policies needed for regular residential long term rentals, and short term vacation rentals. I would say you have enough info here to understand everything they tell you now!

    Lars thanked patl8
  • CA Kate z9

    God Gad! I seem to have opened up a can of worms. Sorry about that, Lars.

    Lars thanked CA Kate z9
  • Elmer J Fudd

    I don't think so. You just started a parade of well-intentioned but misleading and incomplete information not well understood by some who offered it.

    Notwithstanding what someone else suggested, your CPA doesn't lose any sleep about whether clients do or don't comply with laws. The email was for their benefit, a trigger to solicit a project, not to keep you snug as a bug in a rug.

  • Lars

    No problem, Kate. Better to have it discussed and understood than not to discuss it at all. I definitely learned something from it from Elmer, and I feel satisfied with his last answer now.

    We just got back from the lawyer's office where my brother and I are setting up a trust so that in the event that one of us dies, the other will be sole heir and not have to go through probate. We also listed our heirs for when the second of us dies, and I discussed LLC with the lawyer, who said we should definitely set up the Cathedral City house and an LLC. He will be sending us more information about that later, and this will be an additional charge of $1,000.00. Is that a reasonable amount? His office is in Culver City, and so his rates should be lower than someone in Beverly Hills.

  • CA Kate z9

    Lars, here goes another can of worms: watch out for Trusts. DH and I had one that was suppose to be "it's own entity". HAH! The trust split in two parts - one his, one mine. I am still the Trustee on both, but here he is dead and still owns a Trust. I have to pay more to have the taxes done for his Trust then the account makes in a year. grrrrrrrrrrr!

    The house that was "Joint Tenures in Common with Rights of Survivor" immediately became mine.

    Lars thanked CA Kate z9
  • salonva

    I misread Lars' question asking if the additional charge was reasonable........I thought it said $1,000,000. Got a good wake up from that one.

  • maddielee

    You may not need an attorney to set up your LLC. In Florida it‘s easy to do by yourself. My nephew owns a few properties (FL) that are Air BnBs. His LLC shows as the owner of those properties.

  • Elmer J Fudd

    Kate, it's Joint Tenants, not tenures

    Living trusts are usually both pretty standard and pretty vanilla. I'm not sure why the "can of worms" description would apply. Are you saying that the lawyer didn't give you alternatives or explain what the consequences were?

  • CA Kate z9

    Elmer, thanks for the accurate correction on "Tenants".

    As to the Trust: what was described is not what we got. Unfortunately we didn't know this until it was too late. It seemed pretty simple and straight forward until DH died.

  • summersrhythm_z6a

    Elmer, Does he really need to set up a LLC for just one rental property? I thought that’s for people who have more rental properties. This is a good thread, very educational.

  • Lars

    Our sister (who is a lawyer) is the one who recommended that we get a trust in order to avoid probate. When there is only one of us (my brother and me) left, the survivor will sell the house in Los Angeles and live in Cathedral City. When Kevin retires (which won't be until 2032), he said that we should sell both houses and buy a larger house in Palm Springs or Cathedral City. There are some very nice houses in Cathedral Gulch, but a lot can change in twelve years. Right now, a new casino is being built in downtown Cathedral City, far enough away from us, but we are very close to Date Palm Drive, although we do not shop in downtown CC that much. I don't know how much the casino will affect traffic, but I do plan to avoid that area once the casino opens.

    From what I understand, we do need a lawyer to set up the LLC in California. It's not the same as setting one up in Florida.

    The lawyer did explain the differences, and he said he was going to set up two trusts for us, as he thought that was the best option for us. He has a lot of experience in this area, and I do trust him. He said he would keep the documents for us, or we could keep them in a safe, if we have one - we do not. I asked him about what would happen if he retires (He looks older than me), and he said he has no current plans to retire but that he would give all his clients a year's notice and that he has an associate who could keep our documents after he retires. I think we should probably get our own safe or safety deposit box - I'm not sure which.

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