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Most landlords make mistakes on their income tax, U.S. says
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A majority – some 53% – of individual landlords in the U.S. make mistakes on their income tax when it comes to reporting rental income and expenses, according to a study by the U.S. Government Accountability Office.
That means that out of about 8.9 million individual landlords in the country, nearly 5 million aren’t paying the correct tax.
And of those 5 million, fully a quarter paid too much tax and should have had a lower tax bill, the government says.
The agency’s figures are based on a comprehensive review of landlords’ returns that have recently been audited.
Altogether, landlords misreport their income by about $12.4 billion every year.
Landlords are far more likely to misreport their income than are other taxpayers, the report says. (By contrast, only about 10% of Americans make mistakes in reporting their income from wages.)
Some 9% of landlords who make mistakes on their taxes report over $1,000 more in taxable rental income than they should, according to the study.
By contrast, 51% of such landlords underreport their income by more than $1,000, and 6% underreport their income by more than $10,000.
The most common type of error – by far – was in reporting rental expenses. The second most common error was misreporting the amount of rent received. Other common errors were reporting rental income on the wrong part of the return and misreporting rental-related losses.
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As for rental expenses, the government found that about 20% of landlords who made a mistake in this area could have deducted more expenses than they did, and should have had a larger deduction.
Other mistakes include deducting unsubstantiated expenses, improperly deducting personal expenses as rental expenses, miscalculating depreciation, and fully deducting expenses that should have been depreciated.
About 166,000 landlords improperly included the value of the land as part of the depreciable basis in their properties.
As for misreporting the amount of rent received, landlords often make mistakes in how they handle expenses paid by tenants and unreturned security deposits.
It certainly seems likely that the government will begin cracking down on landlords’ tax returns, and it would be a good idea for all landlords to brush up on the proper tax treatment of expenses and deductions.
You can read the complete report at http://www.gao.gov/new.items/d08956.pdf.
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Chicago 'historic area' zoning case being watched across the country
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Can a city block property owners from making improvements to a building or a neighborhood on the grounds that doing so would destroy its value as a historic landmark?
A closely watched case in Chicago could answer that question. Although the case is specific to Chicago, cities and property owners across the country are paying attention to it because the same issues could be brought up in many other places.
Al Hanna and Carol Mrowka live in the East Village neighborhood in Chicago’s Lincoln Park district. It’s an area full of small, flat buildings and cottages that were popular with immigrants in the late 1800s. The pair are not allowed to make certain improvements to their property because the entire neighborhood has been designated a “landmark” by the city’s Landmarks Commission.
So Hanna and Mrowka went to court. A judge initially dismissed their suit, but on appeal, the state Appeals Court said it could proceed. Now both sides are waiting to see if the state Supreme Court will resolve the issue.
The property owners say the neighborhood is not really a landmark, and that city officials approved the designation merely because they wanted to regulate gentrification and alter the area’s racial makeup.
But the city argues that the lawsuit attacks the whole idea of historic preservation, and that if it succeeds, there will be no law left in place to stop the city’s most significant architectural wonders from facing the wrecking ball.
Legally, there’s no question that a city has a right to preserve its valuable historic sites. At issue in the Chicago case is whether the criteria used by the city commission to designate landmarks are so vague as to be essentially meaningless, with the result that the commission can pick anything at all as a landmark and take away property owners’ rights willy-nilly.
The city’s landmarks law says that a landmark has to meet at least two of seven criteria. Among the criteria are that the property:
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• Has value “as an example of the architectural, cultural, economic, historic, social, or other aspects” of the city, state or country;
• Represents “an architectural, cultural, economic, historic, social, or other theme expressed through distinctive areas, districts, buildings, structures, works of art, or other objects that may or may not be contiguous”; and
• Represents “an established and familiar visual feature of a neighborhood.”
Hanna and Mrowka say these criteria are so broad that they could arguably include any structure in the city.
The pair are also challenging the makeup of the Landmarks Commission, which is supposed to include, among other things, people who have a “special interest” in neighborhood preservation. They say this term is likewise vague and meaningless.
The appeals court sided with the property owners. It said there was no way that a “person of common intelligence” who read the law could figure out whether a property should be considered a landmark or whether a person was qualified to serve on the commission.
Hanna and Mrowka say their goal is not to threaten the true treasures of Chicago, but to make sure the landmark law works only to preserve real architectural and historic gems, not to allow political manipulation of neighborhoods.
Still, if the law is struck down, comparable laws in many other cities and towns could face a similar challenge, and it might be some time before it’s clear what the rights of property owners are.
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Vacation homes, investment properties may be cheap
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While the average price of a primary residence declined last year, the average price of vacation homes and investment properties declined even further, suggesting that many of these properties might now be available at an attractive cost.
The median sales price of a vacation home was $150,000 last year, down from $195,000 in 2007, according to the National Association of Realtors. That’s a 23% drop in one year.
A typical investment property cost $108,000 last year, down from $150,000
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in 2007. That’s a drop of 28%.
Sales of these properties have been off, which might explain the price declines. Sales of primary residences were down 13% last year, but investment-home sales were down more than 17% and vacation-home sales were down 31%.
Vacation-home buyers appear to be looking at their properties as a long-term investment. Some 58% of purchasers say they expect to keep the property for 11 years or longer.
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Fannie Mae makes it harder to get a condo mortgage
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New rules from Fannie Mae are making it harder to get a mortgage for a condominium unit.
Effective this past March 1, the mortgage giant will no longer purchase mortgages for condo units in new buildings unless at least 70% of the units are sold or under contract. Previously, Fannie would purchase mortgages as long as at least 51% of the units had been sold.
As a result of the change, a number of people who thought they would have no trouble getting a mortgage suddenly found out otherwise. They might be able to get out of their purchase and sale agreement, assuming they have a
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mortgage contingency clause.
Fannie says the change is necessary to protect people from buying into buildings that could see a high rate of foreclosures.
Developers are allowed to apply for an exemption from the rule, though, and Fannie says it has already made dozens of exceptions.
In another change, Fannie says it will no longer purchase mortgages in condo buildings if 15% of the owners are 30 days late on their condo association dues. (However, this change only applies to initial purchases, not to refinancings.)
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'Green leases' are raising legal issues
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More and more commercial buildings are being designed to meet environmentally friendly, or “green,” standards. In addition, a growing number of communities around the country are adopting “green ordinances” that mandate certain environmental standards for large commercial buildings or developments.
As a result, commercial leases in these buildings need to take green issues into account. And since this is a new area, how these issues should be handled isn’t always clear, and can lead to considerable negotiation between the parties.
Here’s a look at just a few of the issues that both sides should consider before signing a green lease:
• A landlord will likely want to be able to pass along to tenants the cost of “green” building improvements. But if the tenant agrees, what qualifies as an improvement? Anything intended to reduce utility costs or greenhouse gases? What about fees for green certification, or the cost of promoting alternative transportation? This should be spelled out in the lease.
• If a landlord can pass along these costs, the tenant might want to limit its expense by paying only a fraction of the cost of the improvement – equal to the portion of the useful life of the improvement covered by the lease term. A tenant might also want to pay for
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improvements only if they actually do reduce utility costs, since some improvements might not work out as planned.
• If there is damage to the building, must the landlord and tenant reconstruct all their green improvements? If they must rebuild to meet certain green certification requirements, are they the ones in effect at the time of the lease or at the time of the rebuilding?
• Can the landlord require that janitorial services be performed during the day to reduce electricity use after hours?
• To what extent must the tenant comply with the landlord’s energy conservation, air-quality and recycling efforts? Do the landlord’s restrictions apply to contractors hired by the tenant? What can the landlord do to enforce these rules?
The more of these sorts of issues you can cover in the lease, the less likely it is that disputes will arise down the road.
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This newsletter is designed to keep you up-to-date with changes in the law. For help with these or any other legal issues, please call our firm today.
The information in this newsletter is intended solely for your information. It does not constitute legal advice, and it should not be relied on without a discussion of your specific situation with an attorney.
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