QUESTION: I own 14 rental houses. Overall, they break even on the cash flow. But the tax loss deduction since the 1986 Tax Reform Act is only $25,000. However, these houses have appreciated substantially in market value. Yet, I am reluctant to sell because of the high (28%) federal tax. Do you think I should sell now even though these houses are still going up in value?
ANSWER: No. Unless you have a good reason for selling, don't sell if your properties are appreciating nicely in market value. I recently had a similar situation where I could sell a rental house for a big profit. But, then I looked around to see where I could invest the after-tax cash and I concluded there is no better place to invest than in single-family rental houses. As a result, I decided not to sell.
Are Security Deposits Taxable Income?
Q: I am a novice landlord. When we bought our new home we decided to keep our old house and rent it to tenants. They paid us a $1,000 security deposit. Is this money taxable to us?
A: Not yet. Only if the tenant forfeits the security deposit, such as to pay for damage to the property, would it become taxable income to you. Of course, you then will have an offsetting repair cost. Until the security deposit is forfeited, the security deposit is not taxable.
Hints for Buying Tax Sale Property
Q: I am considering bidding at a tax sale where property is being sold for unpaid real estate taxes. Is there any book I can read? Are there any pitfalls to avoid?
A: I do not know of any books about how to successfully bid at property tax sales. However, the properties offered at these auctions are usually vacant land. Rarely will a parcel with a house or other structure on it come up for sale. Most of the tax sales involve odd parcels of land that often are not very valuable.
Of course, before bidding, check out each parcel very carefully. If you discover a gem, contact the owner shortly before the sale to see if you can buy it directly from him. If you are successful in obtaining a deed before the sale, pay the unpaid taxes, so the property will not be auctioned.
Unexpected Risk in a Limited Partnership
Q: About five years ago, I invested $20,000 as a limited partner in a motel built by a well-known developer. The limited partnership was sold to me by a stockbroker. Everything went well until March and April when I didn't receive my usual dividend check and K-1 partnership income tax return. When I called the stockbroker, she said the limited partnership is bankrupt and the lenders are foreclosing. Just last December we were told the motel was doing very well. How can this happen and what can the limited partners do?
A: You raise an unexpected risk of limited partnership real estate investments. The developer you named but which I deleted has over 11,000 limited partners who were similarly defrauded by what appears to be looting of the partnership cash accounts. Other than suing the developer and alerting the government authorities, there isn't much you can do to get your investment back after the lender forecloses on the partnership assets.
When Discrimination in Rental Is Justified
Q: I recently had an "unpleasantry" on which I want your opinion. I had a house for rent, which I advertised in the newspaper. A nice couple applied. The man is white and the woman is black. They filled out my standard rental application form and gave me a $100 deposit check. When I ran credit check, I learned that both have credit problems with department stores and the man had a credit dispute on a Visa card. After phoning the man's employer, I learned that he is a temporary employee and is not employed by the company he listed on his rental application. So I refunded their $100 and politely rejected them. Now, they say, I am illegally discriminating because of the woman's race. What do you think?
A: You were completely within your rights to discriminate on the basis of poor credit history and lying about employment on your rental application form. Please consult your attorney for further details.
Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to the Real Estate Section, Los Angeles Times, Times Mirror Square, Los Angeles 90053.