Tips for Accidental Landlords
Be mindful of tax considerations. There is currently a capital gains tax exemption on the sale of a primary residence. The exemption is up to $250,000 in gains for single filers and $500,000 for married filers. The IRS defines a primary residence as one’s permanent home for 2 out of the 5 most recent years. The length of time you have tenants can impact what your capital gains taxes will be in the future. Consult your CPA.
Pay mind to your ownership structure. You likely took title to your condo or house in your name, but know that shifting title into an LLC may protect your personal assets from a tenant’s legal claims and judgements. Also, know that establishing a separate ownership entity can streamline accounting, allowing for easier use of write-offs and depreciation? Consult your CPA and attorney.
If you own in a condominium building, know your board and managing agent. They will need to be advised of your sublet, and will have a list of requirements to meet beforehand. These include a rental application, fees, a waiver of their right of first refusal, and references required. Allow time for paperwork processing when projecting an occupancy date.
Screen your tenants. Your tenant’s ability and willingness to pay in full and in a timely fashion is paramount. A thorough review of your tenant’s income, credit and assets is necessary. Verify through employment letters, and stick to rules-of-thumb, like income being 40-60x rent. Demand NY-based guarantors if necessary. Ask for a full financial statement to ensure reserve assets, and contact past landlords.
Demand renters insurance. This is important in cases of injury, floods, and any other activity that might impinge on neighbors.
Restrict tenant alterations to property. Ensure that tenant alterations are prohibited. Leases are typically 1-2 years in length, so permanent changes aren’t recommended – limit it to paint, and consider requiring a “paint back” upon move-out.
Demand a security deposit. Make it at least 1 month and ideally 2. Ensure these monies aren’t commingled with personal funds and bear interest. Do not allow for security deposits to be allocated to final month(s) rent. Wait to refund until a thorough walk-thru is completed. Ask for more if your tenant has a pet.
Consider a property manager on your behalf for a fee. This ensures urgent issues are resolved, rent rolls are maximized, and investments are protected. At Ian K. Katz Group, we offer these services exclusively to owners of individual homes or condominiums who we represented during their purchase.