Real Estate Legal Tips

Protect Your Investment Assets - Rental Property Law

I am not a real estate attorney so take any real estate legal advice I offer with a grain of salt. Consult a competent real estate lawyer before making any major financial decisions.

No matter if you own just a single rental property or dozens, there is one thing that you should do:

Treat it professionally!

Now this doesn't mean you have to run out and hire a real estate attorney to incorporate your business before you look at your first property. But, it does mean that you should at least keep some minimal records so that whoever does your tax returns can input the information correctly.

The first action I would do if I were just getting starting in investing in rental property would be to start attending meetings of the local Real Estate Investment Club. The reason is that real estate legal processes vary widely from State to State.

I've purchased investment properties in two different States. In the first State I never used a real estate attorney, in the second one I wouldn't dare buy a property without one. Talk to club members and find out what is common in your State.

So, do you need to incorporate your business or form an LLC? I would say not when you are just getting started. At some point forming an LLC will be a good move. But I would recommend that you give your business a name(DBA) for a couple of reasons:

• If you wish to benefit from favorable tax laws for businesses


• If you want to take advantage of some of the strategies for saving money discussed in the Home Inspection and Repair section

Giving your business a name is pretty simple. Many County clerical offices have a section where you can register a business name (and make sure you are not using someone else's name). There may be no fee or a small fee to do this. Once you have a name get a separate checking account so that you do not mix up personal funds and business funds (e.g. John Doe d/b/a JD Enterprises).

Another step you definitely want to do before you purchase any rental property is get investment property insurance from your insurance agent.

Once you find a rental property and want to make an offer you (or your Realtor) will want to fill out a real estate contract. I get into lots of discussion about real estate contracts here.

If you are paying cash for an investment property the closing documents can be pretty simple. However, if you are borrowing money there is usually an overwhelming amount of paperwork to review and sign. Before closing your real estate attorney or Realtor will probably provide you with a HUD-1 statement (or "good faith estimate of closing costs"). Your should be aware of what all of the line items are.

Although I don't know it for a fact, I believe that if you own rental property you are at a slightly higher risk for a tax audit. I've been audited three times - not once have I had to pay additional taxes! Click here to read a discussion of real estate tax issues. Don't be swayed by fears about tax problems - there are many really excellent tax benefits of investing in rental property.

Rental Property Law and Evicting Tenants

Once you own a rental property, you need to learn some basics about rental property law.

Finally, but not without importance, a landlord must learn how to evict a tenant.

Real estate legal tax issues and Land Contracts

If you sell your rental property with a Land Contract, you will have to declare the interest you receive as income. If you lease a property for more then 3 years the IRS may also consider that as a sale and impute an interest income on the rent. Likewise, if you buy a property with a Land Contract you should be able to deduct taxes and interest on your income tax statement. However, the IRS is someonewhat inconsistent here. On the one hand they seem to require that the Deed be recorded to qualify for the first time buyers tax credit. However, even if the Deed was not recorded, they still seem to want to treat the Land Contract as a sale. Eventually, someone will have to take the IRS to Court to clarify their inconsistencies.

No matter how you sell your property you must pay investment property capital gains taxes.

In summary, real estate legal issues may involve some new areas of learning. But they are not insurmountable.

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