May 20, 2025 • 58 mins
Are you a landlord or real estate investor in Philadelphia? You need to watch this episode.
CPA Jennifer Faust sits down with The Philly Landlord Guy to break down critical Philly tax rules every property owner should know — including BIRT, NPT, and the Philadelphia transfer tax.
🎯 Learn how to:
✅ Know which Philadelphia taxes apply to your rental income
✅ Understand your tax obligations even if you live out of state
✅ Navigate the Philly transfer tax on property sales
✅ Avoid the most commonly missed landlord tax deductions
✅ Hear Jennifer’s #1 tax tip for every Philly landlord in 2025
Whether you’re managing a single rental or growing a Philly portfolio, this episode is packed with must-know tax insights to keep you compliant and profitable.
🔔 Don’t get hit with penalties — hit play now!
👇 Got questions? Drop them in the comments!
⸻
📞 Contact CPA Jennifer Faust:
🌐 Website: https://www.lehighbookkeeping.com
📱 Phone: 484-899-9399
This episode is brought to you by TrustArt Realty, your full-service property management partner in Philadelphia.
Whether you’re just getting started or scaling your portfolio, TrustArt helps you stay compliant, efficient, and profitable.
http://www.trustartrealty.com
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Jennifer (00:00):
That's where it gets broken out because you might
only have $100,000 actualequity.
Yuriy (00:05):
What are those birth and NPT taxes?
What they are and how do we paythem and where are they coming
from?
We're here to share insightsand experiences, not legal or
accounting advice.
Be sure to talk to yourattorney, accountant, or
(00:28):
professional advisor beforemaking any decisions.
Everyone's situation isdifferent.
Get the help that is right foryou.
Hi, everyone.
Welcome back to the PhillyLandlord Guide.
I'm your host, YuriSkripnichenko, licensed broker,
real estate broker and certifiedproperty management in
(00:49):
philadelphia and today we diveon into a topic that every
landlord must know andunderstand try it taxes.
And to help us break it down,I'm joined by Jennifer Foss, a
seasoned accountant who workwith clients with a lot of real
estate investors and landlords,helping them navigating all of
(01:11):
this tax system that we have inthis country and in the city.
As you know, or maybe you donot know that we have special
taxes that you have to pay whenyou have rental property in the
city of Philadelphia.
And without further ado, let'sjump right into it.
And Welcome, Jennifer.
Glad to have you here todaywith us on our show.
(01:32):
And let's just dive right intoit.
And if you can just introduceyourself, who you are, tell us a
little bit more about what youdo and how did you get into tax
accounting.
Jennifer (01:43):
Okay.
And first, I'd like to startwith saying thank you, Yuri, for
having me here today.
I'm really happy to be here andto share some of my knowledge
and help some of your clients aswell.
As you said, I'm a CPA.
I started because I went intothis field because I work with,
I wanted to work with businessesand I come from a family of
(02:05):
entrepreneurs and that's why Ichose the niche as working with
closely held businesses.
I started with an internationalfirm in the city And I work
with all closely heldbusinesses, even with the big
firms, because that's where myheart really lies.
And that path kind of led meinto going out on my own.
(02:27):
And now I kind of, I did myown, I guess my own vision is
how I see I can help my clientsthe best, and that is to work
really as a right-hand man tothem.
I try to be accessible to myclients if they have any
questions on their taxsituations, even I help them
(02:49):
sometimes with bookkeeping,consulting, because I find that
it helps my job.
It makes my job easier ifthings are really good and
accurate when we go to do thetaxes.
Not only that, no bigsurprises, hopefully.
Because if I'm talking to myclients throughout the year,
they're asking me, hey, I'mthinking of buying this property
(03:12):
or I think I'm going to sellthis property.
That way we're planning throughthe year and there's no big
surprises.
And I really like that.
That's why I did my own firmthat way, my model, because I
think it's the best of bothworlds.
And as far as Even goingforward, that's the type of
(03:34):
client I even like to bring in,the ones that I feel like I can
really help.
Yuriy (03:40):
Okay.
So you're mostly working withclients that do real estate, is
that right?
Jennifer (03:44):
I have a lot of real estate clients, a lot of real
estate investors, yes.
I also work with the closelyheld businesses, but I find it's
kind of interesting, I see thattransition where business
owners eventually come propertyowners.
That's just the nextsuccession.
Once their business startsthriving, especially the first
(04:07):
thing I see is they, you know,whatever business they have,
they buy their building or abuilding for their business.
And that's where it starts.
And then as the business goes,you know, like I said, it seems
as though the next logicalinvestment to a lot of these
business owners, businessmen isproperty.
Yuriy (04:26):
You mentioned that a few times that you're working with
closely held businesses.
Jennifer (04:31):
What does that mean?
It means that they're notpublicly traded and it means
that they're owned just by aperson as opposed to being
traded on the stock market andthat's what they call a closely
held business.
Yuriy (04:45):
Okay, so basically everyone who's listening to this
podcast or show watching thisvideo they will be in the same
category.
They're probably going to bepublicly traded companies.
Let's go out of that.
And you mentioned somethingthat you work with your clients
during the year to prepare forthe tax season.
And since we're just actuallygoing out of the tax season,
(05:07):
we're recording this in thebeginning of May 2025.
So tax season just is over formost of people.
When would you say is the besttime to get ready for your next
tax season?
I know some people do it lastminute.
You start getting these callslike, oh, where's my 1099?
I need my 1099.
(05:28):
I need to know how much money Ineed.
So how do you usually handlethat?
And what would you advisepeople to do?
Jennifer (05:35):
Well, I will tell you, I get, because a lot of returns
are extended right now becausepeople weren't ready.
And if it's like a partnershipor an S corporation, the
extended due date is September15th.
I will be getting calls orinformation, you know, a week or
two before before September15th for some people that really
procrastinate.
(05:56):
Then I have other people who,like you said, I get those
calls.
I didn't file.
Well, hopefully they filed anextension so that we can avoid
the penalty for that.
But I do have some clients Imeet with every week and we're
always doing tax planning, taxstrategy.
the one particular client thati'm thinking of i'm kind of like
(06:21):
their managerial accountant aswell so i'm looking at it from
all angles i'm looking at itfrom managing the company and
strategy for company growth andthen i'm also taking into
consideration the tax piece ofit which a lot of accountants
if they're just like managerialaccountants they don't know the
(06:43):
tax piece So I kind of try tobring it together if clients
want that service.
And I really, I like that.
I have one particular clientthat, like I said, we work very
closely together and they'regrowing incredibly actually.
He just opened his secondbusiness.
He just had his grand openingthis past weekend.
(07:04):
And he's got big plans forthat.
So it's exciting to see whathis future holds.
Yuriy (07:09):
So can you walk us through the main taxes since our
show is catered toPhiladelphia, specifically
Philadelphia investors andlandlords in Philadelphia.
And most of us are small momand pop shops.
We're not like some kind ofhuge company.
We're not some kind of hugebusiness.
And probably a lot of peopledon't even keep books in the way
(07:30):
that you usually used to see inthem, like QuickBooks or
whatever else they can be using.
Most people don't don't do thator don't have that.
So can you walk us through themain taxes that Philadelphia
landlord needs to be aware of?
Jennifer (07:43):
Well, the main ones are the BERT, the business
income receipts tax and the NPTtax, which is the net profits
tax.
Any business or because theyconsider, you know, the real
estate rental business.
So anything that's moneymaking, has to file those taxes.
The only way you don't have tois if you have a corporation or
(08:05):
an S corporation, you don't filethe NPT tax.
Unfortunately though, I mean,it depends on what your ultimate
goal is with your properties,which is something we may get
into later, but typically you donot put a property into an S
corporation and it's strictlytax reasons.
There's some different reasonsthat it's not such a good idea.
(08:28):
But depending on what yoursituation is, it may work for
you.
But typically they're put intoLLCs, partnerships.
Yuriy (08:37):
What are those birth and NPT taxes?
What they are and how do we paythem?
I guess where they're comingfrom.
Jennifer (08:44):
Yeah.
Well, the BERT tax, that's thebusiness income receipts tax.
When you're paying those, theactual tax piece, and I'm
actually looking at one of thereturns because I see the flow
easier.
But with the BERT, theyactually take $100,000 out of
(09:05):
the receipts portion of it,because what they do is there's
two portions to that.
There's the receipts portion,and then there is the net income
portion, and then they put themtogether.
So one of the things that somelandlords may not know about the
BERT taxes, you kind of wantto, and I don't want to say keep
(09:25):
your receipts low, but you haveto report all your receipts as
far as rent for is concerned butif you're getting credit card
rebates don't put that in yourtop line as a receipt because
that goes into the burkecalculation then you know as a
receipt and you're looking atmostly keeping the rental income
(09:46):
in there and some i will tellyou some landlords if they get
reimbursements from tenants andthings like that we don't even
keep that above the line it'soffset their expense so that
they They don't report.
The net effect is zero, okay?
If you pay an expense for yourclient or your tenant, if you
(10:08):
pay that expense for them, ifit's a utility and they pay you
back, you just kind of offsetthat payment that you make.
So you don't take the expenseon your return, but you also
don't report it as income.
because you would get taxed inPhiladelphia on that.
Yuriy (10:23):
Just to break it down, if let's say I have a tenant in
Philadelphia, they just moved ininto a single family house, and
usually I never recommendanyone putting, let's say, water
name into tenants.
So landlords usually keep that.
So me as a landlord, I will goand pay for the water bill, and
then I will bill back the tenantto collect the funds.
(10:45):
So let's say it's $100 water,for water bill a month and then
I build a tenant and they pay me$100.
So what you're saying, insteadof making a record that I have
$100 income and $100 expense,you would rather not put it
above the line because the
Jennifer (11:01):
expense
Yuriy (11:02):
will not be calculated in the birth tax and you will pay
this...
tax on the water bill.
Jennifer (11:07):
On the water bill, yeah.
Now, as I said, with the BERTpiece of it, they do exclude
$100,000 in receipts.
So it's kind of minimal, but ifyou start getting into where
you have big utilities thatyou're being reimbursed or you
have several properties, you canhave a lot of rental income.
And so every little bit helps.
(11:31):
And like I said, they'reexcluding that $100,000 off the
receipts because there's twoportions to that birth tax.
Yuriy (11:39):
And by the receipts, so let's just clarify it.
By the receipts, you meaneverything that you receive as
an income from your rentalproperty?
Jennifer (11:46):
The rents.
I try to keep it for the rents.
That's why I'm saying if you'regetting these reimbursements,
it's kind of offsetting justmoney that you put out.
for an expense and it's a zeronet effect on your return then.
Yuriy (12:02):
So I need to get at least $100,000 or over $100,000 in
rents during the year to be hitby this bird.
Jennifer (12:11):
Yeah.
Yes.
Because if you don't have, andthis is one of the things where
they say, like they take the$100,000 out of there, so then
you wouldn't even have...
any piece to that receiptsbecause they're taking $100,000
off of it.
Now, there still is a littlebit of a profits part to the
(12:31):
BERT as well.
It all gets added together forthe BERT return then.
There's two pieces to it.
There's the income piece andthe net income piece.
Yuriy (12:42):
Can you talk a little bit more about that?
How does that work?
They tax you twice on the netand the gross?
Jennifer (12:50):
Well, that's why they take $100,000 out of the
receipts, I believe, becausethey're saying if you don't have
any liability on the BERT,there's an actual other return.
Because if you're filing a zeroreturn, you're filing a zero
return.
But they're saying if you don'thave...
(13:11):
any taxes on there you can fileanother return it's called a no
no tax liability return is whatthey're saying but i i don't
really see a point in filing adifferent return i just file a
burt at zero it doesn't matteras long as you file something i
guess basically what they'resaying is just because you don't
(13:32):
owe tax don't dismiss filingthese tax returns because One
thing that I do know, if youdon't file these returns, they
don't renew your rentallicenses.
Yuriy (13:44):
Yeah, they will flag you and you will not be able to
renew the rental license or geta new one if you have a new
property under the same account.
So that's BERT.
And what is NPT then?
Jennifer (13:55):
That's another tax.
It's basically, it's the samething.
It's a net profits tax.
It's calculated a little bitdifferently, but And that's
where the corporations don't paythe net profits tax.
Philadelphia, you know, I mean,it's a little bit of an anomaly
with their tax situation, butthey're calculated differently.
(14:15):
And there's no exclusions onthe NPT as far as dollar amount,
but it actually is a smallertax.
I mean, it's not a huge amount,but it still is a tax.
It's on a net profit.
So in other words, I don't wantto say...
It's a double-edged sword withrental properties.
A lot of times we see our realestate investors creating losses
(14:37):
in rental properties because ofthe depreciation and the
repairs and everything, right?
So a lot of times they don'tend up paying a whole lot on the
NPT because there is no profit.
They may have a BERT obligationfor the receipts part of it,
but the net income piece isn'tthere.
(14:59):
That I see a lot with realestate investors.
Yuriy (15:02):
Yeah.
And PT is so kind of easier tounderstand, right?
It's just your net profit,whatever that is.
Usually there is none becausefor most people who have been
investing in real estate andbeing landlord, they understand
how that works.
You have a lot of differentdeductions.
So no matter how hard you try,and even if you have cash flow,
you still on the paper can bezero or negative.
(15:24):
And that happens often.
Very often.
For the birth tax, though, assoon as it's calculated, not on
the net, it's on the totalreceipts.
Jennifer (15:36):
It's on both, yeah.
Yuriy (15:38):
So if I have a mortgage on a house, that mortgage will
not be taken out of the birth.
or for the calculation forbirth?
Jennifer (15:46):
It will be taken out of the net income, not the
mortgage, but the interest.
Right.
Because they go by the netincome from the federal.
So what you're deducting onthere and in what's flowing
through, you can take theinterest piece of it, but the
mortgage, no.
The only place, the mortgagedoesn't come into effect at all
(16:07):
that actual liability balancedoesn't come into effect at all
on these returns.
Yuriy (16:12):
Okay, so both of those taxes, do they affect only
people who actually reside inthe city of Philadelphia or in
the state of Pennsylvania, orit's just for anybody in the
country or outside of thecountry or anybody who has a
property in Philadelphia?
How does that work?
Jennifer (16:28):
It is for anybody that has a property in Philadelphia,
yes.
So if you own, you know, abunch of properties and half of
them are in Philadelphia.
It's only subject to theproperties in Philadelphia,
whether you live in Philadelphiaor don't live in Philadelphia,
as long as you own the propertyin Philadelphia.
Yuriy (16:48):
Okay.
So basically everybody who hasa property in Philadelphia or
who has a rental property inPhiladelphia has to file for
those taxes.
Jennifer (16:57):
That is correct.
Yes.
Yuriy (16:58):
So what are the, most common mistakes that you see
landlords make when filing forthese taxes
Jennifer (17:06):
for those taxes the biggest thing i see and and it's
actually it's a real shock thefirst year for the per tax
because you pay an estimated taxon the birth tax so you're
paying prepaying for next year'stax on this year so the first
year that you get you know haveto file that tax return and you
(17:26):
have income you're paying twice.
So in other words, if you owe,say this year, you owe $3,500
for this year liability, youhave to pay another 3,500 for
next year's liability.
So that's $7,000.
So the biggest mistake I seepeople make is they forget to
carry that estimated paymentover.
(17:48):
And the city usually does catchthat.
But so if you pay that $3,500this year, you deduct it from
next year's return when you goto pay.
And I do see that a lot.
That happened a lot.
That's one mistake I see.
One of the other mistakes I seeis, like I said on the receipts
(18:11):
piece of it, where they put toomuch into the receipts.
They're not categorizing theirincome properly.
I've seen people who get,they're using their credit cards
to pay for their repairs andstuff.
and they get the money that youcan apply to the credit card,
(18:32):
the rewards, and they classifyit as income and we fix it.
We don't put it there.
And I get it.
They're not thinking.
To them, it is income, but it'snot rental income.
It's rewards for your creditcard.
Yuriy (18:47):
So if you don't classify it as an income, how would you
classify it?
Jennifer (18:52):
Well, you would put it into the...
If that money, when you'regetting the reward for your
credit card, if it's goingtowards your credit card
balance, then that's where itgets classified to.
because it goes against yourcredit card balance.
Now that doesn't get shown onthis tax return, but any
(19:13):
expenses that you used yourcredit card to pay for are on
the tax return because thecredit card is on the balance
sheet.
We don't see the balance sheetpiece on the Philadelphia
returns.
We only see the profit andloss.
Yuriy (19:27):
Okay.
So since we're talking aboutall of this classifications and
you classify that or that creditcard balance sheet.
There's a lot of differentwords that, again, most of
smaller size real estateinvestors or landlords, they
don't track it.
It's cumbersome.
It's a lot of time you need topay for whatever tool you use.
(19:48):
And so do you have anyrecommendations?
What is the best way for peoplewho have, let's say, anywhere
between one to ten propertieshow should they manage all the
expenses, income and expenses,how they should record it, how
they should classify it?
Is there any online tool maybethat is free for them to use or
do they just do Excelspreadsheet or whatever, Google
(20:10):
spreadsheet and using
Jennifer (20:12):
it?
Yeah, I actually have a lot ofclients that will use a Google
spreadsheet.
I have one client who hasseveral properties in the city
that they just give me ahandwritten sheet.
But I will tell you, they missa lot of expenses and i know
that and i will ask them did youhave this did you have this did
(20:32):
you have this they say oh yeahi did so i highly recommend i
think that's a really goodquestion i highly recommend that
people are tracking this everymonth don't wait until you go to
file your taxes to sit down andfill out a paper of your income
expenses i actually have somepeople who do a separate bank
(20:55):
ledger sheet.
They don't even use software.
They literally write everythingdown on a bank ledger sheet.
It really depends on how manyproperties you have, how many
transactions you have.
Because if you only have oneproperty, it's definitely
doable, you know, handwritingthings.
But I'm going to say once youget up to like five properties,
(21:19):
you probably should be usingsoftware and you should be
putting, you should definitelyat the very least have at least
one bank account for yourproperties and one credit card
that you use solely forproperties.
It makes it so much easierbecause even if you're not
keeping track of it on paper, wehave the bank statements then.
(21:42):
We can come up with somethingfrom the bank statements.
And I just, I cannot emphasizeenough that people don't capture
all their expenses.
I know it and I see it becausewhen I question them, they say,
oh yeah, oh yeah, oh yeah.
So that's really important,especially if you're working
(22:03):
with somebody that isn't askingyou.
I hear a lot of people, theygive their accountant their
paperwork and they just do thereturn and don't get questions
about what about this, this andthis.
Everybody works differently.
The other piece of it too, ofcourse, you know, this is the
managerial part of it for all ofyour landlords.
(22:26):
It helps to see it on paper.
It truly does because you canwalk around and say, I have
these rental properties.
You don't even know if you'reprofitable.
I'll tell you what, most peopleare pretty good with having it
in their head.
but it's still not the same asseeing it in black and white,
because that is telling the realstory.
And it's an eye opener for somepeople, truly, that they need
(22:50):
to change their ways inbusiness.
So not only is it good from atax perspective, from a business
perspective, it's just a goodidea.
And especially property byproperty, you can see how
profitable each property is.
Or if you don't wanna be thatdetailed, You need it that way
for the tax return anyway, soyou might as well just do it
(23:10):
right.
But I highly recommend that.
Yuriy (23:13):
Yeah.
And I think I'm prettydetail-oriented person.
And I've, in the beginning,when I just started, I was just
using Excel.
We didn't have Googlespreadsheets back then.
It was just an Excelspreadsheet.
And what I did, I just took allthe items from 1040, right?
Where you report your expenses.
I just took everything that ison the form because I knew that
(23:33):
my accountant will ask me forthat.
So I just took that.
I created separate tab for eachproperty and I was just
recording income expenses andcategorizing them based on
whatever was on that 1040 form.
And I was...
sure that I was doing a greatjob with that.
I saw all of my numbers.
(23:54):
But of course, when you'redoing that on a spreadsheet, you
don't do any reconciliations.
You do not check your bankaccounts against what you have
in your records.
And as Jennifer, as you said,you just have to have a separate
bank account and a credit cardfor your properties.
Do not mix it with otherbusinesses or do not mix it with
your personal accounts becausethen it becomes a nightmare
(24:17):
besides the legal liabilitiesthat might How was that?
Just accounting-wise, it's anightmare.
And then when I grew to acertain point where it was too
hard for me to do all of that onthe spreadsheet, I had to start
QuickBooks.
Well, it doesn't have to beQuickBooks, but I did
QuickBooks.
And when I started putting allof that into QuickBooks.
(24:40):
I had help, of course, I had noidea how to do it.
We went one year back because Istarted it, I think it was in
December.
So I was trying to get readyfor the tax season.
Of course it was too late forthat, but still I was trying and
we put it all in QuickBooks.
And then I realized how manythings they just were missing.
(25:01):
I had no idea.
We started reconciling month bymonth, every bank account.
And of course I had like 10different bank accounts and a
couple of them were personalbecause a couple of properties
were in my personal name.
So I figured like, why would Ihave separate accounts?
If I already have personalaccounts, I can just combine
everything.
And then when I startedcomparing all of that, all my
(25:23):
expenses to actual bankaccounts, it was nightmare to
figure out what, Each expensewas where it went to, why I
paid, who I paid to.
And it was thousands andthousands of dollars that I just
missed in my spreadsheet.
So tracking that, it'sdefinitely eye-opening
experience.
Jennifer (25:43):
It is.
It is.
And that's why I try to tellpeople as much as possible,
especially rental properties,because you're putting money out
and you don't even realizesometimes.
And that's why it's nice tohave a separate account.
Yuriy (25:57):
Yeah, yeah.
So you touched a little bit tothat point of having properties
in LLC or corporation orpersonally, maybe.
So is there any advantage ordisadvantage of having one or
the other, especially forPhiladelphia?
Jennifer (26:18):
The city of Philadelphia, the only advantage
comes down to when you have, ifyou have your properties in an
S corporation or, anything in anS corporation, you don't have
to pay the NPT tax.
Unfortunately, an S corporationis not the best entity type to
hold a property in.
And the reason for that is,there's a couple different
(26:42):
reasons if depending on whatyour purpose of buying the
property is and that's one ofthe things i recommend to people
before they buy propertyunderstand and really get clear
in your own mind what is thepurpose of this property because
that that's going to tell youhow it should be you know what
kind of entity should you put itin and how does what does the
(27:04):
whole picture look like but foran s corporation if you were to
put a property in an scorporation as opposed to having
it in an llc if you have loanson that property mortgages or
whatever if those mortgagesdon't go into your basis okay
And basis is huge when it comesto taking losses.
(27:26):
And we all know as real estateinvestors, that's one of the
reasons that we're investing inproperty because we get losses.
But in order to take thoselosses on your tax return, you
have to have basis.
So it's
Yuriy (27:40):
a whole thing.
Let me stop you right there.
Tell us a little bit aboutbasis, what it is and why do we
need to know about that?
Jennifer (27:49):
okay because the tax piece of it and it solely is you
know it's it's a tax piecebasis is what your equity is in
that property when you buy theproperty you know your basis is
whatever you pay for it and sothat's your basis right so you
paid 450 000 but your equitypiece you know because the the
(28:11):
mortgage is on there that that'swhere it gets broken out
because you might only have ahundred thousand dollars actual
equity okay but if you have an scorporation you only get credit
for that hundred thousanddollars as far as basis goes
when you're pulling money out ofyour company that's the
difference if you have an llcthe whole thing is considered
(28:34):
basis so where that matters iswhen you're taking money out of
your company whether or not it'sit's a taxable distribution or
not, because you can only takedistributions tax free.
Remember, when you take moneyout of your company, you're
paying tax on the bottom linenet income.
You're not necessarily payingtax on the money you take out.
(28:56):
That's a distribution and youdon't pay pay tax on that as
long as you have basis or equityin your company.
And that's where it kind ofplays back and forth.
So if you have properties in anS corporation and they're
highly mortgaged, you don't havea lot of basis to be able to
take money out without beingtaxed on it.
(29:19):
You would pay capital gains taxon that on the excess basis.
Okay.
So if you have the, in an LLC,it's all equity and all basis as
far as taking distributionsout.
So that, because think aboutit.
the way that you add basis orequity it's kind of same thing
(29:39):
the way that you're adding yourbasis is by the money that you
put in by the income that yourcompany gets every year and then
your basis gets reduced by theamount of money you take out if
you're not making money to addto your basis and you're always
pulling money out eventuallyyou're going to come very much
(30:00):
upside down kind of thing.
Yuriy (30:02):
This episode brought to you by TrustArt Realty, a
full-service property managementcompany in Philadelphia.
And for all of our listenersand subscribers, they offer free
rental analysis and freeproperty management evaluation.
So if you would like toschedule that call, feel free to
send an email at TrustArtRealtyat phililandlordguy.com or just
(30:26):
click on the link in the shownotes to fill out the form and
someone will get in touch withyou and now let's get back into
it okay so if
Jennifer (30:34):
you're in an s corporation it could be a
problem
Yuriy (30:37):
i know that as corporations they can they have
like or they can elect thestatus that they can be treated
as an llc correct
Jennifer (30:44):
well what happens you form it as an llc and The S
election is strictly for taxpurposes.
So you elect to become an Scorporation from an LLC or a
corporation.
Most likely would not putproperty in a corporation
because that defeats the purposeof being able to take losses on
your personal return because aregular corporation is totally
(31:08):
separate from you.
One of the other disadvantagesof putting property into an S
corporation is you can'tdistribute the property without
it being a tax In an LLC, youcan.
That's another reason thatpeople usually do not put
property in an S corporation.
Another thing, too, is if youhold a property in an S
(31:30):
corporation and you want to putit into a trust, there are only
certain trusts that you can putan S corporation into.
So a big part of this is estateplanning, too.
As you can see, that's why Isaid it's really important when
you buy property that youunderstand or have a clear
(31:51):
knowledge of what you wanna dowith it.
And things do change.
Your life changes, yourscenario changes.
So you have to keep that inmind too when you're making
these decisions.
Is it flexible?
Transfer tax.
If you buy a property and youput it into an LLC, You can
(32:13):
transfer that LLC easily and youdon't pay transfer tax on it.
You can give the LLC tosomebody.
It's holding the property.
You don't pay transfer taxbecause the property is already
in the LLC's need.
So if you want to put that intoa trust or whatever, there's no
transfer tax.
And like I said, with the Scorporation, you can't just put
(32:34):
that into a trust.
There are certain trusts, butwhen you put things into a
trust, like propertiesespecially, a lot of times you
want the trust to do something.
And the QSSTs can't necessarilydo what you want the trust to
do.
There's just a lot of planninginvolved there.
So typically you will seeproperty in LLCs.
Yuriy (32:57):
Yeah, that's definitely something that we'll see.
I don't think I actually everseen anyone having property in
this corporation.
Actually, I have one of ourclients and their accountant
keep telling them that you needto transfer, you need to
transfer.
And finally, I think after afew years, they did transfer.
They had to pay transfer tax,as you said, but at this cost of
(33:18):
the business.
So Jennifer, what types ofincome need to be reported for
rental property?
We already kind of touchedthat, but again, what kind of
income we need to record orreport for rental property and
what common expenses can bededucted out of that income for
the taxes?
Jennifer (33:35):
For the income, like you said, you know, definitely
any rental income.
And if you want to keep, I seesome people do like
reimbursement income under thedown, at the bottom of the P&L
where it's like an other incomebecause you kind of keep your
rental receipts separate so thatyou have a clear picture of
(33:57):
what's going on.
Expense wise, it depends on,you know, every property owner
is kind of unique.
You know, if you live far awayfrom your property and you have,
you know, a property managerrunning that property for you,
you probably don't have a lot oftravel expenses, but sometimes
you might.
(34:17):
And you can certainly take thatas a deduction, you know, if
you have to fly into town.
And then, of course, you haveall your expenses that you pay
to a property managementcompany, your real estate taxes,
mortgage interest, anythinglike that, anything repairs,
utilities, all of that kind ofstuff.
I mean, if you are.
(34:37):
real estate investor that it'syour sole business there's a lot
more that you can deductbecause then you're using your
cell phone every day youprobably have a vehicle what i
usually do with that type ofperson is then i will open an s
corporation as a managementcompany and the reason i do that
is we will take a lot of theincome and shift it over to the
(34:59):
management company and thenbecause this is their job you
know if that's how they're doingit will shift a lot of the
income over there and then theycan take a paycheck out of that
at w2 they can set up aretirement plan for themselves
in the s corporation and thenall of the the properties pay a
(35:20):
management fee to the scorporation and that way you
know they have their overallentity set up for themselves
Yuriy (35:30):
it makes sense to do that we had a few clients asking us
about that.
Well, we have properties andLLCs, but we heard that we need
to have a management corporationor different LLC on the top of
the LLC.
And then it becomes socomplicated that you have to
file taxes for all of them forCity of Philadelphia just
because they treat itdifferently and the City of
(35:52):
Philadelphia look at them likedifferent businesses.
So at which point it makessense and when you don't have to
file at separate taxes for yourLLC and then for your S corp or
another LLC for the sameproperty.
Jennifer (36:05):
Well, that's a good point.
And let's break it down, right?
If you have those propertiesall in separate LLCs and you
have to file separatePhiladelphia returns, you're
going to pay less taxes becauseyou're getting $100,000 out of
each LLC that's being taken out.
If you have them all in oneLLC, you're still only getting
(36:26):
one $100,000 deduction.
You see how that piece works?
And then the S corporation doesnot file the MPT tax.
So in a way, I guess kind ofyou're shifting some of the
income because you are puttinginto the S corporation, but It
depends.
If you set the S corporation upoutside of the city, if you
(36:49):
don't live in the city, it's amute point because that
corporation's set up out there.
Now, there are cases where youstill would have to pay some
Philadelphia tax because you'recoming into the city to work
because you can actually...
It's a little bit different ifthe property is actually in
(37:11):
here.
But if you have a managementcompany and you have some
properties outside of the cityand some in the city, you can
break that out.
It's not the whole thing.
Again, it's just the propertiesthat are in here, that are in
the city of Philadelphia, thatyou're paying that on.
Yuriy (37:28):
Okay.
So we will not go too deep intothat because it gets more
complicated as...
Jennifer (37:34):
It's a rabbit
Yuriy (37:36):
hole.
It's, I think, a conversationfor a separate time when we can
have a different show on that,just how to structure all of
your LLCs and corporations toget better tax results.
But for all of us regularpeople who do not do that, who
have a few properties, maybethey're in the personal name,
(37:57):
maybe a few LLCs, are there anyPhiladelphia-specific deductions
that landlords...
can take or often overlook ordon't even know about them.
Jennifer (38:08):
A lot of times it's kind of ironic, and it comes
down to keeping track of yourexpenses.
They miss the permits, allthose little things.
And I realize they're littlepieces, but they add up.
You're paying for permits,you're paying for inspections,
you're paying for these testing,the lead testing and all of
(38:28):
that.
It's kind of surprising to mesometimes that I get the basics.
You'll get, here's my rentincome.
Here's the electric that Ipaid.
Here's like I said, the basics,but you don't see permits on
there.
You don't see inspections, youknow, anything like that.
And I, when a lot of times whenI asked, they, they did have
(38:48):
them, they just missed it.
Yuriy (38:50):
Can you tell us a little bit about depreciation and how
does it work or is it differentin Philadelphia where it's the
same everywhere?
Jennifer (38:59):
It is not different in Philadelphia because
Philadelphia takes the netincome from the federal.
So that's why it's notdifferent.
It's different forPennsylvania, but it's not
different for Philadelphia.
Pennsylvania has a differentdepreciation when it comes to
bonus and 179 depreciation.
(39:19):
They only allow 20, 25,000 forPennsylvania.
Yuriy (39:23):
Just for it to be easy for people to understand, what
is depreciation?
What are we depreciating?
Jennifer (39:29):
Okay.
Depreciation.
And that's actually a verycommon question because what
depreciation is, is you'rebuying something.
Obviously with landlords,you're buying a piece of
property.
Only the building getsdepreciated.
And that's what's different inPhiladelphia because a lot of
times the property owners inPhiladelphia are buying row
(39:53):
homes.
The land's not big, okay?
So the land does not getdepreciated.
So that's a big difference thatI do see in Philadelphia.
If you come to me and you say,I just bought a $500,000
property, well, it's totallydifferent if that $500,000
(40:14):
property is sitting on an acreof land as opposed to sitting on
a very small piece of land.
So you get a lot moredepreciation out of that, which
is kind of nice.
on the expense part of it.
But what depreciation is, isit's expensing something over
the useful life of whatever itis that you're depreciating.
(40:34):
So property, a building, if itis residential investment
property, it's depreciated over27 and a half years.
If it is commercial property,it's depreciated over 39 years.
So they consider that theuseful lives.
And then when you go to dorepairs and things like that,
(40:56):
they also, depending on what therepair is, it has the
improvements, it also getsdepreciated over a certain life.
Some things that you buy, whenyou depreciate them, it might be
five years.
Usually a lot of times with theproperties, it gets depreciated
over the 27 and a half years ifit's improvements and things
(41:18):
like that.
Sometimes they have specialdepreciation.
You know, like one year youmight hear them say, hey, we
have bonus depreciation thisyear.
We can take that or whatever.
It just depends on the yearsometimes, you know.
At
Yuriy (41:30):
which point, you mentioned that when you do
repairs or capital, well, youdidn't say that word, but when
you do big improvement to yourproperty, right, you would put
that in as a depreciation anddepends on what exactly it is.
It will be maybe five years, 10years or whatever, 27 years.
So at which point, you know, orhow do you determine if it's
(41:53):
just an expense or it will bedepreciated over a certain
amount of time?
Is it by the amount?
Is it by the type of work, bythe type of the equipment?
What is the rule there?
Jennifer (42:03):
It's all of the above, quite frankly.
So kind of the rule of thumbwith the IRS is $2,500 is what
the invoice is.
So in other words, if you goout and you buy, you know, you
buy a window for 1500 and youbuy a door for 1500, that's
(42:26):
$3,000, right?
But they're separate.
So you could really justexpense them.
In other words, if you havesomebody come in and do repairs,
technically, if those repairscome out, if they're repairs,
they're expensive.
They don't have to becapitalized if it's truly
repairs.
If it's improvements and it'sbettering the property, that's
(42:47):
when you have to capitalize it.
There are instances where youcan have a study done.
It's called the cost seg.
And that's totally fordepreciation, which I have seen
people do on, you know, biggerproperties, or if it makes sense
for your property, but the costseg off obviously costs money.
(43:09):
So you have to make adetermination whether or not
it's worth it.
Because when they change the, Imean, the depreciation, you
could probably do a wholesegment on depreciation.
And I'm not even kidding.
It's convoluted when it comesto some of the bigger stuff, but
part of it is systems.
Like if you have six airconditioner units in your
(43:32):
building, and if you'rereplacing over half of them,
then it has to be capitalized.
that's where these cost segscome in and breaking everything
out.
So it does get a littleconvoluted, but I would say
probably for the normal landlordin their situation, it goes
(43:53):
according to the $2,500threshold or whether it's,
repairs.
If it's all repairs, a lot oftimes you can expense it.
But if it's an actualimprovement, it has to be
capitalized.
Yuriy (44:06):
Are there any implications for landlords in
Philadelphia who are not havinga rental license in place when
they file taxes or claimdeductions?
Jennifer (44:17):
No.
Yuriy (44:19):
So those two, they're not connected?
Jennifer (44:22):
Not from that.
Like we said before, the otherway, yes, you have to have your
taxes filed to get your license,but you don't need the license
to file the tax.
Yuriy (44:33):
Okay.
What about short-term rentalsthat operate in the city of
Philadelphia?
Do they have some kind ofdifferent tax obligations
compared to long-term landlordsor everything is basically the
same?
Jennifer (44:45):
They have a hotel tax that they have to pay in the
city of Philadelphia, which it'seight and a half percent.
And I believe that the companylike Airbnb or Vrbo, is that the
other one?
I believe they collect thatright off the top.
And at that point, that becomesan expense to you.
(45:10):
to the landlord or whoever'soperating that property, it's an
expense.
And that's something you needto remember, but it is on the
statements.
They usually give you a prettygood detailed statement because
unfortunately the whole amountis in the rental piece because
that's a tax that's paid off thetop line.
Yuriy (45:32):
Jennifer, what is your take on paying yourself?
I know you touched a little biton that when you were talking
about LLCs versus S-corporationsand management or your
corporation as a management foryour LLCs.
So what is your take on payingyourself as a landlord versus
reinvesting all profits backinto the property?
Jennifer (45:53):
It depends on a few things.
The property itself, if itneeds updating and you want to
be the type of landlord that youcan keep your property and your
business operating top-notch,get top rent you probably want
to keep reinvesting in yourproperty if your property
(46:16):
doesn't go downhill and you havegood tenants in there they're
not costing you a lot of moneythat's that that's the key right
is getting the right tenantbecause then it becomes a very
profitable property but thatbeing said if if the interest
rates are low you are muchbetter off borrowing money and
putting it into the propertythan you are using your own
(46:38):
money take that money and investit.
That's what I say.
You know, if you are into thatkind of thing or take that money
and buy another property or I'msure that's how a lot of
property owners do it.
But right now, I don't want tosay that the interest rates
aren't high.
They're more normal.
They're just not on the low,low end where when they were on
(47:01):
the low end, I would say topeople, well, yeah, pull the
money out depending on whatyou're using it for.
You know, So it's kind of thesituation of what does that look
like?
Even if you're taking moneyout, taking a loan out to buy
another property, you're stillinvesting it.
But if you're just pulling itout to go on vacation, that's a
(47:24):
personal thing.
I have seen some people whothey cannot handle their bank
account being under a threshold.
It's got to be at $10,000 or Ican't sleep at night.
So that's a determining factoras well.
And then I have people who theydon't care about their bank
balance.
They care about them feelinglike they're getting paid for
(47:46):
working.
And I say to them, if that'show you feel good, you know, it
really is a personal and eachsituation is different.
Yuriy (47:57):
Yeah, it is.
It's truly every singlelandlord is different.
Everybody has a differentsituation and it works
differently for everyone.
There is not a magic advicethat you can give someone and
tell them, hey, go buy thatproperty, put the tenant on and
do this with your money and youwill get the best results.
It is all very personal andcomes down to your personal
(48:20):
goals and to the type of personyou are and what you're trying
to do with it.
Jennifer (48:25):
That is for sure.
And I will tell you, I haveseen so many different thought
processes on that question.
Everybody's personality is, andit's interesting.
It's interesting.
Yuriy (48:39):
Yeah, but I often, in my line of work, I often have these
conversations with landlords orour clients and they would come
to me and they would tell me,well, I want to invest, like,
what is the best property to buyright now?
Or which area is the best forme to invest?
Well, I need more information.
I cannot tell you what is thebest property.
I can tell you where I boughtmy last property or what
(49:00):
property I bought and why Ibought it.
But you and I will havecompletely different set of
goals and we have differenttypes of investments and we have
different personalities.
So it all depends on whatexactly you're looking for.
Tell me more.
Tell me what you want to have.
Tell me how much you're lookingto spend.
Is it just a short-term game?
(49:21):
Is it something that you wantto be in for 15 years?
So it's a lot.
I like that.
Jennifer, are there anyupcoming tax law changes that
you know of and that we need tobe aware of?
Jennifer (49:37):
well because you know we have a new administration
and that always makes things alittle bit tricky but what i
will say there's two things forcertain that will affect
property owners is there's thecuba deduction which is the
qualified business incomededuction will be sun setting at
(49:59):
the end of 25 and also the saltthe state and local tax
threshold which hits on thepersonal return but it has to do
with real estate taxeseverything they're um going to
be sunsetting at the end of2025.
there has been indication thatthey do plan on extending it if
(50:19):
not making it permanent sothat's kind of what we're
thinking is going to happenespecially since the current
administration is who put thatinto place
Yuriy (50:29):
right Yeah, that's what I would think as well.
Jennifer (50:32):
Those are really that I would really see hitting real
estate investors for the mostpart is that QBID deduction.
And of course, everything withthe depreciation, too, because
that and that changes all thetime or it can.
That's that's pretty obvious.
year to year a lot of times
Yuriy (50:52):
jennifer if someone is buying their first rental
property this year inphiladelphia what is the most
important single thing that theyneed to do to avoid tax mass
later
Jennifer (51:06):
i would say for one thing expect that extra
mandatory tax on the BERT forthe first year that you're
showing income.
Now, if they only have oneproperty, most likely they're
going to end up paying zerotaxes in Philadelphia because
they have that $100,000exclusion.
And the first year that you buyproperty, most times you will
(51:29):
end up with a loss because ofthe depreciation and the loan
costs, the title, the transfersand all of that, typically the
first year.
But To your point, becausethey're new, they don't know
what to expect.
And I'm sure you've heard itfrom people as well.
They get kind of blindsided thesecond, third year.
(51:51):
That's when some of the othertaxes start picking up.
And then by the time they startbuying their second, third
property, you're going to seethat $100,000 exclusion come
out.
And that first year that theyhave profit in there, they have
to pay their first year tax.
and their estimated tax.
That's when I see the realshock happen.
(52:12):
That all goes back to keepingtrack of your books throughout
the year, knowing what yourincome is so you know what, have
somewhat of an idea what toexpect, and even touching base
with your accountant especiallytowards the end of the year,
because once 1231 hits, there'snothing you can do.
Yuriy (52:32):
That's a good point.
Let's say I'm a brand newinvestor or a landlord.
I just bought a property thisyear.
It's my first property.
Do I have to have anaccountant?
Because to me, it sounds like Inever had an accountant.
I was using, I don't know,TurboTax to file in my W-2 taxes
all the time.
And now all of a sudden I havethis property that I need to
file taxes for.
(52:53):
It doesn't sound thatcomplicated.
I just have like, I don't know,12 friends coming in.
I can just put it all togetherand then put it in the app and
file my taxes.
Do I need to have anaccountant?
Because I don't have enoughincome from this property to pay
for an accountant, to be quitehonest.
Jennifer (53:10):
Well...
My answer to that is no, youdon't have to.
If you're fully, you know, feelconfident in what you're doing,
what I would suggest, though,is that you talk to an
accountant at the very leastbefore you buy the property for
all of the reasons that we justdiscussed.
I have people that ask me.
questions they do their own taxreturn they'll ask me questions
(53:34):
and I am not against that atall because I do think some
people are capable of it but ifyou aren't keeping good records
it's really important you knowthat you talk to somebody you my
my thing that I would say topeople is you know yourself you
know but keep up on the changinglaws and it does not hurt to
(53:56):
reach out to an accountant andtalk to them and just really
make sure that you're up on itbecause there's a lot of
misconceptions out there.
And what happens is I see itoccasionally where people, they
do it themselves and they don'tconsultant accountant until it's
(54:19):
too late and then it costs thema lot of money and that's why
i'm saying you know even yourannual return you're just
putting it on your personalreturn It's really not that big
of a deal if you're confidentwith it, but I definitely would
talk to somebody before, getsome knowledge, I guess.
Yuriy (54:36):
Yeah.
I would also add to it, if youtalk to someone, make sure that
you're talking to someone whoknows specifically CTO of
Philadelphia taxes.
I've seen that happen manytimes when people out of state,
even in the state, just a littlebit away from Philadelphia, a
couple of counties away, Theyinvest in Philadelphia and they
(54:56):
have no idea about thisadditional taxes that they need
to pay.
And they have an accountant,but the accountant has no idea
about that either because theydon't work in CEO.
Jennifer (55:04):
You bring up a very good point because I actually
just was working on resolvingsomebody with that same exact
situation.
They had an out-of-stateaccountant and did not know
about the local Philadelphiataxes.
And that does happen.
And then, I mean, everything'sfixable, but it costs more to
fix.
it than it does to do it rightthe first time.
(55:26):
So yeah, definitely make sureyou know about the Philadelphia
taxes.
And the strange thing is too,Philadelphia is, they're hard to
get a hold of on the phonesometimes.
Yuriy (55:38):
Sometimes.
I would rephrase that.
You never can get them on thephone.
Jennifer (55:44):
Yes.
But what I have been doing andin telling people to do is
emailing them.
They do seem to, because thenyou have it in writing.
Plus you do have it in writing.
Plus then you do have it inwriting because that kind of
helps cover things too.
Yuriy (56:02):
Well, that's a wealth of information, Jennifer.
Thank you so much for joiningus today.
Thank you.
So if any of our listeners orwatchers want to reach out to
you, what is the best way?
We will put your information inthe show notes, but What's the
best way for reaching out andhow they can get a hold of you?
Jennifer (56:22):
My website is lehightaxservices.com and our
phone number is 484-899-9399.
And yeah, if you have anyquestions, you can certainly
reach out to me.
I do have people that will callwith questions and I try to
help people as fast as I canbecause it does help me to keep
(56:43):
my head in the game too.
And I actually, I really likewhat I do.
And Philadelphia is a challengeand a good challenge is always
good.
So
Yuriy (56:54):
yeah.
I agree with you on that.
It's always fun.
And it's always nice talking topeople and try and figuring out
the problem and how to solveit.
Well, Jennifer, thank you somuch.
And thank you for joining us.
And hopefully we'll see youagain sometime.
Yes,
Jennifer (57:10):
thank you, Yuri.
I appreciate
Yuriy (57:12):
it.
Big thanks again to Jenniferfor staying with us today and
for sharing all of this wealthof information.
Remember, Philadelphia is avery specific place with very
specific tax responsibilities.
And as a landlord, you need toknow how to get ahead of them
that you can save money.
(57:33):
a lot of stress and money downthe line.
If you enjoyed today's episode,please don't forget to
subscribe, like it, share it.
And if you need to get in touchwith Jennifer, you will find
her contact information in theshow notes.
Thank you and see you nexttime.
That's where it gets broken out because you might
only have $100,000 actualequity.
Yuriy (00:05):
What are those birth and NPT taxes?
What they are and how do we paythem and where are they coming
from?
We're here to share insightsand experiences, not legal or
accounting advice.
Be sure to talk to yourattorney, accountant, or
(00:28):
professional advisor beforemaking any decisions.
Everyone's situation isdifferent.
Get the help that is right foryou.
Hi, everyone.
Welcome back to the PhillyLandlord Guide.
I'm your host, YuriSkripnichenko, licensed broker,
real estate broker and certifiedproperty management in
(00:49):
philadelphia and today we diveon into a topic that every
landlord must know andunderstand try it taxes.
And to help us break it down,I'm joined by Jennifer Foss, a
seasoned accountant who workwith clients with a lot of real
estate investors and landlords,helping them navigating all of
(01:11):
this tax system that we have inthis country and in the city.
As you know, or maybe you donot know that we have special
taxes that you have to pay whenyou have rental property in the
city of Philadelphia.
And without further ado, let'sjump right into it.
And Welcome, Jennifer.
Glad to have you here todaywith us on our show.
(01:32):
And let's just dive right intoit.
And if you can just introduceyourself, who you are, tell us a
little bit more about what youdo and how did you get into tax
accounting.
Jennifer (01:43):
Okay.
And first, I'd like to startwith saying thank you, Yuri, for
having me here today.
I'm really happy to be here andto share some of my knowledge
and help some of your clients aswell.
As you said, I'm a CPA.
I started because I went intothis field because I work with,
I wanted to work with businessesand I come from a family of
(02:05):
entrepreneurs and that's why Ichose the niche as working with
closely held businesses.
I started with an internationalfirm in the city And I work
with all closely heldbusinesses, even with the big
firms, because that's where myheart really lies.
And that path kind of led meinto going out on my own.
(02:27):
And now I kind of, I did myown, I guess my own vision is
how I see I can help my clientsthe best, and that is to work
really as a right-hand man tothem.
I try to be accessible to myclients if they have any
questions on their taxsituations, even I help them
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sometimes with bookkeeping,consulting, because I find that
it helps my job.
It makes my job easier ifthings are really good and
accurate when we go to do thetaxes.
Not only that, no bigsurprises, hopefully.
Because if I'm talking to myclients throughout the year,
they're asking me, hey, I'mthinking of buying this property
(03:12):
or I think I'm going to sellthis property.
That way we're planning throughthe year and there's no big
surprises.
And I really like that.
That's why I did my own firmthat way, my model, because I
think it's the best of bothworlds.
And as far as Even goingforward, that's the type of
(03:34):
client I even like to bring in,the ones that I feel like I can
really help.
Yuriy (03:40):
Okay.
So you're mostly working withclients that do real estate, is
that right?
Jennifer (03:44):
I have a lot of real estate clients, a lot of real
estate investors, yes.
I also work with the closelyheld businesses, but I find it's
kind of interesting, I see thattransition where business
owners eventually come propertyowners.
That's just the nextsuccession.
Once their business startsthriving, especially the first
(04:07):
thing I see is they, you know,whatever business they have,
they buy their building or abuilding for their business.
And that's where it starts.
And then as the business goes,you know, like I said, it seems
as though the next logicalinvestment to a lot of these
business owners, businessmen isproperty.
Yuriy (04:26):
You mentioned that a few times that you're working with
closely held businesses.
Jennifer (04:31):
What does that mean?
It means that they're notpublicly traded and it means
that they're owned just by aperson as opposed to being
traded on the stock market andthat's what they call a closely
held business.
Yuriy (04:45):
Okay, so basically everyone who's listening to this
podcast or show watching thisvideo they will be in the same
category.
They're probably going to bepublicly traded companies.
Let's go out of that.
And you mentioned somethingthat you work with your clients
during the year to prepare forthe tax season.
And since we're just actuallygoing out of the tax season,
(05:07):
we're recording this in thebeginning of May 2025.
So tax season just is over formost of people.
When would you say is the besttime to get ready for your next
tax season?
I know some people do it lastminute.
You start getting these callslike, oh, where's my 1099?
I need my 1099.
(05:28):
I need to know how much money Ineed.
So how do you usually handlethat?
And what would you advisepeople to do?
Jennifer (05:35):
Well, I will tell you, I get, because a lot of returns
are extended right now becausepeople weren't ready.
And if it's like a partnershipor an S corporation, the
extended due date is September15th.
I will be getting calls orinformation, you know, a week or
two before before September15th for some people that really
procrastinate.
(05:56):
Then I have other people who,like you said, I get those
calls.
I didn't file.
Well, hopefully they filed anextension so that we can avoid
the penalty for that.
But I do have some clients Imeet with every week and we're
always doing tax planning, taxstrategy.
the one particular client thati'm thinking of i'm kind of like
(06:21):
their managerial accountant aswell so i'm looking at it from
all angles i'm looking at itfrom managing the company and
strategy for company growth andthen i'm also taking into
consideration the tax piece ofit which a lot of accountants
if they're just like managerialaccountants they don't know the
(06:43):
tax piece So I kind of try tobring it together if clients
want that service.
And I really, I like that.
I have one particular clientthat, like I said, we work very
closely together and they'regrowing incredibly actually.
He just opened his secondbusiness.
He just had his grand openingthis past weekend.
(07:04):
And he's got big plans forthat.
So it's exciting to see whathis future holds.
Yuriy (07:09):
So can you walk us through the main taxes since our
show is catered toPhiladelphia, specifically
Philadelphia investors andlandlords in Philadelphia.
And most of us are small momand pop shops.
We're not like some kind ofhuge company.
We're not some kind of hugebusiness.
And probably a lot of peopledon't even keep books in the way
(07:30):
that you usually used to see inthem, like QuickBooks or
whatever else they can be using.
Most people don't don't do thator don't have that.
So can you walk us through themain taxes that Philadelphia
landlord needs to be aware of?
Jennifer (07:43):
Well, the main ones are the BERT, the business
income receipts tax and the NPTtax, which is the net profits
tax.
Any business or because theyconsider, you know, the real
estate rental business.
So anything that's moneymaking, has to file those taxes.
The only way you don't have tois if you have a corporation or
(08:05):
an S corporation, you don't filethe NPT tax.
Unfortunately though, I mean,it depends on what your ultimate
goal is with your properties,which is something we may get
into later, but typically you donot put a property into an S
corporation and it's strictlytax reasons.
There's some different reasonsthat it's not such a good idea.
(08:28):
But depending on what yoursituation is, it may work for
you.
But typically they're put intoLLCs, partnerships.
Yuriy (08:37):
What are those birth and NPT taxes?
What they are and how do we paythem?
I guess where they're comingfrom.
Jennifer (08:44):
Yeah.
Well, the BERT tax, that's thebusiness income receipts tax.
When you're paying those, theactual tax piece, and I'm
actually looking at one of thereturns because I see the flow
easier.
But with the BERT, theyactually take $100,000 out of
(09:05):
the receipts portion of it,because what they do is there's
two portions to that.
There's the receipts portion,and then there is the net income
portion, and then they put themtogether.
So one of the things that somelandlords may not know about the
BERT taxes, you kind of wantto, and I don't want to say keep
(09:25):
your receipts low, but you haveto report all your receipts as
far as rent for is concerned butif you're getting credit card
rebates don't put that in yourtop line as a receipt because
that goes into the burkecalculation then you know as a
receipt and you're looking atmostly keeping the rental income
(09:46):
in there and some i will tellyou some landlords if they get
reimbursements from tenants andthings like that we don't even
keep that above the line it'soffset their expense so that
they They don't report.
The net effect is zero, okay?
If you pay an expense for yourclient or your tenant, if you
(10:08):
pay that expense for them, ifit's a utility and they pay you
back, you just kind of offsetthat payment that you make.
So you don't take the expenseon your return, but you also
don't report it as income.
because you would get taxed inPhiladelphia on that.
Yuriy (10:23):
Just to break it down, if let's say I have a tenant in
Philadelphia, they just moved ininto a single family house, and
usually I never recommendanyone putting, let's say, water
name into tenants.
So landlords usually keep that.
So me as a landlord, I will goand pay for the water bill, and
then I will bill back the tenantto collect the funds.
(10:45):
So let's say it's $100 water,for water bill a month and then
I build a tenant and they pay me$100.
So what you're saying, insteadof making a record that I have
$100 income and $100 expense,you would rather not put it
above the line because the
Jennifer (11:01):
expense
Yuriy (11:02):
will not be calculated in the birth tax and you will pay
this...
tax on the water bill.
Jennifer (11:07):
On the water bill, yeah.
Now, as I said, with the BERTpiece of it, they do exclude
$100,000 in receipts.
So it's kind of minimal, but ifyou start getting into where
you have big utilities thatyou're being reimbursed or you
have several properties, you canhave a lot of rental income.
And so every little bit helps.
(11:31):
And like I said, they'reexcluding that $100,000 off the
receipts because there's twoportions to that birth tax.
Yuriy (11:39):
And by the receipts, so let's just clarify it.
By the receipts, you meaneverything that you receive as
an income from your rentalproperty?
Jennifer (11:46):
The rents.
I try to keep it for the rents.
That's why I'm saying if you'regetting these reimbursements,
it's kind of offsetting justmoney that you put out.
for an expense and it's a zeronet effect on your return then.
Yuriy (12:02):
So I need to get at least $100,000 or over $100,000 in
rents during the year to be hitby this bird.
Jennifer (12:11):
Yeah.
Yes.
Because if you don't have, andthis is one of the things where
they say, like they take the$100,000 out of there, so then
you wouldn't even have...
any piece to that receiptsbecause they're taking $100,000
off of it.
Now, there still is a littlebit of a profits part to the
(12:31):
BERT as well.
It all gets added together forthe BERT return then.
There's two pieces to it.
There's the income piece andthe net income piece.
Yuriy (12:42):
Can you talk a little bit more about that?
How does that work?
They tax you twice on the netand the gross?
Jennifer (12:50):
Well, that's why they take $100,000 out of the
receipts, I believe, becausethey're saying if you don't have
any liability on the BERT,there's an actual other return.
Because if you're filing a zeroreturn, you're filing a zero
return.
But they're saying if you don'thave...
(13:11):
any taxes on there you can fileanother return it's called a no
no tax liability return is whatthey're saying but i i don't
really see a point in filing adifferent return i just file a
burt at zero it doesn't matteras long as you file something i
guess basically what they'resaying is just because you don't
(13:32):
owe tax don't dismiss filingthese tax returns because One
thing that I do know, if youdon't file these returns, they
don't renew your rentallicenses.
Yuriy (13:44):
Yeah, they will flag you and you will not be able to
renew the rental license or geta new one if you have a new
property under the same account.
So that's BERT.
And what is NPT then?
Jennifer (13:55):
That's another tax.
It's basically, it's the samething.
It's a net profits tax.
It's calculated a little bitdifferently, but And that's
where the corporations don't paythe net profits tax.
Philadelphia, you know, I mean,it's a little bit of an anomaly
with their tax situation, butthey're calculated differently.
(14:15):
And there's no exclusions onthe NPT as far as dollar amount,
but it actually is a smallertax.
I mean, it's not a huge amount,but it still is a tax.
It's on a net profit.
So in other words, I don't wantto say...
It's a double-edged sword withrental properties.
A lot of times we see our realestate investors creating losses
(14:37):
in rental properties because ofthe depreciation and the
repairs and everything, right?
So a lot of times they don'tend up paying a whole lot on the
NPT because there is no profit.
They may have a BERT obligationfor the receipts part of it,
but the net income piece isn'tthere.
(14:59):
That I see a lot with realestate investors.
Yuriy (15:02):
Yeah.
And PT is so kind of easier tounderstand, right?
It's just your net profit,whatever that is.
Usually there is none becausefor most people who have been
investing in real estate andbeing landlord, they understand
how that works.
You have a lot of differentdeductions.
So no matter how hard you try,and even if you have cash flow,
you still on the paper can bezero or negative.
(15:24):
And that happens often.
Very often.
For the birth tax, though, assoon as it's calculated, not on
the net, it's on the totalreceipts.
Jennifer (15:36):
It's on both, yeah.
Yuriy (15:38):
So if I have a mortgage on a house, that mortgage will
not be taken out of the birth.
or for the calculation forbirth?
Jennifer (15:46):
It will be taken out of the net income, not the
mortgage, but the interest.
Right.
Because they go by the netincome from the federal.
So what you're deducting onthere and in what's flowing
through, you can take theinterest piece of it, but the
mortgage, no.
The only place, the mortgagedoesn't come into effect at all
(16:07):
that actual liability balancedoesn't come into effect at all
on these returns.
Yuriy (16:12):
Okay, so both of those taxes, do they affect only
people who actually reside inthe city of Philadelphia or in
the state of Pennsylvania, orit's just for anybody in the
country or outside of thecountry or anybody who has a
property in Philadelphia?
How does that work?
Jennifer (16:28):
It is for anybody that has a property in Philadelphia,
yes.
So if you own, you know, abunch of properties and half of
them are in Philadelphia.
It's only subject to theproperties in Philadelphia,
whether you live in Philadelphiaor don't live in Philadelphia,
as long as you own the propertyin Philadelphia.
Yuriy (16:48):
Okay.
So basically everybody who hasa property in Philadelphia or
who has a rental property inPhiladelphia has to file for
those taxes.
Jennifer (16:57):
That is correct.
Yes.
Yuriy (16:58):
So what are the, most common mistakes that you see
landlords make when filing forthese taxes
Jennifer (17:06):
for those taxes the biggest thing i see and and it's
actually it's a real shock thefirst year for the per tax
because you pay an estimated taxon the birth tax so you're
paying prepaying for next year'stax on this year so the first
year that you get you know haveto file that tax return and you
(17:26):
have income you're paying twice.
So in other words, if you owe,say this year, you owe $3,500
for this year liability, youhave to pay another 3,500 for
next year's liability.
So that's $7,000.
So the biggest mistake I seepeople make is they forget to
carry that estimated paymentover.
(17:48):
And the city usually does catchthat.
But so if you pay that $3,500this year, you deduct it from
next year's return when you goto pay.
And I do see that a lot.
That happened a lot.
That's one mistake I see.
One of the other mistakes I seeis, like I said on the receipts
(18:11):
piece of it, where they put toomuch into the receipts.
They're not categorizing theirincome properly.
I've seen people who get,they're using their credit cards
to pay for their repairs andstuff.
and they get the money that youcan apply to the credit card,
(18:32):
the rewards, and they classifyit as income and we fix it.
We don't put it there.
And I get it.
They're not thinking.
To them, it is income, but it'snot rental income.
It's rewards for your creditcard.
Yuriy (18:47):
So if you don't classify it as an income, how would you
classify it?
Jennifer (18:52):
Well, you would put it into the...
If that money, when you'regetting the reward for your
credit card, if it's goingtowards your credit card
balance, then that's where itgets classified to.
because it goes against yourcredit card balance.
Now that doesn't get shown onthis tax return, but any
(19:13):
expenses that you used yourcredit card to pay for are on
the tax return because thecredit card is on the balance
sheet.
We don't see the balance sheetpiece on the Philadelphia
returns.
We only see the profit andloss.
Yuriy (19:27):
Okay.
So since we're talking aboutall of this classifications and
you classify that or that creditcard balance sheet.
There's a lot of differentwords that, again, most of
smaller size real estateinvestors or landlords, they
don't track it.
It's cumbersome.
It's a lot of time you need topay for whatever tool you use.
(19:48):
And so do you have anyrecommendations?
What is the best way for peoplewho have, let's say, anywhere
between one to ten propertieshow should they manage all the
expenses, income and expenses,how they should record it, how
they should classify it?
Is there any online tool maybethat is free for them to use or
do they just do Excelspreadsheet or whatever, Google
(20:10):
spreadsheet and using
Jennifer (20:12):
it?
Yeah, I actually have a lot ofclients that will use a Google
spreadsheet.
I have one client who hasseveral properties in the city
that they just give me ahandwritten sheet.
But I will tell you, they missa lot of expenses and i know
that and i will ask them did youhave this did you have this did
(20:32):
you have this they say oh yeahi did so i highly recommend i
think that's a really goodquestion i highly recommend that
people are tracking this everymonth don't wait until you go to
file your taxes to sit down andfill out a paper of your income
expenses i actually have somepeople who do a separate bank
(20:55):
ledger sheet.
They don't even use software.
They literally write everythingdown on a bank ledger sheet.
It really depends on how manyproperties you have, how many
transactions you have.
Because if you only have oneproperty, it's definitely
doable, you know, handwritingthings.
But I'm going to say once youget up to like five properties,
(21:19):
you probably should be usingsoftware and you should be
putting, you should definitelyat the very least have at least
one bank account for yourproperties and one credit card
that you use solely forproperties.
It makes it so much easierbecause even if you're not
keeping track of it on paper, wehave the bank statements then.
(21:42):
We can come up with somethingfrom the bank statements.
And I just, I cannot emphasizeenough that people don't capture
all their expenses.
I know it and I see it becausewhen I question them, they say,
oh yeah, oh yeah, oh yeah.
So that's really important,especially if you're working
(22:03):
with somebody that isn't askingyou.
I hear a lot of people, theygive their accountant their
paperwork and they just do thereturn and don't get questions
about what about this, this andthis.
Everybody works differently.
The other piece of it too, ofcourse, you know, this is the
managerial part of it for all ofyour landlords.
(22:26):
It helps to see it on paper.
It truly does because you canwalk around and say, I have
these rental properties.
You don't even know if you'reprofitable.
I'll tell you what, most peopleare pretty good with having it
in their head.
but it's still not the same asseeing it in black and white,
because that is telling the realstory.
And it's an eye opener for somepeople, truly, that they need
(22:50):
to change their ways inbusiness.
So not only is it good from atax perspective, from a business
perspective, it's just a goodidea.
And especially property byproperty, you can see how
profitable each property is.
Or if you don't wanna be thatdetailed, You need it that way
for the tax return anyway, soyou might as well just do it
(23:10):
right.
But I highly recommend that.
Yuriy (23:13):
Yeah.
And I think I'm prettydetail-oriented person.
And I've, in the beginning,when I just started, I was just
using Excel.
We didn't have Googlespreadsheets back then.
It was just an Excelspreadsheet.
And what I did, I just took allthe items from 1040, right?
Where you report your expenses.
I just took everything that ison the form because I knew that
(23:33):
my accountant will ask me forthat.
So I just took that.
I created separate tab for eachproperty and I was just
recording income expenses andcategorizing them based on
whatever was on that 1040 form.
And I was...
sure that I was doing a greatjob with that.
I saw all of my numbers.
(23:54):
But of course, when you'redoing that on a spreadsheet, you
don't do any reconciliations.
You do not check your bankaccounts against what you have
in your records.
And as Jennifer, as you said,you just have to have a separate
bank account and a credit cardfor your properties.
Do not mix it with otherbusinesses or do not mix it with
your personal accounts becausethen it becomes a nightmare
(24:17):
besides the legal liabilitiesthat might How was that?
Just accounting-wise, it's anightmare.
And then when I grew to acertain point where it was too
hard for me to do all of that onthe spreadsheet, I had to start
QuickBooks.
Well, it doesn't have to beQuickBooks, but I did
QuickBooks.
And when I started putting allof that into QuickBooks.
(24:40):
I had help, of course, I had noidea how to do it.
We went one year back because Istarted it, I think it was in
December.
So I was trying to get readyfor the tax season.
Of course it was too late forthat, but still I was trying and
we put it all in QuickBooks.
And then I realized how manythings they just were missing.
(25:01):
I had no idea.
We started reconciling month bymonth, every bank account.
And of course I had like 10different bank accounts and a
couple of them were personalbecause a couple of properties
were in my personal name.
So I figured like, why would Ihave separate accounts?
If I already have personalaccounts, I can just combine
everything.
And then when I startedcomparing all of that, all my
(25:23):
expenses to actual bankaccounts, it was nightmare to
figure out what, Each expensewas where it went to, why I
paid, who I paid to.
And it was thousands andthousands of dollars that I just
missed in my spreadsheet.
So tracking that, it'sdefinitely eye-opening
experience.
Jennifer (25:43):
It is.
It is.
And that's why I try to tellpeople as much as possible,
especially rental properties,because you're putting money out
and you don't even realizesometimes.
And that's why it's nice tohave a separate account.
Yuriy (25:57):
Yeah, yeah.
So you touched a little bit tothat point of having properties
in LLC or corporation orpersonally, maybe.
So is there any advantage ordisadvantage of having one or
the other, especially forPhiladelphia?
Jennifer (26:18):
The city of Philadelphia, the only advantage
comes down to when you have, ifyou have your properties in an
S corporation or, anything in anS corporation, you don't have
to pay the NPT tax.
Unfortunately, an S corporationis not the best entity type to
hold a property in.
And the reason for that is,there's a couple different
(26:42):
reasons if depending on whatyour purpose of buying the
property is and that's one ofthe things i recommend to people
before they buy propertyunderstand and really get clear
in your own mind what is thepurpose of this property because
that that's going to tell youhow it should be you know what
kind of entity should you put itin and how does what does the
(27:04):
whole picture look like but foran s corporation if you were to
put a property in an scorporation as opposed to having
it in an llc if you have loanson that property mortgages or
whatever if those mortgagesdon't go into your basis okay
And basis is huge when it comesto taking losses.
(27:26):
And we all know as real estateinvestors, that's one of the
reasons that we're investing inproperty because we get losses.
But in order to take thoselosses on your tax return, you
have to have basis.
So it's
Yuriy (27:40):
a whole thing.
Let me stop you right there.
Tell us a little bit aboutbasis, what it is and why do we
need to know about that?
Jennifer (27:49):
okay because the tax piece of it and it solely is you
know it's it's a tax piecebasis is what your equity is in
that property when you buy theproperty you know your basis is
whatever you pay for it and sothat's your basis right so you
paid 450 000 but your equitypiece you know because the the
(28:11):
mortgage is on there that that'swhere it gets broken out
because you might only have ahundred thousand dollars actual
equity okay but if you have an scorporation you only get credit
for that hundred thousanddollars as far as basis goes
when you're pulling money out ofyour company that's the
difference if you have an llcthe whole thing is considered
(28:34):
basis so where that matters iswhen you're taking money out of
your company whether or not it'sit's a taxable distribution or
not, because you can only takedistributions tax free.
Remember, when you take moneyout of your company, you're
paying tax on the bottom linenet income.
You're not necessarily payingtax on the money you take out.
(28:56):
That's a distribution and youdon't pay pay tax on that as
long as you have basis or equityin your company.
And that's where it kind ofplays back and forth.
So if you have properties in anS corporation and they're
highly mortgaged, you don't havea lot of basis to be able to
take money out without beingtaxed on it.
(29:19):
You would pay capital gains taxon that on the excess basis.
Okay.
So if you have the, in an LLC,it's all equity and all basis as
far as taking distributionsout.
So that, because think aboutit.
the way that you add basis orequity it's kind of same thing
(29:39):
the way that you're adding yourbasis is by the money that you
put in by the income that yourcompany gets every year and then
your basis gets reduced by theamount of money you take out if
you're not making money to addto your basis and you're always
pulling money out eventuallyyou're going to come very much
(30:00):
upside down kind of thing.
Yuriy (30:02):
This episode brought to you by TrustArt Realty, a
full-service property managementcompany in Philadelphia.
And for all of our listenersand subscribers, they offer free
rental analysis and freeproperty management evaluation.
So if you would like toschedule that call, feel free to
send an email at TrustArtRealtyat phililandlordguy.com or just
(30:26):
click on the link in the shownotes to fill out the form and
someone will get in touch withyou and now let's get back into
it okay so if
Jennifer (30:34):
you're in an s corporation it could be a
problem
Yuriy (30:37):
i know that as corporations they can they have
like or they can elect thestatus that they can be treated
as an llc correct
Jennifer (30:44):
well what happens you form it as an llc and The S
election is strictly for taxpurposes.
So you elect to become an Scorporation from an LLC or a
corporation.
Most likely would not putproperty in a corporation
because that defeats the purposeof being able to take losses on
your personal return because aregular corporation is totally
(31:08):
separate from you.
One of the other disadvantagesof putting property into an S
corporation is you can'tdistribute the property without
it being a tax In an LLC, youcan.
That's another reason thatpeople usually do not put
property in an S corporation.
Another thing, too, is if youhold a property in an S
(31:30):
corporation and you want to putit into a trust, there are only
certain trusts that you can putan S corporation into.
So a big part of this is estateplanning, too.
As you can see, that's why Isaid it's really important when
you buy property that youunderstand or have a clear
(31:51):
knowledge of what you wanna dowith it.
And things do change.
Your life changes, yourscenario changes.
So you have to keep that inmind too when you're making
these decisions.
Is it flexible?
Transfer tax.
If you buy a property and youput it into an LLC, You can
(32:13):
transfer that LLC easily and youdon't pay transfer tax on it.
You can give the LLC tosomebody.
It's holding the property.
You don't pay transfer taxbecause the property is already
in the LLC's need.
So if you want to put that intoa trust or whatever, there's no
transfer tax.
And like I said, with the Scorporation, you can't just put
(32:34):
that into a trust.
There are certain trusts, butwhen you put things into a
trust, like propertiesespecially, a lot of times you
want the trust to do something.
And the QSSTs can't necessarilydo what you want the trust to
do.
There's just a lot of planninginvolved there.
So typically you will seeproperty in LLCs.
Yuriy (32:57):
Yeah, that's definitely something that we'll see.
I don't think I actually everseen anyone having property in
this corporation.
Actually, I have one of ourclients and their accountant
keep telling them that you needto transfer, you need to
transfer.
And finally, I think after afew years, they did transfer.
They had to pay transfer tax,as you said, but at this cost of
(33:18):
the business.
So Jennifer, what types ofincome need to be reported for
rental property?
We already kind of touchedthat, but again, what kind of
income we need to record orreport for rental property and
what common expenses can bededucted out of that income for
the taxes?
Jennifer (33:35):
For the income, like you said, you know, definitely
any rental income.
And if you want to keep, I seesome people do like
reimbursement income under thedown, at the bottom of the P&L
where it's like an other incomebecause you kind of keep your
rental receipts separate so thatyou have a clear picture of
(33:57):
what's going on.
Expense wise, it depends on,you know, every property owner
is kind of unique.
You know, if you live far awayfrom your property and you have,
you know, a property managerrunning that property for you,
you probably don't have a lot oftravel expenses, but sometimes
you might.
(34:17):
And you can certainly take thatas a deduction, you know, if
you have to fly into town.
And then, of course, you haveall your expenses that you pay
to a property managementcompany, your real estate taxes,
mortgage interest, anythinglike that, anything repairs,
utilities, all of that kind ofstuff.
I mean, if you are.
(34:37):
real estate investor that it'syour sole business there's a lot
more that you can deductbecause then you're using your
cell phone every day youprobably have a vehicle what i
usually do with that type ofperson is then i will open an s
corporation as a managementcompany and the reason i do that
is we will take a lot of theincome and shift it over to the
(34:59):
management company and thenbecause this is their job you
know if that's how they're doingit will shift a lot of the
income over there and then theycan take a paycheck out of that
at w2 they can set up aretirement plan for themselves
in the s corporation and thenall of the the properties pay a
(35:20):
management fee to the scorporation and that way you
know they have their overallentity set up for themselves
Yuriy (35:30):
it makes sense to do that we had a few clients asking us
about that.
Well, we have properties andLLCs, but we heard that we need
to have a management corporationor different LLC on the top of
the LLC.
And then it becomes socomplicated that you have to
file taxes for all of them forCity of Philadelphia just
because they treat itdifferently and the City of
(35:52):
Philadelphia look at them likedifferent businesses.
So at which point it makessense and when you don't have to
file at separate taxes for yourLLC and then for your S corp or
another LLC for the sameproperty.
Jennifer (36:05):
Well, that's a good point.
And let's break it down, right?
If you have those propertiesall in separate LLCs and you
have to file separatePhiladelphia returns, you're
going to pay less taxes becauseyou're getting $100,000 out of
each LLC that's being taken out.
If you have them all in oneLLC, you're still only getting
(36:26):
one $100,000 deduction.
You see how that piece works?
And then the S corporation doesnot file the MPT tax.
So in a way, I guess kind ofyou're shifting some of the
income because you are puttinginto the S corporation, but It
depends.
If you set the S corporation upoutside of the city, if you
(36:49):
don't live in the city, it's amute point because that
corporation's set up out there.
Now, there are cases where youstill would have to pay some
Philadelphia tax because you'recoming into the city to work
because you can actually...
It's a little bit different ifthe property is actually in
(37:11):
here.
But if you have a managementcompany and you have some
properties outside of the cityand some in the city, you can
break that out.
It's not the whole thing.
Again, it's just the propertiesthat are in here, that are in
the city of Philadelphia, thatyou're paying that on.
Yuriy (37:28):
Okay.
So we will not go too deep intothat because it gets more
complicated as...
Jennifer (37:34):
It's a rabbit
Yuriy (37:36):
hole.
It's, I think, a conversationfor a separate time when we can
have a different show on that,just how to structure all of
your LLCs and corporations toget better tax results.
But for all of us regularpeople who do not do that, who
have a few properties, maybethey're in the personal name,
(37:57):
maybe a few LLCs, are there anyPhiladelphia-specific deductions
that landlords...
can take or often overlook ordon't even know about them.
Jennifer (38:08):
A lot of times it's kind of ironic, and it comes
down to keeping track of yourexpenses.
They miss the permits, allthose little things.
And I realize they're littlepieces, but they add up.
You're paying for permits,you're paying for inspections,
you're paying for these testing,the lead testing and all of
(38:28):
that.
It's kind of surprising to mesometimes that I get the basics.
You'll get, here's my rentincome.
Here's the electric that Ipaid.
Here's like I said, the basics,but you don't see permits on
there.
You don't see inspections, youknow, anything like that.
And I, when a lot of times whenI asked, they, they did have
(38:48):
them, they just missed it.
Yuriy (38:50):
Can you tell us a little bit about depreciation and how
does it work or is it differentin Philadelphia where it's the
same everywhere?
Jennifer (38:59):
It is not different in Philadelphia because
Philadelphia takes the netincome from the federal.
So that's why it's notdifferent.
It's different forPennsylvania, but it's not
different for Philadelphia.
Pennsylvania has a differentdepreciation when it comes to
bonus and 179 depreciation.
(39:19):
They only allow 20, 25,000 forPennsylvania.
Yuriy (39:23):
Just for it to be easy for people to understand, what
is depreciation?
What are we depreciating?
Jennifer (39:29):
Okay.
Depreciation.
And that's actually a verycommon question because what
depreciation is, is you'rebuying something.
Obviously with landlords,you're buying a piece of
property.
Only the building getsdepreciated.
And that's what's different inPhiladelphia because a lot of
times the property owners inPhiladelphia are buying row
(39:53):
homes.
The land's not big, okay?
So the land does not getdepreciated.
So that's a big difference thatI do see in Philadelphia.
If you come to me and you say,I just bought a $500,000
property, well, it's totallydifferent if that $500,000
(40:14):
property is sitting on an acreof land as opposed to sitting on
a very small piece of land.
So you get a lot moredepreciation out of that, which
is kind of nice.
on the expense part of it.
But what depreciation is, isit's expensing something over
the useful life of whatever itis that you're depreciating.
(40:34):
So property, a building, if itis residential investment
property, it's depreciated over27 and a half years.
If it is commercial property,it's depreciated over 39 years.
So they consider that theuseful lives.
And then when you go to dorepairs and things like that,
(40:56):
they also, depending on what therepair is, it has the
improvements, it also getsdepreciated over a certain life.
Some things that you buy, whenyou depreciate them, it might be
five years.
Usually a lot of times with theproperties, it gets depreciated
over the 27 and a half years ifit's improvements and things
(41:18):
like that.
Sometimes they have specialdepreciation.
You know, like one year youmight hear them say, hey, we
have bonus depreciation thisyear.
We can take that or whatever.
It just depends on the yearsometimes, you know.
At
Yuriy (41:30):
which point, you mentioned that when you do
repairs or capital, well, youdidn't say that word, but when
you do big improvement to yourproperty, right, you would put
that in as a depreciation anddepends on what exactly it is.
It will be maybe five years, 10years or whatever, 27 years.
So at which point, you know, orhow do you determine if it's
(41:53):
just an expense or it will bedepreciated over a certain
amount of time?
Is it by the amount?
Is it by the type of work, bythe type of the equipment?
What is the rule there?
Jennifer (42:03):
It's all of the above, quite frankly.
So kind of the rule of thumbwith the IRS is $2,500 is what
the invoice is.
So in other words, if you goout and you buy, you know, you
buy a window for 1500 and youbuy a door for 1500, that's
(42:26):
$3,000, right?
But they're separate.
So you could really justexpense them.
In other words, if you havesomebody come in and do repairs,
technically, if those repairscome out, if they're repairs,
they're expensive.
They don't have to becapitalized if it's truly
repairs.
If it's improvements and it'sbettering the property, that's
(42:47):
when you have to capitalize it.
There are instances where youcan have a study done.
It's called the cost seg.
And that's totally fordepreciation, which I have seen
people do on, you know, biggerproperties, or if it makes sense
for your property, but the costseg off obviously costs money.
(43:09):
So you have to make adetermination whether or not
it's worth it.
Because when they change the, Imean, the depreciation, you
could probably do a wholesegment on depreciation.
And I'm not even kidding.
It's convoluted when it comesto some of the bigger stuff, but
part of it is systems.
Like if you have six airconditioner units in your
(43:32):
building, and if you'rereplacing over half of them,
then it has to be capitalized.
that's where these cost segscome in and breaking everything
out.
So it does get a littleconvoluted, but I would say
probably for the normal landlordin their situation, it goes
(43:53):
according to the $2,500threshold or whether it's,
repairs.
If it's all repairs, a lot oftimes you can expense it.
But if it's an actualimprovement, it has to be
capitalized.
Yuriy (44:06):
Are there any implications for landlords in
Philadelphia who are not havinga rental license in place when
they file taxes or claimdeductions?
Jennifer (44:17):
No.
Yuriy (44:19):
So those two, they're not connected?
Jennifer (44:22):
Not from that.
Like we said before, the otherway, yes, you have to have your
taxes filed to get your license,but you don't need the license
to file the tax.
Yuriy (44:33):
Okay.
What about short-term rentalsthat operate in the city of
Philadelphia?
Do they have some kind ofdifferent tax obligations
compared to long-term landlordsor everything is basically the
same?
Jennifer (44:45):
They have a hotel tax that they have to pay in the
city of Philadelphia, which it'seight and a half percent.
And I believe that the companylike Airbnb or Vrbo, is that the
other one?
I believe they collect thatright off the top.
And at that point, that becomesan expense to you.
(45:10):
to the landlord or whoever'soperating that property, it's an
expense.
And that's something you needto remember, but it is on the
statements.
They usually give you a prettygood detailed statement because
unfortunately the whole amountis in the rental piece because
that's a tax that's paid off thetop line.
Yuriy (45:32):
Jennifer, what is your take on paying yourself?
I know you touched a little biton that when you were talking
about LLCs versus S-corporationsand management or your
corporation as a management foryour LLCs.
So what is your take on payingyourself as a landlord versus
reinvesting all profits backinto the property?
Jennifer (45:53):
It depends on a few things.
The property itself, if itneeds updating and you want to
be the type of landlord that youcan keep your property and your
business operating top-notch,get top rent you probably want
to keep reinvesting in yourproperty if your property
(46:16):
doesn't go downhill and you havegood tenants in there they're
not costing you a lot of moneythat's that that's the key right
is getting the right tenantbecause then it becomes a very
profitable property but thatbeing said if if the interest
rates are low you are muchbetter off borrowing money and
putting it into the propertythan you are using your own
(46:38):
money take that money and investit.
That's what I say.
You know, if you are into thatkind of thing or take that money
and buy another property or I'msure that's how a lot of
property owners do it.
But right now, I don't want tosay that the interest rates
aren't high.
They're more normal.
They're just not on the low,low end where when they were on
(47:01):
the low end, I would say topeople, well, yeah, pull the
money out depending on whatyou're using it for.
You know, So it's kind of thesituation of what does that look
like?
Even if you're taking moneyout, taking a loan out to buy
another property, you're stillinvesting it.
But if you're just pulling itout to go on vacation, that's a
(47:24):
personal thing.
I have seen some people whothey cannot handle their bank
account being under a threshold.
It's got to be at $10,000 or Ican't sleep at night.
So that's a determining factoras well.
And then I have people who theydon't care about their bank
balance.
They care about them feelinglike they're getting paid for
(47:46):
working.
And I say to them, if that'show you feel good, you know, it
really is a personal and eachsituation is different.
Yuriy (47:57):
Yeah, it is.
It's truly every singlelandlord is different.
Everybody has a differentsituation and it works
differently for everyone.
There is not a magic advicethat you can give someone and
tell them, hey, go buy thatproperty, put the tenant on and
do this with your money and youwill get the best results.
It is all very personal andcomes down to your personal
(48:20):
goals and to the type of personyou are and what you're trying
to do with it.
Jennifer (48:25):
That is for sure.
And I will tell you, I haveseen so many different thought
processes on that question.
Everybody's personality is, andit's interesting.
It's interesting.
Yuriy (48:39):
Yeah, but I often, in my line of work, I often have these
conversations with landlords orour clients and they would come
to me and they would tell me,well, I want to invest, like,
what is the best property to buyright now?
Or which area is the best forme to invest?
Well, I need more information.
I cannot tell you what is thebest property.
I can tell you where I boughtmy last property or what
(49:00):
property I bought and why Ibought it.
But you and I will havecompletely different set of
goals and we have differenttypes of investments and we have
different personalities.
So it all depends on whatexactly you're looking for.
Tell me more.
Tell me what you want to have.
Tell me how much you're lookingto spend.
Is it just a short-term game?
(49:21):
Is it something that you wantto be in for 15 years?
So it's a lot.
I like that.
Jennifer, are there anyupcoming tax law changes that
you know of and that we need tobe aware of?
Jennifer (49:37):
well because you know we have a new administration
and that always makes things alittle bit tricky but what i
will say there's two things forcertain that will affect
property owners is there's thecuba deduction which is the
qualified business incomededuction will be sun setting at
(49:59):
the end of 25 and also the saltthe state and local tax
threshold which hits on thepersonal return but it has to do
with real estate taxeseverything they're um going to
be sunsetting at the end of2025.
there has been indication thatthey do plan on extending it if
(50:19):
not making it permanent sothat's kind of what we're
thinking is going to happenespecially since the current
administration is who put thatinto place
Yuriy (50:29):
right Yeah, that's what I would think as well.
Jennifer (50:32):
Those are really that I would really see hitting real
estate investors for the mostpart is that QBID deduction.
And of course, everything withthe depreciation, too, because
that and that changes all thetime or it can.
That's that's pretty obvious.
year to year a lot of times
Yuriy (50:52):
jennifer if someone is buying their first rental
property this year inphiladelphia what is the most
important single thing that theyneed to do to avoid tax mass
later
Jennifer (51:06):
i would say for one thing expect that extra
mandatory tax on the BERT forthe first year that you're
showing income.
Now, if they only have oneproperty, most likely they're
going to end up paying zerotaxes in Philadelphia because
they have that $100,000exclusion.
And the first year that you buyproperty, most times you will
(51:29):
end up with a loss because ofthe depreciation and the loan
costs, the title, the transfersand all of that, typically the
first year.
But To your point, becausethey're new, they don't know
what to expect.
And I'm sure you've heard itfrom people as well.
They get kind of blindsided thesecond, third year.
(51:51):
That's when some of the othertaxes start picking up.
And then by the time they startbuying their second, third
property, you're going to seethat $100,000 exclusion come
out.
And that first year that theyhave profit in there, they have
to pay their first year tax.
and their estimated tax.
That's when I see the realshock happen.
(52:12):
That all goes back to keepingtrack of your books throughout
the year, knowing what yourincome is so you know what, have
somewhat of an idea what toexpect, and even touching base
with your accountant especiallytowards the end of the year,
because once 1231 hits, there'snothing you can do.
Yuriy (52:32):
That's a good point.
Let's say I'm a brand newinvestor or a landlord.
I just bought a property thisyear.
It's my first property.
Do I have to have anaccountant?
Because to me, it sounds like Inever had an accountant.
I was using, I don't know,TurboTax to file in my W-2 taxes
all the time.
And now all of a sudden I havethis property that I need to
file taxes for.
(52:53):
It doesn't sound thatcomplicated.
I just have like, I don't know,12 friends coming in.
I can just put it all togetherand then put it in the app and
file my taxes.
Do I need to have anaccountant?
Because I don't have enoughincome from this property to pay
for an accountant, to be quitehonest.
Jennifer (53:10):
Well...
My answer to that is no, youdon't have to.
If you're fully, you know, feelconfident in what you're doing,
what I would suggest, though,is that you talk to an
accountant at the very leastbefore you buy the property for
all of the reasons that we justdiscussed.
I have people that ask me.
questions they do their own taxreturn they'll ask me questions
(53:34):
and I am not against that atall because I do think some
people are capable of it but ifyou aren't keeping good records
it's really important you knowthat you talk to somebody you my
my thing that I would say topeople is you know yourself you
know but keep up on the changinglaws and it does not hurt to
(53:56):
reach out to an accountant andtalk to them and just really
make sure that you're up on itbecause there's a lot of
misconceptions out there.
And what happens is I see itoccasionally where people, they
do it themselves and they don'tconsultant accountant until it's
(54:19):
too late and then it costs thema lot of money and that's why
i'm saying you know even yourannual return you're just
putting it on your personalreturn It's really not that big
of a deal if you're confidentwith it, but I definitely would
talk to somebody before, getsome knowledge, I guess.
Yuriy (54:36):
Yeah.
I would also add to it, if youtalk to someone, make sure that
you're talking to someone whoknows specifically CTO of
Philadelphia taxes.
I've seen that happen manytimes when people out of state,
even in the state, just a littlebit away from Philadelphia, a
couple of counties away, Theyinvest in Philadelphia and they
(54:56):
have no idea about thisadditional taxes that they need
to pay.
And they have an accountant,but the accountant has no idea
about that either because theydon't work in CEO.
Jennifer (55:04):
You bring up a very good point because I actually
just was working on resolvingsomebody with that same exact
situation.
They had an out-of-stateaccountant and did not know
about the local Philadelphiataxes.
And that does happen.
And then, I mean, everything'sfixable, but it costs more to
fix.
it than it does to do it rightthe first time.
(55:26):
So yeah, definitely make sureyou know about the Philadelphia
taxes.
And the strange thing is too,Philadelphia is, they're hard to
get a hold of on the phonesometimes.
Yuriy (55:38):
Sometimes.
I would rephrase that.
You never can get them on thephone.
Jennifer (55:44):
Yes.
But what I have been doing andin telling people to do is
emailing them.
They do seem to, because thenyou have it in writing.
Plus you do have it in writing.
Plus then you do have it inwriting because that kind of
helps cover things too.
Yuriy (56:02):
Well, that's a wealth of information, Jennifer.
Thank you so much for joiningus today.
Thank you.
So if any of our listeners orwatchers want to reach out to
you, what is the best way?
We will put your information inthe show notes, but What's the
best way for reaching out andhow they can get a hold of you?
Jennifer (56:22):
My website is lehightaxservices.com and our
phone number is 484-899-9399.
And yeah, if you have anyquestions, you can certainly
reach out to me.
I do have people that will callwith questions and I try to
help people as fast as I canbecause it does help me to keep
(56:43):
my head in the game too.
And I actually, I really likewhat I do.
And Philadelphia is a challengeand a good challenge is always
good.
So
Yuriy (56:54):
yeah.
I agree with you on that.
It's always fun.
And it's always nice talking topeople and try and figuring out
the problem and how to solveit.
Well, Jennifer, thank you somuch.
And thank you for joining us.
And hopefully we'll see youagain sometime.
Yes,
Jennifer (57:10):
thank you, Yuri.
I appreciate
Yuriy (57:12):
it.
Big thanks again to Jenniferfor staying with us today and
for sharing all of this wealthof information.
Remember, Philadelphia is avery specific place with very
specific tax responsibilities.
And as a landlord, you need toknow how to get ahead of them
that you can save money.
(57:33):
a lot of stress and money downthe line.
If you enjoyed today's episode,please don't forget to
subscribe, like it, share it.
And if you need to get in touchwith Jennifer, you will find
her contact information in theshow notes.
Thank you and see you nexttime.
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