Jennifer 0:00

That's where it gets broken out because you might only have $100,000 actual equity.

Yuriy 0:05

What are those birth and NPT taxes? What they are and how do we pay them and where are they coming from? We're here to share insights and experiences, not legal or accounting advice. Be sure to talk to your attorney, accountant, or professional advisor before making any decisions. Everyone's situation is different. Get the help that is right for you. Hi, everyone. Welcome back to the Philly Landlord Guide. I'm your host, Yuri Skripnichenko, licensed broker, real estate broker and certified property management in philadelphia and today we dive on into a topic that every landlord must know and understand try it taxes. And to help us break it down, I'm joined by Jennifer Foss, a seasoned accountant who work with clients with a lot of real estate investors and landlords, helping them navigating all of this tax system that we have in this country and in the city. As you know, or maybe you do not know that we have special taxes that you have to pay when you have rental property in the city of Philadelphia. And without further ado, let's jump right into it. And Welcome, Jennifer. Glad to have you here today with us on our show. And let's just dive right into it. And if you can just introduce yourself, who you are, tell us a little bit more about what you do and how did you get into tax accounting.

Jennifer 1:43

Okay. And first, I'd like to start with saying thank you, Yuri, for having me here today. I'm really happy to be here and to share some of my knowledge and help some of your clients as well. As you said, I'm a CPA. I started because I went into this field because I work with, I wanted to work with businesses and I come from a family of entrepreneurs and that's why I chose the niche as working with closely held businesses. I started with an international firm in the city And I work with all closely held businesses, even with the big firms, because that's where my heart really lies. And that path kind of led me into going out on my own. And now I kind of, I did my own, I guess my own vision is how I see I can help my clients the best, and that is to work really as a right-hand man to them. I try to be accessible to my clients if they have any questions on their tax situations, even I help them sometimes with bookkeeping, consulting, because I find that it helps my job. It makes my job easier if things are really good and accurate when we go to do the taxes. Not only that, no big surprises, hopefully. Because if I'm talking to my clients throughout the year, they're asking me, hey, I'm thinking of buying this property or I think I'm going to sell this property. That way we're planning through the year and there's no big surprises. And I really like that. That's why I did my own firm that way, my model, because I think it's the best of both worlds. And as far as Even going forward, that's the type of client I even like to bring in, the ones that I feel like I can really help.

Yuriy 3:40

Okay. So you're mostly working with clients that do real estate, is that right?

Jennifer 3:44

I have a lot of real estate clients, a lot of real estate investors, yes. I also work with the closely held businesses, but I find it's kind of interesting, I see that transition where business owners eventually come property owners. That's just the next succession. Once their business starts thriving, especially the first thing I see is they, you know, whatever business they have, they buy their building or a building 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 logical investment to a lot of these business owners, businessmen is property.

Yuriy 4:26

You mentioned that a few times that you're working with closely held businesses.

Jennifer 4:31

What does that mean? It means that they're not publicly traded and it means that they're owned just by a person as opposed to being traded on the stock market and that's what they call a closely held business.

Yuriy 4:45

Okay, so basically everyone who's listening to this podcast or show watching this video they will be in the same category. They're probably going to be publicly traded companies. Let's go out of that. And you mentioned something that you work with your clients during the year to prepare for the tax season. And since we're just actually going out of the tax season, we're recording this in the beginning of May 2025. So tax season just is over for most of people. When would you say is the best time to get ready for your next tax season? I know some people do it last minute. You start getting these calls like, oh, where's my 1099? I need my 1099. I need to know how much money I need. So how do you usually handle that? And what would you advise people to do?

Jennifer 5:35

Well, I will tell you, I get, because a lot of returns are extended right now because people weren't ready. And if it's like a partnership or an S corporation, the extended due date is September 15th. I will be getting calls or information, you know, a week or two before before September 15th for some people that really procrastinate. Then I have other people who, like you said, I get those calls. I didn't file. Well, hopefully they filed an extension so that we can avoid the penalty for that. But I do have some clients I meet with every week and we're always doing tax planning, tax strategy. the one particular client that i'm thinking of i'm kind of like their managerial accountant as well so i'm looking at it from all angles i'm looking at it from managing the company and strategy for company growth and then i'm also taking into consideration the tax piece of it which a lot of accountants if they're just like managerial accountants they don't know the tax piece So I kind of try to bring it together if clients want that service. And I really, I like that. I have one particular client that, like I said, we work very closely together and they're growing incredibly actually. He just opened his second business. He just had his grand opening this past weekend. And he's got big plans for that. So it's exciting to see what his future holds.

Yuriy 7:09

So can you walk us through the main taxes since our show is catered to Philadelphia, specifically Philadelphia investors and landlords in Philadelphia. And most of us are small mom and pop shops. We're not like some kind of huge company. We're not some kind of huge business. And probably a lot of people don't even keep books in the way that you usually used to see in them, like QuickBooks or whatever else they can be using. Most people don't don't do that or don't have that. So can you walk us through the main taxes that Philadelphia landlord needs to be aware of?

Jennifer 7:43

Well, the main ones are the BERT, the business income receipts tax and the NPT tax, which is the net profits tax. Any business or because they consider, you know, the real estate rental business. So anything that's money making, has to file those taxes. The only way you don't have to is if you have a corporation or an S corporation, you don't file the 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 do not put a property into an S corporation and it's strictly tax reasons. There's some different reasons that it's not such a good idea. But depending on what your situation is, it may work for you. But typically they're put into LLCs, partnerships.

Yuriy 8:37

What are those birth and NPT taxes? What they are and how do we pay them? I guess where they're coming from.

Jennifer 8:44

Yeah. Well, the BERT tax, that's the business income receipts tax. When you're paying those, the actual tax piece, and I'm actually looking at one of the returns because I see the flow easier. But with the BERT, they actually take $100,000 out of 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 them together. So one of the things that some landlords may not know about the BERT taxes, you kind of want to, and I don't want to say keep your receipts low, but you have to report all your receipts as far as rent for is concerned but if you're getting credit card rebates don't put that in your top line as a receipt because that goes into the burke calculation then you know as a receipt and you're looking at mostly keeping the rental income in there and some i will tell you some landlords if they get reimbursements from tenants and things like that we don't even keep that above the line it's offset their expense so that they They don't report. The net effect is zero, okay? If you pay an expense for your client or your tenant, if you pay that expense for them, if it's a utility and they pay you back, you just kind of offset that payment that you make. So you don't take the expense on your return, but you also don't report it as income. because you would get taxed in Philadelphia on that.

Yuriy 10:23

Just to break it down, if let's say I have a tenant in Philadelphia, they just moved in into a single family house, and usually I never recommend anyone putting, let's say, water name into tenants. So landlords usually keep that. So me as a landlord, I will go and pay for the water bill, and then I will bill back the tenant to collect the funds. 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, instead of 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 BERT piece of it, they do exclude $100,000 in receipts. So it's kind of minimal, but if you start getting into where you have big utilities that you're being reimbursed or you have several properties, you can have a lot of rental income. And so every little bit helps. And like I said, they're excluding that $100,000 off the receipts because there's two portions to that birth tax.

Yuriy 11:39

And by the receipts, so let's just clarify it. By the receipts, you mean everything that you receive as an income from your rental property?

Jennifer 11:46

The rents. I try to keep it for the rents. That's why I'm saying if you're getting these reimbursements, it's kind of offsetting just money that you put out. for an expense and it's a zero net 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 hit by this bird.

Jennifer 12:11

Yeah. Yes. Because if you don't have, and this 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 receipts because they're taking $100,000 off of it. Now, there still is a little bit of a profits part to the BERT as well. It all gets added together for the BERT return then. There's two pieces to it. There's the income piece and the 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 net and the gross?

Jennifer 12:50

Well, that's why they take $100,000 out of the receipts, I believe, because they're saying if you don't have any liability on the BERT, there's an actual other return. Because if you're filing a zero return, you're filing a zero return. But they're saying if you don't have... any taxes on there you can file another return it's called a no no tax liability return is what they're saying but i i don't really see a point in filing a different return i just file a burt at zero it doesn't matter as long as you file something i guess basically what they're saying is just because you don't owe tax don't dismiss filing these tax returns because One thing that I do know, if you don't file these returns, they don't renew your rental licenses.

Yuriy 13:44

Yeah, they will flag you and you will not be able to renew the rental license or get a 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 same thing. It's a net profits tax. It's calculated a little bit differently, but And that's where the corporations don't pay the net profits tax. Philadelphia, you know, I mean, it's a little bit of an anomaly with their tax situation, but they're calculated differently. And there's no exclusions on the NPT as far as dollar amount, but it actually is a smaller tax. 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 want to say... It's a double-edged sword with rental properties. A lot of times we see our real estate investors creating losses in rental properties because of the depreciation and the repairs and everything, right? So a lot of times they don't end up paying a whole lot on the NPT because there is no profit. They may have a BERT obligation for the receipts part of it, but the net income piece isn't there. That I see a lot with real estate investors.

Yuriy 15:02

Yeah. And PT is so kind of easier to understand, right? It's just your net profit, whatever that is. Usually there is none because for most people who have been investing in real estate and being landlord, they understand how that works. You have a lot of different deductions. So no matter how hard you try, and even if you have cash flow, you still on the paper can be zero or negative. And that happens often. Very often. For the birth tax, though, as soon as it's calculated, not on the net, it's on the total receipts.

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 for birth?

Jennifer 15:46

It will be taken out of the net income, not the mortgage, but the interest. Right. Because they go by the net income from the federal. So what you're deducting on there and in what's flowing through, you can take the interest piece of it, but the mortgage, no. The only place, the mortgage doesn't come into effect at all that actual liability balance doesn'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 in the city of Philadelphia or in the state of Pennsylvania, or it's just for anybody in the country or outside of the country 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, a bunch of properties and half of them are in Philadelphia. It's only subject to the properties in Philadelphia, whether you live in Philadelphia or don't live in Philadelphia, as long as you own the property in Philadelphia.

Yuriy 16:48

Okay. So basically everybody who has a property in Philadelphia or who has a rental property in Philadelphia 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 for these taxes

Jennifer 17:06

for those taxes the biggest thing i see and and it's actually it's a real shock the first year for the per tax because you pay an estimated tax on the birth tax so you're paying prepaying for next year's tax on this year so the first year that you get you know have to file that tax return and you have income you're paying twice. So in other words, if you owe, say this year, you owe $3,500 for this year liability, you have to pay another 3,500 for next year's liability. So that's $7,000. So the biggest mistake I see people make is they forget to carry that estimated payment over. And the city usually does catch that. But so if you pay that $3,500 this year, you deduct it from next year's return when you go to pay. And I do see that a lot. That happened a lot. That's one mistake I see. One of the other mistakes I see is, like I said on the receipts piece of it, where they put too much into the receipts. They're not categorizing their income properly. I've seen people who get, they're using their credit cards to pay for their repairs and stuff. and they get the money that you can apply to the credit card, the rewards, and they classify it 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's not rental income. It's rewards for your credit card.

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're getting the reward for your credit card, if it's going towards your credit card balance, then that's where it gets classified to. because it goes against your credit card balance. Now that doesn't get shown on this tax return, but any expenses that you used your credit card to pay for are on the tax return because the credit card is on the balance sheet. We don't see the balance sheet piece on the Philadelphia returns. We only see the profit and loss.

Yuriy 19:27

Okay. So since we're talking about all of this classifications and you classify that or that credit card balance sheet. There's a lot of different words that, again, most of smaller size real estate investors or landlords, they don't track it. It's cumbersome. It's a lot of time you need to pay for whatever tool you use. And so do you have any recommendations? What is the best way for people who have, let's say, anywhere between one to ten properties how should they manage all the expenses, income and expenses, how they should record it, how they should classify it? Is there any online tool maybe that is free for them to use or do they just do Excel spreadsheet or whatever, Google spreadsheet and using

Jennifer 20:12

it? Yeah, I actually have a lot of clients that will use a Google spreadsheet. I have one client who has several properties in the city that they just give me a handwritten sheet. But I will tell you, they miss a lot of expenses and i know that and i will ask them did you have this did you have this did you have this they say oh yeah i did so i highly recommend i think that's a really good question i highly recommend that people are tracking this every month don't wait until you go to file your taxes to sit down and fill out a paper of your income expenses i actually have some people who do a separate bank ledger sheet. They don't even use software. They literally write everything down on a bank ledger sheet. It really depends on how many properties you have, how many transactions you have. Because if you only have one property, it's definitely doable, you know, handwriting things. But I'm going to say once you get up to like five properties, you probably should be using software and you should be putting, you should definitely at the very least have at least one bank account for your properties and one credit card that you use solely for properties. It makes it so much easier because even if you're not keeping track of it on paper, we have the bank statements then. We can come up with something from the bank statements. And I just, I cannot emphasize enough that people don't capture all their expenses. I know it and I see it because when I question them, they say, oh yeah, oh yeah, oh yeah. So that's really important, especially if you're working with somebody that isn't asking you. I hear a lot of people, they give their accountant their paperwork and they just do the return and don't get questions about what about this, this and this. Everybody works differently. The other piece of it too, of course, you know, this is the managerial part of it for all of your landlords. It helps to see it on paper. It truly does because you can walk around and say, I have these rental properties. You don't even know if you're profitable. I'll tell you what, most people are pretty good with having it in their head. but it's still not the same as seeing it in black and white, because that is telling the real story. And it's an eye opener for some people, truly, that they need to change their ways in business. So not only is it good from a tax perspective, from a business perspective, it's just a good idea. And especially property by property, you can see how profitable each property is. Or if you don't wanna be that detailed, You need it that way for the tax return anyway, so you might as well just do it right. But I highly recommend that.

Yuriy 23:13

Yeah. And I think I'm pretty detail-oriented person. And I've, in the beginning, when I just started, I was just using Excel. We didn't have Google spreadsheets back then. It was just an Excel spreadsheet. And what I did, I just took all the items from 1040, right? Where you report your expenses. I just took everything that is on the form because I knew that my accountant will ask me for that. So I just took that. I created separate tab for each property and I was just recording income expenses and categorizing them based on whatever was on that 1040 form. And I was... sure that I was doing a great job with that. I saw all of my numbers. But of course, when you're doing that on a spreadsheet, you don't do any reconciliations. You do not check your bank accounts 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 card for your properties. Do not mix it with other businesses or do not mix it with your personal accounts because then it becomes a nightmare besides the legal liabilities that might How was that? Just accounting-wise, it's a nightmare. And then when I grew to a certain point where it was too hard for me to do all of that on the spreadsheet, I had to start QuickBooks. Well, it doesn't have to be QuickBooks, but I did QuickBooks. And when I started putting all of that into QuickBooks. I had help, of course, I had no idea how to do it. We went one year back because I started it, I think it was in December. So I was trying to get ready for the tax season. Of course it was too late for that, but still I was trying and we put it all in QuickBooks. And then I realized how many things they just were missing. I had no idea. We started reconciling month by month, every bank account. And of course I had like 10 different bank accounts and a couple of them were personal because a couple of properties were in my personal name. So I figured like, why would I have separate accounts? If I already have personal accounts, I can just combine everything. And then when I started comparing all of that, all my expenses to actual bank accounts, it was nightmare to figure out what, Each expense was where it went to, why I paid, who I paid to. And it was thousands and thousands of dollars that I just missed in my spreadsheet. So tracking that, it's definitely eye-opening experience.

Jennifer 25:43

It is. It is. And that's why I try to tell people as much as possible, especially rental properties, because you're putting money out and you don't even realize sometimes. And that's why it's nice to have a separate account.

Yuriy 25:57

Yeah, yeah. So you touched a little bit to that point of having properties in LLC or corporation or personally, maybe. So is there any advantage or disadvantage of having one or the other, especially for Philadelphia?

Jennifer 26:18

The city of Philadelphia, the only advantage comes down to when you have, if you have your properties in an S corporation or, anything in an S corporation, you don't have to pay the NPT tax. Unfortunately, an S corporation is not the best entity type to hold a property in. And the reason for that is, there's a couple different reasons if depending on what your purpose of buying the property is and that's one of the things i recommend to people before they buy property understand and really get clear in your own mind what is the purpose of this property because that that's going to tell you how it should be you know what kind of entity should you put it in and how does what does the whole picture look like but for an s corporation if you were to put a property in an s corporation as opposed to having it in an llc if you have loans on that property mortgages or whatever if those mortgages don't go into your basis okay And basis is huge when it comes to taking losses. And we all know as real estate investors, that's one of the reasons that we're investing in property because we get losses. But in order to take those losses 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 about basis, 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 piece basis is what your equity is in that property when you buy the property you know your basis is whatever you pay for it and so that's your basis right so you paid 450 000 but your equity piece you know because the the mortgage is on there that that's where it gets broken out because you might only have a hundred thousand dollars actual equity okay but if you have an s corporation you only get credit for that hundred thousand dollars as far as basis goes when you're pulling money out of your company that's the difference if you have an llc the whole thing is considered basis so where that matters is when you're taking money out of your company whether or not it's it's a taxable distribution or not, because you can only take distributions tax free. Remember, when you take money out of your company, you're paying tax on the bottom line net income. You're not necessarily paying tax on the money you take out. That's a distribution and you don't pay pay tax on that as long as you have basis or equity in your company. And that's where it kind of plays back and forth. So if you have properties in an S corporation and they're highly mortgaged, you don't have a lot of basis to be able to take money out without being taxed on it. You would pay capital gains tax on 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 distributions out. So that, because think about it. the way that you add basis or equity it's kind of same thing the way that you're adding your basis is by the money that you put in by the income that your company gets every year and then your basis gets reduced by the amount of money you take out if you're not making money to add to your basis and you're always pulling money out eventually you're going to come very much upside down kind of thing.

Yuriy 30:02

This episode brought to you by TrustArt Realty, a full-service property management company in Philadelphia. And for all of our listeners and subscribers, they offer free rental analysis and free property management evaluation. So if you would like to schedule that call, feel free to send an email at TrustArtRealty at phililandlordguy.com or just click on the link in the show notes to fill out the form and someone will get in touch with you 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 the status 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 tax purposes. So you elect to become an S corporation from an LLC or a corporation. Most likely would not put property in a corporation because that defeats the purpose of being able to take losses on your personal return because a regular corporation is totally separate from you. One of the other disadvantages of putting property into an S corporation is you can't distribute the property without it being a tax In an LLC, you can. That's another reason that people usually do not put property in an S corporation. Another thing, too, is if you hold a property in an S corporation and you want to put it into a trust, there are only certain trusts that you can put an S corporation into. So a big part of this is estate planning, too. As you can see, that's why I said it's really important when you buy property that you understand or have a clear knowledge of what you wanna do with it. And things do change. Your life changes, your scenario changes. So you have to keep that in mind too when you're making these decisions. Is it flexible? Transfer tax. If you buy a property and you put it into an LLC, You can transfer that LLC easily and you don't pay transfer tax on it. You can give the LLC to somebody. It's holding the property. You don't pay transfer tax because the property is already in the LLC's need. So if you want to put that into a trust or whatever, there's no transfer tax. And like I said, with the S corporation, you can't just put that into a trust. There are certain trusts, but when you put things into a trust, like properties especially, a lot of times you want the trust to do something. And the QSSTs can't necessarily do what you want the trust to do. There's just a lot of planning involved there. So typically you will see property in LLCs.

Yuriy 32:57

Yeah, that's definitely something that we'll see. I don't think I actually ever seen anyone having property in this corporation. Actually, I have one of our clients and their accountant keep telling them that you need to transfer, you need to transfer. And finally, I think after a few years, they did transfer. They had to pay transfer tax, as you said, but at this cost of the business. So Jennifer, what types of income need to be reported for rental property? We already kind of touched that, but again, what kind of income we need to record or report for rental property and what common expenses can be deducted 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 see some people do like reimbursement income under the down, at the bottom of the P&L where it's like an other income because you kind of keep your rental receipts separate so that you have a clear picture of what's going on. Expense wise, it depends on, you know, every property owner is kind of unique. You know, if you live far away from your property and you have, you know, a property manager running that property for you, you probably don't have a lot of travel expenses, but sometimes you might. And you can certainly take that as a deduction, you know, if you have to fly into town. And then, of course, you have all your expenses that you pay to a property management company, your real estate taxes, mortgage interest, anything like that, anything repairs, utilities, all of that kind of stuff. I mean, if you are. real estate investor that it's your sole business there's a lot more that you can deduct because then you're using your cell phone every day you probably have a vehicle what i usually do with that type of person is then i will open an s corporation as a management company and the reason i do that is we will take a lot of the income and shift it over to the management company and then because this is their job you know if that's how they're doing it will shift a lot of the income over there and then they can take a paycheck out of that at w2 they can set up a retirement plan for themselves in the s corporation and then all of the the properties pay a management fee to the s corporation and that way you know they have their overall entity 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 and LLCs, but we heard that we need to have a management corporation or different LLC on the top of the LLC. And then it becomes so complicated that you have to file taxes for all of them for City of Philadelphia just because they treat it differently and the City of Philadelphia look at them like different businesses. So at which point it makes sense and when you don't have to file at separate taxes for your LLC and then for your S corp or another LLC for the same property.

Jennifer 36:05

Well, that's a good point. And let's break it down, right? If you have those properties all in separate LLCs and you have to file separate Philadelphia returns, you're going to pay less taxes because you're getting $100,000 out of each LLC that's being taken out. If you have them all in one LLC, you're still only getting one $100,000 deduction. You see how that piece works? And then the S corporation does not file the MPT tax. So in a way, I guess kind of you're shifting some of the income because you are putting into the S corporation, but It depends. If you set the S corporation up outside of the city, if you don't live in the city, it's a mute point because that corporation's set up out there. Now, there are cases where you still would have to pay some Philadelphia tax because you're coming into the city to work because you can actually... It's a little bit different if the property is actually in here. But if you have a management company and you have some properties outside of the city and some in the city, you can break that out. It's not the whole thing. Again, it's just the properties that are in here, that are in the city of Philadelphia, that you're paying that on.

Yuriy 37:28

Okay. So we will not go too deep into that because it gets more complicated as...

Jennifer 37:34

It's a rabbit

Yuriy 37:36

hole. It's, I think, a conversation for a separate time when we can have a different show on that, just how to structure all of your LLCs and corporations to get better tax results. But for all of us regular people who do not do that, who have a few properties, maybe they're in the personal name, maybe a few LLCs, are there any Philadelphia-specific deductions that landlords... can take or often overlook or don'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 your expenses. They miss the permits, all those little things. And I realize they're little pieces, 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 that. It's kind of surprising to me sometimes that I get the basics. You'll get, here's my rent income. Here's the electric that I paid. Here's like I said, the basics, but you don't see permits on there. You don't see inspections, you know, anything like that. And I, when a lot of times when I asked, they, they did have 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 different in Philadelphia where it's the same everywhere?

Jennifer 38:59

It is not different in Philadelphia because Philadelphia takes the net income from the federal. So that's why it's not different. It's different for Pennsylvania, but it's not different for Philadelphia. Pennsylvania has a different depreciation when it comes to bonus and 179 depreciation. They only allow 20, 25,000 for Pennsylvania.

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 very common question because what depreciation is, is you're buying something. Obviously with landlords, you're buying a piece of property. Only the building gets depreciated. And that's what's different in Philadelphia because a lot of times the property owners in Philadelphia are buying row homes. The land's not big, okay? So the land does not get depreciated. So that's a big difference that I do see in Philadelphia. If you come to me and you say, I just bought a $500,000 property, well, it's totally different if that $500,000 property is sitting on an acre of land as opposed to sitting on a very small piece of land. So you get a lot more depreciation out of that, which is kind of nice. on the expense part of it. But what depreciation is, is it's expensing something over the useful life of whatever it is that you're depreciating. So property, a building, if it is residential investment property, it's depreciated over 27 and a half years. If it is commercial property, it's depreciated over 39 years. So they consider that the useful lives. And then when you go to do repairs and things like that, they also, depending on what the repair is, it has the improvements, it also gets depreciated over a certain life. Some things that you buy, when you depreciate them, it might be five years. Usually a lot of times with the properties, it gets depreciated over the 27 and a half years if it's improvements and things like that. Sometimes they have special depreciation. You know, like one year you might hear them say, hey, we have bonus depreciation this year. We can take that or whatever. It just depends on the year sometimes, you know. At

Yuriy 41:30

which point, you mentioned that when you do repairs or capital, well, you didn't say that word, but when you do big improvement to your property, right, you would put that in as a depreciation and depends on what exactly it is. It will be maybe five years, 10 years or whatever, 27 years. So at which point, you know, or how do you determine if it's just an expense or it will be depreciated over a certain amount of time? Is it by the amount? Is it by the type of work, by the 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 thumb with the IRS is $2,500 is what the invoice is. So in other words, if you go out and you buy, you know, you buy a window for 1500 and you buy a door for 1500, that's $3,000, right? But they're separate. So you could really just expense them. In other words, if you have somebody come in and do repairs, technically, if those repairs come out, if they're repairs, they're expensive. They don't have to be capitalized if it's truly repairs. If it's improvements and it's bettering the property, that's when you have to capitalize it. There are instances where you can have a study done. It's called the cost seg. And that's totally for depreciation, which I have seen people do on, you know, bigger properties, or if it makes sense for your property, but the cost seg off obviously costs money. So you have to make a determination whether or not it's worth it. Because when they change the, I mean, the depreciation, you could probably do a whole segment on depreciation. And I'm not even kidding. It's convoluted when it comes to some of the bigger stuff, but part of it is systems. Like if you have six air conditioner units in your building, and if you're replacing over half of them, then it has to be capitalized. that's where these cost segs come in and breaking everything out. So it does get a little convoluted, but I would say probably for the normal landlord in their situation, it goes according to the $2,500 threshold or whether it's, repairs. If it's all repairs, a lot of times you can expense it. But if it's an actual improvement, it has to be capitalized.

Yuriy 44:06

Are there any implications for landlords in Philadelphia who are not having a rental license in place when they file taxes or claim deductions?

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 other way, 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 rentals that operate in the city of Philadelphia? Do they have some kind of different tax obligations compared to long-term landlords or 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's eight and a half percent. And I believe that the company like Airbnb or Vrbo, is that the other one? I believe they collect that right off the top. And at that point, that becomes an expense to you. to the landlord or whoever's operating that property, it's an expense. And that's something you need to remember, but it is on the statements. They usually give you a pretty good detailed statement because unfortunately the whole amount is in the rental piece because that's a tax that's paid off the top line.

Yuriy 45:32

Jennifer, what is your take on paying yourself? I know you touched a little bit on that when you were talking about LLCs versus S-corporations and management or your corporation as a management for your LLCs. So what is your take on paying yourself as a landlord versus reinvesting all profits back into the property?

Jennifer 45:53

It depends on a few things. The property itself, if it needs updating and you want to be the type of landlord that you can keep your property and your business operating top-notch, get top rent you probably want to keep reinvesting in your property if your property doesn't go downhill and you have good tenants in there they're not costing you a lot of money that's that that's the key right is getting the right tenant because then it becomes a very profitable property but that being said if if the interest rates are low you are much better off borrowing money and putting it into the property than you are using your own money take that money and invest it. That's what I say. You know, if you are into that kind of thing or take that money and buy another property or I'm sure that's how a lot of property owners do it. But right now, I don't want to say 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 the low end, I would say to people, well, yeah, pull the money out depending on what you're using it for. You know, So it's kind of the situation of what does that look like? Even if you're taking money out, taking a loan out to buy another property, you're still investing it. But if you're just pulling it out to go on vacation, that's a personal thing. I have seen some people who they cannot handle their bank account being under a threshold. It's got to be at $10,000 or I can't sleep at night. So that's a determining factor as well. And then I have people who they don't care about their bank balance. They care about them feeling like they're getting paid for working. And I say to them, if that's how you feel good, you know, it really is a personal and each situation is different.

Yuriy 47:57

Yeah, it is. It's truly every single landlord is different. Everybody has a different situation and it works differently for everyone. There is not a magic advice that you can give someone and tell them, hey, go buy that property, put the tenant on and do this with your money and you will get the best results. It is all very personal and comes down to your personal goals and to the type of person you are and what you're trying to do with it.

Jennifer 48:25

That is for sure. And I will tell you, I have seen so many different thought processes on that question. Everybody's personality is, and it's interesting. It's interesting.

Yuriy 48:39

Yeah, but I often, in my line of work, I often have these conversations with landlords or our clients and they would come to me and they would tell me, well, I want to invest, like, what is the best property to buy right now? Or which area is the best for me to invest? Well, I need more information. I cannot tell you what is the best property. I can tell you where I bought my last property or what property I bought and why I bought it. But you and I will have completely different set of goals and we have different types of investments and we have different personalities. So it all depends on what exactly you're looking for. Tell me more. Tell me what you want to have. Tell me how much you're looking to spend. Is it just a short-term game? Is it something that you want to be in for 15 years? So it's a lot. I like that. Jennifer, are there any upcoming tax law changes that you know of and that we need to be aware of?

Jennifer 49:37

well because you know we have a new administration and that always makes things a little bit tricky but what i will say there's two things for certain that will affect property owners is there's the cuba deduction which is the qualified business income deduction will be sun setting at the end of 25 and also the salt the state and local tax threshold which hits on the personal return but it has to do with real estate taxes everything they're um going to be sunsetting at the end of 2025. there has been indication that they do plan on extending it if not making it permanent so that's kind of what we're thinking is going to happen especially since the current administration is who put that into 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 most part is that QBID deduction. And of course, everything with the depreciation, too, because that and that changes all the time 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 in philadelphia what is the most important single thing that they need to do to avoid tax mass later

Jennifer 51:06

i would say for one thing expect that extra mandatory tax on the BERT for the first year that you're showing income. Now, if they only have one property, most likely they're going to end up paying zero taxes in Philadelphia because they have that $100,000 exclusion. And the first year that you buy property, most times you will end up with a loss because of the depreciation and the loan costs, the title, the transfers and all of that, typically the first year. But To your point, because they're new, they don't know what to expect. And I'm sure you've heard it from people as well. They get kind of blindsided the second, third year. That's when some of the other taxes start picking up. And then by the time they start buying their second, third property, you're going to see that $100,000 exclusion come out. And that first year that they have profit in there, they have to pay their first year tax. and their estimated tax. That's when I see the real shock happen. That all goes back to keeping track of your books throughout the year, knowing what your income is so you know what, have somewhat of an idea what to expect, and even touching base with your accountant especially towards the end of the year, because once 1231 hits, there's nothing you can do.

Yuriy 52:32

That's a good point. Let's say I'm a brand new investor or a landlord. I just bought a property this year. It's my first property. Do I have to have an accountant? Because to me, it sounds like I never 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 have this property that I need to file taxes for. It doesn't sound that complicated. I just have like, I don't know, 12 friends coming in. I can just put it all together and then put it in the app and file my taxes. Do I need to have an accountant? Because I don't have enough income from this property to pay for an accountant, to be quite honest.

Jennifer 53:10

Well... My answer to that is no, you don't have to. If you're fully, you know, feel confident in what you're doing, what I would suggest, though, is that you talk to an accountant at the very least before you buy the property for all of the reasons that we just discussed. I have people that ask me. questions they do their own tax return they'll ask me questions and I am not against that at all because I do think some people are capable of it but if you aren't keeping good records it's really important you know that you talk to somebody you my my thing that I would say to people is you know yourself you know but keep up on the changing laws and it does not hurt to reach out to an accountant and talk to them and just really make sure that you're up on it because there's a lot of misconceptions out there. And what happens is I see it occasionally where people, they do it themselves and they don't consultant accountant until it's too late and then it costs them a lot of money and that's why i'm saying you know even your annual return you're just putting it on your personal return It's really not that big of a deal if you're confident with it, but I definitely would talk to somebody before, get some knowledge, I guess.

Yuriy 54:36

Yeah. I would also add to it, if you talk to someone, make sure that you're talking to someone who knows specifically CTO of Philadelphia taxes. I've seen that happen many times when people out of state, even in the state, just a little bit away from Philadelphia, a couple of counties away, They invest in Philadelphia and they have no idea about this additional taxes that they need to pay. And they have an accountant, but the accountant has no idea about that either because they don't work in CEO.

Jennifer 55:04

You bring up a very good point because I actually just was working on resolving somebody with that same exact situation. They had an out-of-state accountant and did not know about the local Philadelphia taxes. And that does happen. And then, I mean, everything's fixable, but it costs more to fix. it than it does to do it right the first time. So yeah, definitely make sure you know about the Philadelphia taxes. And the strange thing is too, Philadelphia is, they're hard to get a hold of on the phone sometimes.

Yuriy 55:38

Sometimes. I would rephrase that. You never can get them on the phone.

Jennifer 55:44

Yes. But what I have been doing and in telling people to do is emailing them. They do seem to, because then you have it in writing. Plus you do have it in writing. Plus then you do have it in writing because that kind of helps cover things too.

Yuriy 56:02

Well, that's a wealth of information, Jennifer. Thank you so much for joining us today. Thank you. So if any of our listeners or watchers want to reach out to you, what is the best way? We will put your information in the show notes, but What's the best way for reaching out and how 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 any questions, you can certainly reach out to me. I do have people that will call with questions and I try to help people as fast as I can because it does help me to keep my head in the game too. And I actually, I really like what I do. And Philadelphia is a challenge and 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 to people and try and figuring out the problem and how to solve it. Well, Jennifer, thank you so much. And thank you for joining us. And hopefully we'll see you again sometime. Yes,

Jennifer 57:10

thank you, Yuri. I appreciate

Yuriy 57:12

it. Big thanks again to Jennifer for staying with us today and for sharing all of this wealth of information. Remember, Philadelphia is a very specific place with very specific tax responsibilities. And as a landlord, you need to know how to get ahead of them that you can save money. a lot of stress and money down the line. If you enjoyed today's episode, please don't forget to subscribe, like it, share it. And if you need to get in touch with Jennifer, you will find her contact information in the show notes. Thank you and see you next time.