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Providing Education, Resources & Networking Since 1978 Kentucky’s premier investment club for landlords, rehabbers and wholesalers Meeting the 4th Thursday of every month (except November & December) KREIA.COM • facebook.com/groups/kreiaky • twitter.com/reiaky

Monthly Newsletter for KREIA Members

Vol 08-20 August 2020 President’s Letter

Paid Advertising Rates

Foundations of Finance: Put your plan into action with Erik Hitzelberger

Welcome, New Members!

Mike Butler: Prepare for Fair Housing ‘Secret Shoppers’

Michelle Rawn: Courts update

Government Affairs Update

Nina Musgrave: Homeownership 14 rates increase, vary by ethnicity KREIA Photos

L.O.T.S. Recap: Wendy Kays converts Beechmont duplex to single-family home

Eric Shadowens: Do you qualify 22 as a Real Estate Professional?

Calendar of Events

Dear KREIA Members and Friends, I wrote last month in my President’s Letter that U.S. home prices according to the U.S. Census have appreciated annually at the rate of 6.564% since 1963. The U.S. medium income has increased at about half this rate as traditional single-family home ownership has continued to be less affordable for a big part of our population, despite government and Chris McCarty private sector initiatives to improve affordability. Nothing about housing costs ever seems to decrease, and instead we see a steady incline in prices, making the American dream ever more illusive. In recent years we have seen some demographic shifts and reversals of housing trends with many moving back to the cities. There’s been a change in demand from buyers, who are seeking access to less expensive housing stock. Older city neighborhoods are looking more attractive as they are being gentrified and transformed. A check of Internet real estate transaction statistics for last month in Louisville, according to Zillow, indicated the median price for a single-family home was $178,807. (Half the sales were above that figure and half below.) The average sale price last month in Louisville, as defined by total dollar amount of sales divided by total number sold, was $261,321. For the same period, the average rent in Louisville was $1,038/month and represents a 3.95% average increase over last year. Average real estate appreciation in Louisville over the past 10 years has been 23.5%. When I started buying single-family homes as rentals many years ago, most of my investments were directed at the older areas of Louisville at a time when many people were moving to the suburbs. Many of the houses I bought were based on the traditional formulas of cash-on-cash return on investment – I used those calculations to guide my decisions, determining risk and reward. The traditional motivation of owning real estate, in addition to the cash flow, is the debt amortization paydown by the residents along with the additional benefit of appreciation. Before any of that could be considered, the deal first had to cash flow and Continued on Page 4

Copyright MMXIX Kentuckiana Real Estate Investors Association • P.O. Box 91225 • Louisville, KY• 40291 (502) 509-2216 www.KREIA.com DISCLAIMER: KREIA does NOT pre-qualify, evaluate, endorse, guarantee or warranty any particular deal, service, company, or person. The Kentuckiana Real Estate Investors Association recommends you perform your own due diligence & seek appropriate legal, accounting, or other professional advice before making any investment. KREIA is a Member of National Real Estate Investors Association.

Your KREIA Leaders

President Chris McCarty

Advertise With KREIA

Secretary Erik Hitzelberger

Vice President John Jones

Treasurer Mike Treasurer-Elect Grinnan CPA Wally Kallbreier

Board of Directors

Put your message in front of the most active rehabbers, landlords and wholesalers in the state! KREIA offers five membership levels for businesses. Go to KREIA.com and join at one of these annual advertising levels to get your ad in every issue of KREIA’s newsletter and be invited to make ad pitches at meetings:

Business Card Membership . . . . . . . . $199 Includes your business-card-sized ad. Admission at monthly meetings is $20. Premium Levels: These four advertising levels include your ½-page ad in each issue.

Rue McFarland

George Foree

Dennis Erhard

Frank Miller

Lauren Willoughby

Greg Nalley

Hampton Scurlock

Rob Bergeron

Christopher Jaquith

Jordan Pohn

Stacey Duvall

Alexis Fentress

ParliamenPast tarian Michelle President Rawn Eric George

Get involved with KREIA. You can help with the monthly meetings, L.O.T.S. program, this newsletter, Saturday workshops, Government Affairs roundups, marketing, the KREIA website & more. Work shoulder-to-shoulder with active investors! Ask for someone to direct you as you check in at the front desk at monthly meetings.

KREIA's newsletter is published monthly and serves to educate you and to remind you of upcoming monthly meetings. About KREIA: The Kentuckiana Real Estate Investors Association is a nonprofit organization focused on education, networking and resources for today’s investor. Whether you are just starting out in real estate investing or are working on your hundredth deal, KREIA can help you learn more, earn more, and have more fun doing it. Group discounts are available. Contact us at support@KREIA.com if you: Want to advertise on KREIA.com • Need help • Have a question

Bronze Membership . . . . . . . . . . . . . $499 Includes free admission to monthly meetings for one person. Silver Membership . . . . . . . . . . . . . . $699 Includes free admission to monthly meetings for two people. Gold Membership . . . . . . . . . . . . . . . $999 Includes free admission to monthly meetings for two people and gives you a skirted table in the vendors area. Platinum Membership . . . . . . . . Reserved Includes extra promotion. There can be only one advertiser at this level. Our current Platinum Sponsor, MM Lending, holds exclusive renewal rights until 2021. Questions? Catch up with KREIA Sponsor/ Advertiser Chair Dennis Erhard at the meetings. Or email support@KREIA.com.

Join KREIA Joining KREIA is easy: Go to KREIA.com and click the "JOIN" option on the menu. Tell all your investing friends. The cost to join as an individual member is $125 per year, with a door fee of $20 at our monthly meetings (which covers the buffet meal and rent on the hall). Click JOIN at KREIA.com to find out about all the benefits of membership for both individuals and businesses. Too many to list here!

Copyright MMXX Kentuckiana Real Estate Investors Association • P.O. Box 91225 • Louisville, KY• 40291 (502) 509-2216 www.KREIA.com DISCLAIMER: KREIA does NOT pre-qualify, evaluate, endorse, guarantee or warranty any particular deal, service, company, or person. The Kentuckiana Real Estate Investors Association recommends you perform your own due diligence & seek appropriate legal, accounting, or other professional advice before making any investment. KREIA is a Member of National Real Estate Investors Association.

What You Don’t Know About Money Can Hurt You Aug. 27 virtual main meeting is about getting your financial house in order By Erik Hitzelberger The greatest failing of the U.S. educational system is the fact that we spend no time providing any sort of financial education for students. People graduate high school or college with the equivalent of a 1 out of 10 (or worse) level of financial knowledge. Instead, we’re left to “learn” from colleagues, HR representatives and brokers. The results are obvious and staggering. A full 40% of retirees have no money whatsoever in a retirement account. For those who do, the average is well under $290,000. When combined with Social Security, that’s not even enough to make it 10 years, assuming no health problems. Gen Xers have a little more time but aren’t really doing any better, and Millennials have the added burden of facing into not one, but two recessions at the start of their careers. Ultimately, this translates into the stress, angst, and anger we see every day. Instead of caring for our neighbors, we are bitter that they are getting help while we struggle. Dave Ramsey, Suze Orman and others have made millions providing enough education to take people from a 1 to a 2 or possibly a 3. That’s great for employees and technicians. It helps them make better decisions even if they don’t necessarily understand why. But we are investors. We want more for ourselves, our loved ones and our communities. We need to know more. The good news is that this is more of an education problem than a financial one. We can control whether we spend our time and resources to get educated. I hope you make that decision this month during our “Foundations of Finance” meeting as we try to build a solid foundation of financial knowledge and learn … • How every economy from your personal one to that of a sovereign nation works • What the 7 numbers are that you must know in your personal financial life • How to establish your investing goals to create financial freedom, wealth and legacy • How to achieve those goals through real estate • How to identify deals and know when to walk away • What the future holds and how to prepare Join our Zoom call on Aug. 27: Log on by 5:30 p.m. to attend the early meeting. Between 6 p.m. and 7 we’ll have announcements, a legislative update, and property and advertiser pitches. Erik’s “Foundations of Finance” starts at 7 p.m. Free for KREIA members! Register at kreia.com!

Photo illustration by Nina Musgrave

Meet Erik Hitzelberger Prior to founding multiple real estate investment companies, including Freedom Property Group, Erik spent several years driving innovation as the leader of engineering teams at three different large corporations. He left the corporate world to pursue his entrepreneurial passions in real estate as an agent and investor. Erik believes success is achieved through the Actions we take, the Community we surround ourselves with and the Education we obtain. As such, he seeks constant improvement in all three areas. Since flipping his first home in 2006, he has been involved in hundreds of rehab projects and maintains a portfolio of rental properties. He counts KREIA as one of the most important networking and education groups he is involved in and has tried to support the community by serving on the Board for the last six years, including as Vice President and Secretary. Finally, he is passionate about both learning and teaching. He dedicates hours each week to absorbing knowledge on real estate, finance and economics, as well as spending time helping others in these same areas. When he isn’t working, Erik enjoys spending time with his family and friends, traveling, reading and golf (as much as one can enjoy this horrible sport). During football season, Erik cannot be found. 5:30 p.m. Early Meeting: Investing Using Your IRA For decades, Chris McCarty has been using his self-directed retirement account to buy rental properties and make other RE investments. Want to learn how to do that too? Log on to our meeting at 5:30 to hear tips from Chris.

Welcome, New KREIA Members! Sheri Arnold David Coffey Mark Cress Artice Franklin Bryan Glover Misty Hampton Daniel Hawkins Laura Hosbach

Rodney Houston Diana Jones Erik McEwen Scott McEwen Andrea McGlamery Zach Morris Susan Nielsen Jennifer Orr

Steve Osowicz Kelli Richie Anthony/Winona Ridgway Gary Smith Sr. Will Stephens Iisha Taylor Jeff Zolinski

KREIA’s New Member Orientation There will be a monthly presentation of the benefits of joining KREIA at every in-person monthly meeting. The presentation will be given from 6:15 p.m. to 6:45 p.m. in the early meeting room at Woodhaven Country Club. If you bring new investors to a KREIA meeting, please point them toward the orientation. See the presentation online: You can also review Rick Littrell’s new member orientation PDF, watch a video of it, and learn how to secure your Home Depot discounts and cash-back bonuses here: kreia.com/MemberBenefits.aspx

President’s Letter Continued from Page 1 make financial sense in order to be considered. Back then, I was not considering that these homes would eventually become excellent prospects for first-time homebuyers or be highly desired in neighborhoods where gentrification would one day dramatically improve values. Today these same fundamentals and investment decisions are in play in Louisville and across the country as improving neighborhoods and housing affordability necessitate demographic changes and upwardly shifting home values. Investors are capitalizing on houses in these areas as rentals or retail flips to new homeowners. Yesterday’s uncertain neighborhoods are today’s areas of urban redevelopment and opportunity. The rising tide of appreciation lifts the values in older and neglected homes. Gentrification of one neighborhood quickly spreads to another, bringing stability, appreciation and new homeownership, which increases family wealth. It’s the natural progression of improving neighborhoods. Our country’s leaders talk about the need for affordable housing, but the reality shows something else. Today’s housing trends do not indicate any change to the current patterns of consistent price appreciation or access to lowercost real estate affordability. My own common-sense observations of current trends and those of other forecasters a lot smarter than me indicate that housing prices will continue to outpace wage growth, and that housing affordability will continue on the scarcity cycle with demand outstripping supply with the likelihood of continued appreciation. In the future, fewer people will be able to live in singlefamily homes due to this scarcity and high cost, and unfortunately more and more will only have multi-family housing choices as affordable options. If you are a current KREIA member and involved with real estate on any level, but particularly as a holder of long-term rentals, you are in the right business and poised for financial gain. KREIA is here to help expose our members to trends and best practices along with networking access to market leaders to help guide you to near-certain success provided you follow the fundamentals. Keep investing and learning, Chris McCarty KREIA President

Some of KREIA’s national sponsors via National REIA. For the full list, and info on discounts, visit nationalreia.org/benefits

Be Prepared for Fair Housing Secret Shoppers They’re calling you – and recording you – looking for costly violations By Mike Butler This is a MUST READ. You could be next! Yes, like we all need another headache in 2020. Not one, but several local investors have reached out to me after being victimized by the Metro Louisville Human Relations Commission “Enforcement Board” for committing HUD Fair Housing violations. Each owner received notice they had violated HUD Fair Housing, and each was assigned a HUD Investigation Case Number. This notice was received from a person in the “Enforcement Board” of Metro Louisville’s Human Relations Commission. THE VIOLATION: in the description area of the violation it rambled on about how one of their secret shoppers had called about a property owner’s available rental unit and asked about how many folks could live in this unit. The owner replied, “Our occupancy standard is two persons per bedroom.” As always, these secret shoppers record everything so they can prove you have violated the law. FYI, this occupancy standard has been the norm for a long time. In 1998, HUD incorporated the Keating Memo of 1991 in HUD Fair Housing. Here’s the link if you want to check it out: https://www.hud.gov/sites/documents/DOC_35681.PDF This has been legal for years, and I have the two-personsper-bedroom occupancy standard pre-printed on our rental application, and it’s on our website as well. After reading this report, unfortunately, there is no clearcut, black-and-white answer. Here’s the gist of it, which has a lot of gray areas. Yes, you can have a two-persons-per-bedroom occupancy standard for your rentals; however, if your rental unit has enough square footage, this can be adjusted. Here’s the example they give. Suppose you have a two-bedroom unit with a living room, kitchen and bath. Following their gray area guidelines, your tenant could use the living room as a bedroom and could legally have six people residing in your two-bedroom unit. Status of these pending Investigations by the Enforcement Board: when these owners contacted the enforcement person, she was Johnny-on-the-spot, answering every phone call and responding promptly to every email, etc. After being confronted with the Occupancy Standard guideline by HUD Fair Housing, this enforcement person is now not answering her cell phone, nor is she responding to emails, etc.

This prompted me to do a little research on the Metro Louisville Human Relations Commission – Enforcement Board. Here’s the link for their board members https://bit.ly/EnforcementBoard and a link to the page for the minutes of their meetings https://bit.ly/EnforcementMinutes Here is the Metro Louisville Human Relations Commission Fair Housing brochure encouraging folks to file a complaint: https://bit.ly/LouFairHousingBrochure This Enforcement Board investigates Fair Housing, employment and public accommodations. PLEASE PRINT THIS FAIR HOUSING BROCHURE so you can learn from it, and share it with everyone involved in your real estate business. This includes rehabbers, flippers, people working on your property, staff, and more. Remember, whatever comes out of their mouth is the same as you saying it. When it comes to renting, selling, buying, lending – absolutely anything involving residential property in the U.S.A. – you MUST abide by ALL Fair Housing laws. The simplest way to train your people when a person asks anything about a property is to say, “I don’t know, please call the office.” Do NOT allow anyone to hand out rental applications unless they have been properly trained. Here’s a good way to CYA. If you do have an office person or are getting ready to hire one, register them to attend a Fair Housing class put on by the Louisville Board of Realtors. You might want to attend yourself. You do NOT have to be a Realtor to attend this training. Back to this occupancy violation. After you have reviewed the Human Relations Fair Housing brochure, you will NOT find anything about occupancy standards; however, this is what these investors were told they violated. It’s really sad, but my experience when it comes to Fair Housing complaints against you or your business… You Are GUILTY Until Proven Innocent! My goal and objective here is to help you prevent this from happening to you. You cannot imagine all of the frustration, anger, time and fear involved, along with having to pay $10,000 or more in fines from one of these investigations. Prevention is your answer. Let me give you a simple solution allowing you to be in Continued on Page 30

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Update on the Courts By Michelle Rawn I know that most of you are anxious to know when the courts will return to normal and evictions for non-payment of rent will be able to start. Below is the breakdown of evictions under the CARES Act and in Kentucky and Indiana. In Kentucky, evictions for non-payment of rent were able to be filed and the cases filed prior to the shut-down were permitted to be rescheduled starting August 3. The hearings for evictions for non-payment of rent started on August 18. All eviction hearings until further notice are via ZOOM video meetings. Landlords are required to participate on the ZOOM call in case the tenants are also present. Pursuant to a new order from the Kentucky Supreme Court, all eviction cases for non-payment of rent where the tenant is present on the ZOOM call will be automatically continued for 7 days to give the landlord and the tenant an opportunity to work out a payment arrangement and/or for the tenant/landlord to apply for rental assistance. If you agree to accept the rental assistance offered through Louisville Metro, the landlord has to sign an agreement that he/she will not evict the tenant for any reason for 60 days. A ruling is supposed to be made on the continuance date. Warrants for possession, more commonly known as sheriff set-outs, are moving forward once the judges sign the orders. The Jefferson County Sheriff’s office has stated they will serve and process any orders signed by the judges that are sent to them. In Indiana, as of August 17, we can now file new evictions and move forward with those evictions that were filed prior to the shut-down. All eviction cases will be heard via ZOOM unless you can prove to the court an undue hardship, and then an in-person date and time will be scheduled. All attorneys and their clients are required to participate via ZOOM. This will be handled as regular eviction court with witnesses being sworn in and testimony being taken. Nationally, the CARES Act applies to those properties, both multi-family and single-family, where the loan for the property is either a Fannie Mae, Freddie Mac or HUDbacked loan; the property is a tax credit development; or the tenants are receiving government assistance with rental payments, including but not limited to Section 8. The moratorium under the CARES Act has expired and has not been extended. This means 30-day notices for any reason were able to be sent on July 25. We are advising all clients to use the 30-day notice through August. Starting in September, regular 7-day notices and 14-day notices should be able to be used even for properties and tenants originally secured under the CARES Act.

Remember, for those properties covered under the CARES Act, late fees cannot be charged from March 24 through July 24. As all of us know, things are still changing on a daily basis. Please feel free to reach out to me to see if there have been any more developments or updates. I hope you and your families are staying safe and healthy. Michelle R. Rawn Rawn Law Firm, PLLC Tel: (502) 639-9396 Fax: (502) 276-0607 Email: Michelle@rawnlawfirm.com

Government Affairs Update The Greater Louisville Association of Realtors reports that the Louisville Metro Council ordinance regarding housing discrimination was reintroduced on June 25 and “may get moving again in the coming weeks.” Ordinance O-395-19 would prevent landlords and property managers from disallowing applicants based on these factors: “lawful source of income, conviction history or arrest history, prior military service or homeless status.” Also… ● Jefferson County voters will decide in November if the property tax increase of 7 cents per $100 in property value will go forth. The Board of Education voted in the increase at their May 21st board meeting, but a petition recalling the vote was turned in on July 10th, and it had attracted more than 40,000 signatures. ● Louisville Metro Council has introduced a resolution to instruct the Planning and Zoning staff at Develop Louisville to review the land development code as it relates to equity and inclusion. Read more in GLAR’s update: bit.ly/LRGAU Rue McFarland is KREIA’s Government Affairs liaison.

GOVERNMENT AFFAIRS LINKS State Government Roundup Kentucky Realtors Legislative Updates. Read weekly updates on bills in play in Frankfort at the Kentucky Realtors’ site: bit.ly/KYR_LEGU

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Local Government Roundup Louisville Metro Government: Get a summary of local affairs (and state) by the Greater Louisville Association of Realtors (GLAR): bit.ly/LRGAU

Homeownership Rates Increase, Vary by Ethnicity Data shows distribution of racial inequality throughout history

By Nina Musgrave U.S. homeownership is trending upward over the last five years, after being on the decline since 2006. For 2020, the U.S. Census shows a breakdown of homeownership by: all U.S. (total ownership) of 66.6%; Non-Hispanic White Alone ownership rate at 74.9%; Black Alone at 45.5%; All other Races at 57.5%; and Hispanic (of any race) at 50.2%. However, the gap between white homeowners and black homeowners is the largest in three decades. A recent report from the Urban Institute offers explanations for the gap, estimating how income, educational attainment, credit score and marital status factor into exacerbating the black-white homeownership Quarterly Homeownership Percentage Rates by Race and Ethnicity in USA: 1994-2019 gap. With a -4.8% change in Percent Black homeownership from 2000-17, addressing these variables from a systemic level could allow this trend to change. If the Black homeownership rate had stayed the same as in the year 2000, there would be 770,000 more Black homeowners. Find the report online at urbn.is/2FuxrZV

At left: Frank Miller – KREIA Past President and owner of Believe Investment Group – headlined our August 4th Lunch & Learn event at Martin's Bar-B-Que Joint, teaching socially distanced investors about how to make money fixing and flipping houses. Below: Investors met up for a bit of safe networking at Bearno’s in Plainview during July’s Happy Hour.

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George Foree kicked off our featured presentation at July’s virtual main meeting, “Financially Free, Thanks to Rentals,” by laying out the basics of investing in rental property. Then Greg Shell (at right) picked up from George with case studies from a few of his investment properties. And Christina George finished out the session by answering questions about the tools she uses to systematize her real estate business.

Beechwood L.O.T.S. Home: A Closer Look Wendy Kays converts duplex into spacious single-family home By Lauren Willoughby You probably know Wendy Kays from her day job alongside Mike Fallot at MM Lending, where she helps rehabbers secure short-term loans to fix and flip houses. But she’s also an experienced rehabber herself, having completed six flips on her own, plus those she has finished for MM Lending. In four years she has flipped more than 25 houses. For our July 28 L.O.T.S. event Wendy invited us on a virtual tour of her current rehab project, a two-story house situated a few blocks south of the Watterson Expressway and east of Southern Parkway. She described the work going on as she walked through the property – while a live KREIA audience watched and asked questions via Zoom. The house was in mid-rehab during L.O.T.S. – you could see the framed bones of rooms in the changed floorplan. When Wendy found this property on the MLS, it was configured as a duplex: a pair of 1-bedroom/1-bath units. Her original plan was to turn it into an Airbnb rental, but she decided to make it a 3-bedroom/3-bath single-family home. For this transformation to an SFR she removed the outside stairs leading to the 2nd-floor unit, will cover over the exterior upstairs door, and is converting the electric from two boxes to one – the house will have only one meter. All the mechanicals were replaced – and relocated. The original HVAC system was in the basement and rather inaccessible, Wendy said. The new 2-ton furnace is coming upstairs to a new first-floor utility/laundry room. The roof was replaced. The hardwood floors will be preserved. She’s also using large-format tile flooring. In the kitchen, Wendy shifted the layout, moving the sink and counters. She’s pairing marble-like tile floors with white

L.O.T.S. host Wendy Kays led us on a tour through her rehab project as Alexis Fentress shot video for the Zoom call.

“I tend to gravitate toward older homes with character, and the front of this house has a lot of character,” Wendy Kays said of her current rehab house at 4571 South 2nd St.

cabinets. For contrast, she’s going to use dark counters and black fixtures, “so it should pop.” She moved the wall between the kitchen and the dining room, opening up the living/dining area from the front of the house to the back. And stepping out the French doors onto the large back deck, you’ll find an above-ground pool. Which was “really disgusting,” but they’re repairing it – not tearing it out. “With COVID, houses with pools have really appreciated in value,” Wendy said. “We think we can get maybe $5,000 or $10,000 more for the house because of the pool, so I’m really excited about that.” Upstairs off the master bedroom, a new master bathroom is taking shape in what used to be a kitchen. And hisand-hers closets are being framed in. Wendy said she planned to be further along in her $55k scope of work by now, but inspection delays have held her up – along with every other rehabber in Jefferson County. Inspections are “taking weeks longer than what we thought it would be, what it was for us in the past,” Wendy said. “That’s why you see open walls and not drywall right now.” And speaking of delays: “We went ahead and paid for the cabinets and the appliances, even though we weren’t ready for them, Continued on Page 30 Why do we call it “L.O.T.S.”? Because we Learn On The Site!

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Eating a Twinkie Does Not Qualify You as a Real Estate Professional you paid on a loan. The loss generated is $150k, which helped reduce your taxable income down to $126k. After many back-and-forth communications, the IRS believes your taxable income should be $276k because they have disallowed your rental loss, claiming you are not a real estate professional. They recalculated your tax liability and included penalties and interest. Their decision is final, but you disagree with their adjustments and petition the tax court to argue your case. Since taxpayers bear the burden of proving the IRS wrong in tax court, the judge asks for you to submit a substantiation of the hours you spent working on your rental properties. You ask for a few days to locate it. The judge accepts your request and you sprint out of the courtroom directly to your home computer, hastily trying to recall every time you drove over to one of your properties to unclog a toilet, replace a light bulb, or cut the grass. You have a decent memory and feel confident that your hindsight tally of 2,000 hours is as close as you can get to the actual amount you spent that year, and you submit this list to the court. Soon the judge issues his opinion – and you’re a loser! A confused and angry one at that. After all, you provided proof! You may or may not eat one Twinkie before calming down enough to read the judge’s reasoning. It seems you recorded a 25-hour workday for one of the days. Also, the court was able to confirm you spent 2,080 hours working in your W2 job. Remember that vacation you IRS Notice Requesting More Info Imagine your tax advisor has just finalized your tax return took in July, when you posted pictures on Instagram? The IRS does – they submitted them to the judge. He’s curious: and e-filed it. You get an email the return was accepted a few hours later. You’ve sweated the filing of your return for how did you manage to record hours that week for your rental property? several months, and now you’re done and can move on These are examples of similar occurrences in many court running your business. But then several months later you get cases. My favorite is the one where the taxpayer spent extra a letter from the IRS. They’re questioning some of your time logging hours in a calendar using different colored pens calculations and would like to take a deeper dive into the and dripping coffee stains on some pages to make it look amounts reported. No sweat, right? Well, not so fast. Sweat is already bead- more contemporaneous. I can only imagine the judge’s face ing up on your face as fear grows about whether you proper- upon reviewing it and noticing the times recorded looking ly documented all the positions you took on the return. You perfect, but the year of the calendar was not the tax year recall the great year you and your spouse had as employees being appealed! in jobs, earning $300k unrelated to the rental business. You Document, Document, Document have done well enough over the last few years that you It’s difficult for real estate investors who are stretched made the dive into purchasing a few rental properties. You began renting the properties early in the year and generated thin with other business tasks to worry about maintaining a Continued on Page 26 a loss with help from depreciation and the interest expense

By Eric Shadowens, DMLO Like a large percentage of Americans, I have fought a long battle with my weight throughout my lifetime. I have started and restarted diets many times. The accountingZ nerd in me has gone as far as creating a spreadsheet to track my daily calories. I’ll do well tracking them for a few weeks. Sometimes I find myself cheating a little bit. Maybe I did or didn’t eat the Twinkie after lunch. If it doesn’t show up on my spreadsheet, no one will ever know. I know my training app recorded 500 calories burned from my workout, but it really felt like 600. I had to have burned at least 25,000 calories the day I walked around the State Fair. It’s all estimates. Am I right? You haven’t been redirected to another article. This is the right place. Today I’m discussing qualifying as a real estate professional to take advantage of rental real estate losses quicker than what a passive investor is allowed. My weight challenge is a good comparison to what I often read in tax court cases on this issue. And it’s one that has seen much litigation through the years. So much I suspect it is the most litigated debate battle in the taxpayer vs. IRS saga, with the taxpayer losing most often. Why, you ask? I believe the most common reason is the taxpayer’s failure to document their qualification as a real estate professional. Here’s how it tends to go.

Do You Want Your Business Card to Appear Here? Join KREIA as a Business Card Advertiser for only $199/year and see your ad in a year's worth of KREIA newsletter issues! Copyright MMXX Kentuckiana Real Estate Investors Association • P.O. Box 91225 • Louisville, KY• 40291 (502) 509-2216 www.KREIA.com DISCLAIMER: KREIA does NOT pre-qualify, evaluate, endorse, guarantee or warranty any particular deal, service, company, or person. The Kentuckiana Real Estate Investors Association recommends you perform your own due diligence & seek appropriate legal, accounting, or other professional advice before making any investment. KREIA is a Member of National Real Estate Investors Association.

Eric Shadowens: Being a Real Estate Professional Continued from Page 22

passive unless it meets an exception as follows:

● More than ½ the personal service you performed in time log that may never have to be presented and will likely trades or businesses during the year must be performed in a only collect dust in a desk. Of course, with today’s technoreal property trade or business in which you materially logy, there are many app choices to help you record. participate, AND What is required to document your time involved in the ● You should perform more than 750 hours of services business? An IRS Temporary Regulation explains: during the year in a real property trade or business in which “The extent of an individual’s participation in an activity you materially participate. may be established by any reasonable means. Contemporaneous daily time reports, logs, or similar documents are You should work predominantly in a real property trade not required if the extent of such participation may be or business such as: established by other reasonable means. Reasonable means for purposes of this paragraph may include but are not ● Real property development limited to the identification of services performed over a ● Redevelopment period of time and the approximate number of hours spent ● Construction performing such services during the period, based on ● Reconstruction appointment books, calendars, or narrative summaries.” ● Acquisition The taxpayer in my earlier example would have a difficult ● Conversion time proving either one of them was a real estate profes● Rental sional since both worked full-time jobs. But you may meet ● Operation the qualifications. Make sure to take the time to document. ● Management ● Leasing; or What Is All the Fuss Anyway About Being a Real Estate ● Brokerage Professional? Remember in my example that the taxpayer had a rental Asking the right questions during tax time is very helpful. loss of $150k. As a passive real estate investor, they were You may recall in my example the taxpayers used a tax not allowed any deduction in the current year because their advisor to prepare their return. It is recommended you modified adjusted gross income (MAGI) exceeded $150k. choose an experienced tax advisor who specializes in real (Had their MAGI been $100k or lower, they would’ve been estate to prepare your return and assist with your tax able to currently deduct only $25k of real estate losses. And planning throughout the year. Real estate tax accounting with MAGI between $100k and $150k, the amount would’ve can be complicated and require a deeper dive into your been reduced pro rata.) current situation than a general accountant may be able to Therefore, the $150k rental loss they produced in their handle. first year is suspended and carried forward to future years. It remains suspended until their MAGI falls within the above Summary parameters or they sell the property. If one of them had So, grab a box of Twinkies and get yourself started on the qualified as a real estate professional, they would’ve been path to real estate professional eligibility by meeting with able to deduct the loss immediately. Of course, they your advisor and documenting your time spent. You’ll be wouldn’t likely have had as much W2 wages, so any glad you have a better understanding if the IRS ever comes resulting overall loss would be carried forward indefinitely – calling. this time being labelled a net operating loss (NOL) to be deducted in future years against ordinary income. (Note: Eric Shadowens, CPA The CARES Act recently allowed NOLs to temporarily be (502) 326-2319 carried back five years.) eshadowens@dmlo.com @ericshad76cpa How Do You Qualify as a Real Estate Professional? linkedin.com/in/ericshadowens Section 469 of the Internal Revenue Code specifically biggerpockets.com/users/EricShadCPA singles out as a default position that any rental activity is Copyright MMXX Kentuckiana Real Estate Investors Association • P.O. Box 91225 • Louisville, KY• 40291 (502) 509-2216 www.KREIA.com DISCLAIMER: KREIA does NOT pre-qualify, evaluate, endorse, guarantee or warranty any particular deal, service, company, or person. The Kentuckiana Real Estate Investors Association recommends you perform your own due diligence & seek appropriate legal, accounting, or other professional advice before making any investment. KREIA is a Member of National Real Estate Investors Association.

Mike Butler: Fair Housing Secret Shoppers Continued from Page 6

L.O.T.S. Recap: Wendy Kays Continued from Page 19

compliance. Please s-l-o-w down and read this very carefully. Simply REPLACE One Word. Replace the word “BEDROOM” with “ROOM,” and this should help you stay out of trouble. Why do they make things so difficult? Your occupancy standard will no longer read “2 Persons Per Bedroom” but will now read:

because I’ve heard horror stories about people not being able to get refrigerators in for three or four weeks.” Putting up new fencing was also problematic because of the difficulty in finding pressure-treated wood these days. “Make friends with your pro desk at Lowe’s,” Wendy said, “because I couldn’t have finished this fence without them.” If this house of Wendy’s turns out like the last one she volunteered as a L.O.T.S. site, the one in the Meriwether neighborhood a couple of years ago, it will be amazing.

“Occupant Limit of 2 Persons Per Room” Remember to change this everywhere you have it posted. Your website, your rental applications, your qualifying standards, posters, flyers… think long and hard. If you are using paper applications that have the occupancy standard in it – TRASH ALL OF THEM and print up a new batch with the revised occupancy. FAIR HOUSING is NOT Limited to rental property. It applies to ALL residential housing in America! This is just the tip of the iceberg on Fair Housing. There is so much more that will surprise you if you have not had the training. Just like in law enforcement, you cannot say, “I did not know that was against the law” – saying that is not a get-out-ofjail-free card like in the game Monopoly. KREIA Parliamentarian and attorney Michelle Rawn has taught several classes for KREIA members on Fair Housing, involving everything from the recently updated information on service animals to Metro Council’s proposed changes to our local Fair Housing laws. Take a gander at your previous issues of the KREIA newsletter and you can find some of her important updates. If you need a quick 20-minute training on Fair Housing, please go to https://MikeButler.com and click on the FREE tab. To your continued success, and stay safe,

More Tips From Wendy ● Manage your own site. “I manage the subs myself. I always do that…. I like to come by the property at least once a week, usually on the weekends, and make sure that everything is going the way that it should.” ● Get home inspections when buying houses as-is. “When we put in the offer, we immediately had a home inspection done on the property, even though we were buying it as-is. And the inspection brought up a couple of issues that weren’t really major on my end, but they sounded scary to the sellers, so we were able to negotiate a much lower price because of that home inspection.” ● Lessons learned over the years: “If you have good contractors, stick with them. Keep them happy.” On the Zoom call, Wendy invited KREIA members to call her if they have further questions about the rehab, or about getting a loan from MM Lending: (502) 400-3015. THE NUMBERS Purchase Price: $95,000 Estimated Sales Price: $200,000 Rehab Budget: $55,200 Real Estate Commission: $12,000 Closing/Holding: $5,500 Estimated Profit: $32,300 TOTAL COST: $155,700 Wendy allowed us to share her scope of work/budget document. Check it out at bit.ly/k2008_rehabscope

P.S. Sign Up for Your FREE Investor Training Every Tuesday at 12 noon: MikeButler.com/PowerLunch Mike Butler is a KREIA Past President, a recipient of the Ed Melton Award, a property manager, a high-volume landlord, a principal in Tenant Finder Service, a retired Louisville undercover police detective, and the author of the bestselling real estate book “Landlording on Autopilot,” now available in its 2nd edition.

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UPCOMING EVENTS

Saving Enough for Retirement? What You Don’t Know About Money Can Hurt You Join Erik Hitzelberger on our August 27 virtual main meeting. He’ll show you how to set investing goals to create financial freedom, wealth and legacy – and how to achieve those goals through real estate. This meeting is free for KREIA members! Register now at kreia.com Early Meeting: At 5:30 p.m. on the call, hear from KREIA President Chris McCarty about how to invest in rental property using your self-directed IRA. ❖ — Noon – 1 p.m. L.O.T.S. Event. We visit a rehab project in an East End in a neighborhood close to the intersection of Brownsboro Road & the Waterson Expressway. September 1st

❖ September 3rd — 5-7 p.m. KREIA Happy Hour. Host Hampton Scurlock says we’re still planning to meet at Bearno’s in Plainview. Though, as you’d expect, rules on gatherings during COVID-19 may affect us. Stay tuned. ❖ September 8th — 11:30 a.m.-1:30 p.m. KREIA Lunch & Learn. Host Ed Gibson has invited attorney Michelle Rawn to speak. Stay tuned on this too for info on the location of the event. ❖ September 17th — 6 p.m.-7:30 p.m. KREIA Game Night: CashFlow. Want to get out of the Rat Race? Play the CashFlow board game with other investors pursuing financial freedom. We’re planning to meet at Bearno’s.

Main Meeting Calendar Here’s what’s coming in the next couple of months: • September 24: REOs & Auctions • October 22: Shark Tank (tentative)

We look forward to seeing you at our next main meeting!