On this screen, you can enter real estate properties that the parties own, will purchase, or live in as tenants.
For properties that are currently owned, you can indicate that they will be sold.
The properties can be partially or entirely rental income properties.
You can enter mortgages for all of these properties.
All of this is discussed on this screen below.
In general
When you first come to this screen, you will see two links at the top:
· Add real estate property
· And tenant expenses
If this is a property that is owned by a party, or a property that will be purchased in the future by a party, then click the first link, “add real estate property.”
If this is a property where the party is paying rent, click the second link, “add tenant expenses.”
Properties that are owned
When you click the link to add a real estate property, you will see a screen of key entries and real estate expenses.
You can fill in the fields in any order, and you can leave fields blank until you know the values.
For example, there is no need to specify the marital equity that will be kept by a party until later in the process.
On the other hand, the entry for who will keep the property is used to calculate the share of the expenses that are being paid by the party (see below). So if you have a guess as to who will be keeping the property, it is good to fill in that number at the outset.
Partial Ownership
If a property is owned in part by people who are not parties (a party’s parents, for example), then enter information just for the parties.
For example, suppose a property has a value of $500,000 and is 40% owned by Party A’s parents, and 60% owned by the parties.
Suppose the mortgage is $400,000, and the monthly mortgage payment is $4,200.
Enter the property as if its value were $300,000 (60% of $500,000). Enter $240,000 (60% of $400,000) as the mortgage, and 60% of $4,200 as the mortgage payment.
Enter the expenses that are paid by the parties.
For example, if the all the expenses are paid by the parties, and not the parents, enter 100% of the expenses.
But if property tax, for example is paid 40% by the parents, enter only 60% of the actual property tax.
Mortgage Information
When you enter the mortgage balance, monthly payment, and interest rate, the software will automatically calculate the deductible amount of interest.
This is a very valuable feature of the software, because the interest amount can change year to year.
If you are using an interest amount from a prior year, it will be inaccurate for the current year.
The software helps you get it right for the current year and future years.
Expenses
On the expense lines, enter the expense for the property in each category.
Then, on the right of each expense line, you enter the percent of that expense that is paid by each party.
This is different than living expenses, where you enter each party’s expense amount individually.
We think this is a better way to enter real estate expenses in particular, because it may be that the total expense is known initially, but the payment shares are negotiated later.
Initially, the software will default to assigning all of the expenses to the party that owns the property. If you have not specified what party owns the property, the software will assign 100% to one party. If you have specified a percent in which property will be divided, the software defaults that all expenses are allocated in that same way.
You can also change the default for any individual expense on the line where that expense is entered.
You may enter a footnote for each party to the right of the line.
Rental real estate
If the property is rental real estate, click the “more info” link on the first line where the property is entered. (This is the green 3-dots button in the Cloud edition.)
This will take you to the “more info” screen for the property.
In the section for “Rental Income Property,” click the box to specify that this is rental income property. Then, a section for entering rental real estate information will open up.
The rental real estate section is designed to be very flexible, allowing you to accommodate a number of different situations.
In particular, you can accommodate situations in which part of the use is personal use, such as when one room of the property is rented out, or when the property is rented out for a portion of the year.
At the bottom of the rental property information section, you will see the results for each party for the current year.
There are two “bottom line” entries here.
The first, in column (4), is net income. This is the net cash flow, and it is the line that flows to the Budget Report and the financial affidavits.
The second, in column (7), is taxable income. This is net cash flow adjusted for mortgage principal and depreciation, and is the amount of income subject to income tax in this year. This line flows to the View/Edit Taxes report.
Please be careful to enter the percent in which the net income will flow to each party. This will determine the percent of net income that carries for each party to the state’s financial affidavit, as well as the software’s Budget Report and other cash flow reports.
Rental real estate with no personal use
If the property is used 100% for income-producing rental purposes, then 100% of the mortgage will be allocated to the property. This is done by entering 100% on the line for the percent of payments allocable to the rental activity. This is the software’s default.
When you scroll down to the section on real estate expenses, you will see a checkbox that gives you an option to specify that the property is exclusively rental income property — that is, not used for personal purposes other than a de minimus amount.
If you check that box, you can itemize the rental expenses in the expense section below.
If the box is checked, then, with respect to the Budget Report, financial affidavit, and other cash flow reports, all the expenses will be totaled to a single number, and subtracted from the rental income, resulting in a single net income number.
That net income number will appear on the financial affidavit and the Budget Report as rental income.
You can see that number in column (4) of the rows of net income that appears at the bottom of the Rental Property Information section.
The expenses that you enter will not flow individually to the state financial affidavit, because they have been combined into, and already subtracted as part of, the net rental income number.
To carry them individually to the financial affidavit would be to double count them.
Note that when this box is checked, and expenses flow to the Rental Property Information section, the columns for “percent paid by” on the expense lines are ignored. Instead, the expenses are totaled, and the total is allocated in the same percent the net income is allocated.
Rental real estate with some personal use
If there is some personal use, you would check the box that says that “This property is also the owner’s residence or vacation home.”
A property could be partly used for personal purposes if it is used part of the year for personal purposes, such as a summer vacation home that is used by the parties some months and rented out some months.
It could also be used partly for personal purposes all year, such as a situation where a party rents out a room in the home, or a floor in a multi-floor unit, or (in New England especially) half of a side-by-side two family house.
In either case, the percent of the mortgage allocable to the rental income activity will be less than 100%.
Enter the percent allocable to the rental activity on the relevant line in the Rental Information Section.
Then, for the expenses that are allocable to personal use, we would enter them in the expense section, line by line.
Those expenses will flow to the financial affidavit and the Budget Report.
Note that the expenses flow to different places, depending on whether or not the property is used solely as a rental property. If it is, then the expenses are totaled and the total is subtracted from real estate income. The number that carries to financial statements is net income, which is real estate income minus the total real estate expenses. If not, then the expenses carry to the financial statements as personal real estate expenses.
If a property is used for personal purposes for part of the year, enter as personal expenses only those expenses incurred during the personal use time. For expenses such as property taxes, you allocate according to the percent of the year that the property had personal use.
If a portion of the property is rented, you typically allocate expenses such as utilities and taxes proportionally to the square footage that is rented.
Special tax rules apply to property that is rented for fewer than 14 days per year. With this very brief rental, the income is non-taxable, and you may count all of the property’s expenses as personal expenses.
What about the expenses allocable to the rental activity? Enter the total of those expenses in a single line, labeled, “Monthly rental expenses….” in the rental income section. You will see that line only if the box is checked to indicate that the rental has some personal use.
Mortgages
You can enter up to two mortgages per property in the software.
If there is a second mortgage, indicate that by checking the button at the top of the “more info” screen.
You can enter existing mortgages or new mortgages (see below).
The software asks questions about the mortgage.
These questions are asked in order to determine whether the interest on the mortgage is tax deductible.
The help buttons at each question explain how it is relevant to that determination.
Please be sure to answer the question who will pay the mortgage. The answer to this question controls how the mortgage payments flow to the financial affidavit.
Existing Mortgages
For existing mortgages, you would answer “no” to the question about whether the mortgage is a new, refinance, or buyout mortgage.
Existing mortgages are easier to enter. You just need to enter the mortgage balance, monthly payment, and interest rate.
The software will automatically calculate the tax-deductible amount of interest.
You should generally select the Statement Method for this mortgage.
However, if the mortgage is an adjustable rate mortgage or an interest-only mortgage, you would select the Detail Method.
For the Detail Method, you will have to enter more information, such as the initial mortgage balance, the date the mortgage was taken out, and so on.
Then, you can enter the adjustable rate and interest-only components by clicking the “more info” link at the bottom of the mortgage section on this screen.
New Mortgages and Refinancing Mortgages
If the mortgage is a new mortgage, refinancing, or buy-out mortgage, you would enter “yes” to the question in the mortgage section that asks about this.
For new mortgages or refinancing mortgages, you will be asked to enter all of the mortgage information, including the date of the mortgage, the initial balance, the interest rate, and the term of the mortgage.
The software will then calculate the amortization table for the mortgage.
If the mortgage is a refinancing mortgage, you will also enter the balance as of the date of the refinancing.
Buyout Mortgages
A “buyout mortgage” is a mortgage whose proceeds will be used to buy out one of the parties.
Here’s how the software works with a buyout mortgage:
You enter the total amount of the mortgage, the balance at refinancing, and the amount to be allocated to one of the parties
The software then calculates, by subtracting, the amount to be allocated to the other party.
For example, suppose Party B is being bought out with a $200,000 mortgage. Suppose the existing mortgage was $120,000. Then there is $80,000 of refinance proceeds available to be used to buy out Party B.
If you indicate that all $80,000 is going to Party B, the software will allocate $0 for Party A.
If you indicate that $50,000 is going to Party B, the software will allocate $30,000 for Party A.
If you indicate that $0 is going to Party B, the software will allocate $80,000 for Party A.
When you go to the Property Division screen, the software will automatically allocate these refinance proceeds to the parties. The remaining equity, post-refinancing, will be divided as you specify.
New or refinancing mortgages will not be reflected on the state financial affidavit, because the financial affidavit is intended to show the property as it exists at the current moment.
Sale of Real Estate
If the property is going to be sold, indicate that in the section on Basis and Sale.
Be sure to click the Worksheet button relating to the tax exemption. Based on the entries you make on that screen, the software will automatically calculate for tax purposes the amount of exclusion that will apply to the sale proceeds.
Here’s how the software handles proceeds from the sale.
Proceeds from the sale flow into the Accumulated Savings account.
Accumulated Savings is a hardcoded investment account in the software.
Positive net income at the end of each year also flows into this account.
If one of the parties buys another real estate property (see below), the proceeds from the Accumulated Savings account will automatically be used to handle the down payment on the new property.
The result of these automatic calculation is that you do not have to specify in any way that the proceeds of the prior property will be used for the new property. The software will handle that automatically by using funds from the Accumulated Savings account to fund the down payment.
Purchase of New Property
If a new property will be purchased, here is how to handle it:
1. Create a new real estate property by clicking the button at the top level to add a real estate property.
2. Click “more info” on that property (green 3-dots button in the Cloud).
3. At the top of the “more info” screen, answer “no” to the question whether the property is currently owned.
The screen will now change to give you an opportunity to specify who will be owning the new property, what the cost will be, and what the new mortgage will be.
The software will automatically calculate the down payment as the difference between the cost and the mortgage.
For example, if the new property will cost $200,000, and the mortgage will be $150,000, the software will calculate that the down payment is $200,000 – $150,000, which is $50,000.
If another property has been sold previously, the proceeds from that sale would flow into the Accumulated Savings account.
The software will then tap that Accumulated Savings account automatically to cover the down payment on the property.
You do not have to specify in any way that the proceeds of the prior property will be used for the new property. The software will do that automatically.