Section 179 Deductions

I just bought a book about tax deductions for landlords, which I really like. Most of the topics in there I already knew about, such as depreciation, mortgage interest, home office, real estate professional exemption, etc., and I am just clarifying the details on how it all works. But I came across one item that I've never even heard of -- Section 179 Expensing.

After going on about depreciation, the author then brings up Section 179, and states "Under Section 179, business owners can deduct the entire cost of long-term personal property that they use in their business, rather than having to depreciate the cost over several years. This is called first-year expensing or Section 179 expensing."

So I can buy a new car for my business, and deduct 100% of the cost of it in the year of purchase! I'm very surprised that I never heard of this before.

Here are the rules:

• Personal property used in rental property, such as appliances, carpets, and drapes, is excluded.
  
• You can't buy the deductible property from a relative or from an entity that you control.
  
• You have to use the property more than 50% of the time for business purposes. (If you use the property less than 100% of the time for business purposes, then you reduce the amount of your deduction by the percentage of personal use.)
  
• The maximum amount of expenses that you can deduct are currently $125,000 per year. But they're scheduled to go down to $25,000 in 2011.
  
• If you purchase more than $500,000 worth of Section 179 deductible items in a year, then you start to lose the deduction. That limit is scheduled to go down to $200,000 in 2011.
  
• You can't use these deductions to deduct more than you make, in profit plus salary. So you can't make your taxable income go below zero and create a loss.
  
• When you deduct the cost of an asset, you must continue to use it for business use for the length of time that you would have had to depreciate it. So, since a car would be depreciated over 5 years, you would have to keep using that car for business use for 5 years. Otherwise you will have to "recapture" the savings.
  

Pretty cool stuff!

Credit Score Breakdown

Credit Score Breakdown

I went to a credit repair company sales pitch today. One of the things I learned was the breakdown of how your FICO score is calculated.

The breakdown of your credit score (FICO score):

1. Payment History: 35%
   
2. Amount Owed: 30%
   
3. Length of History: 15%
   
4. Inquiries/New Debt: 10%
   
5. Types of Credit: 10%
   

Buying Your Credit Scores

You can get your credit report for free at annualcreditreport.com. But it doesn't include your FICO score. There are a lot of places on the Internet where you can buy your credit report with a score, but they generally aren't FICO scores, they are just estimates. Only FICO (Fair Issacs Company) provides the real scores that almost all lenders use.

But you can buy your actual FICO score at myfico.com, which is owned by Fair Issacs. It costs about $48. With a little searching I found some discount codes which got the price down to $38. The code I used was CPPSAVINGS (8/14/08). If that doesn't work, search around the net, or check out this forum which looks like it stays up to date.

You can also have a mortgage broker pull the credit for you, but that will cause a "hard hit" which decreases your scores. (A "soft hit" is when you pull your own credit, like with myfico, or when someone pulls your credit without you authorizing them, such as credit card companies who want to send you pre-approved offers.)

It is IMPOSSIBLE to violate a "Due on Sale" clause

I hear all the time about the dangers of violating the "Due on Sale" clause in a deed of trust (or mortgage). I've heard a very experienced title officer state that wrap around mortgages were illegal because they violate the Due on Sale clause. I've heard that in some states realtors are banned from participating in "subject to" transactions because they are illegally helping the seller to violate the Due on Sale clause.

In my opinion, this is all a bunch of nonsense. It is IMPOSSIBLE to violate the Due on Sale clause!

The Due on Sale clause in a deed of trust or mortgage basically states that if the borrower transfers title without the lender's permission, the lender has the right to accelerate the note, i.e. demand payment in full of the remaining balance owed.

So, to reiterate, the Due on Sale clause says that IF the borrower does something, then the lender HAS THE RIGHT to do something else. It's an "If/Then" clause. That sort of clause is impossible to violate! If the borrower transfers title, have they broken some law? NO! Have they taken away the lender's right to accelerate? NO! They haven't VIOLATED the Due on Sale clause, they've FOLLOWED and FULFILLED their part of it! They've fulfilled the "if" part of the "If/Then" clause. Then the lender has the opportunity to fulfill the "then" part of the clause. And the lender can go right ahead and accelerate the note if they so desire. (Which they occasionally do, but not very often.)

Now, if the Due on Sale clause said "Thou Shalt Not Transfer Title", or "According to Statute 19-Q of our state constitution, transferring title of this property is illegal without permission of the lender", THEN it would be possible to violate it. But as the Due on Sale clauses actually read, there is NO WAY TO VIOLATE them!! And it is certainly not illegal, immoral, or unethical to transfer title or assist someone else in doing so.

Thank you and good night.