Incomplete 1031 Exchange Can Haunt Real Estate Investors

Here is the tale of how an incomplete 1031 Exchange can haunt real estate investors. Mr. Jones had bought a lot at a great price from his friend and built an apartment building on it. His cost basis was roughly 1.9 million. His circumstances a few years later demanded that he come up with liquid cash for other obligations he had, and he sold the building for 3.8 million. After sales costs and other accounting adjustments, his net capital gain was a bit over 1.4 million. He had enough knowledge to open a 1031 Exchange with the title company's accommodation department. This IRS tax code would allow him to roll the proceeds over into a new investment property without paying tax on the approximately 1.4 capital gain. He had his eye on a parcel of land in the country he would develop. There were ongoing problems with the purchase and even though he was warned that he MUST complete the purchase on the new property within 180 days or get soaked with taxes, he did not, believing erroneously that he could get an extension because "somebody had told him so". Imagine his surprise the following year when he filed his tax return and was presented with a federal tax liability of almost 215,000 and a comparable amount to the State of California. By then he had already spent a good amount of the liquid cash he received from the sale. The year after his failed 1031 Exchange Mr. Jones sold two rental homes at a significant loss but he could not apply the loss retroactively to his huge gain the previous year.

Moral of the story:

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  Sellers should plan their exit strategy carefully if they want to sell real estate investment property

  
  


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  Consult with a tax professional before any purchase or sale

  
  


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  Evaluate the entire portfolio if there are more than one property and sell them in the right sequence

  
  


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  Obtain and listen to the advice of professionals who know the rules (real estate brokers, 1031 Exchange accommodators, CPAs), not "somebody at the title company"

  
  


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  Capital gain is not related to how much the loan is on a property; it is calculated from the cost basis not the equity

  
  


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  Occasionally sellers choose to pay capital gains taxes because they have plans that do not allow for an exchange. This decision should be made consciously and should never be a surprise tax bill

  
  

If you are a strategist rather than a gambler, let professionals help you achieve your goals. Start by contacting

How can sellers make sure they get a listing agent who works hard for them?

How can sellers make sure they get a listing agent who works hard for them? Interview carefully and ask to see copies of the agent's past listings. Watch for these listing flaws:

[caption id="attachment_1840" align="alignright" width="150"] Restricted access to home for sale hurts sellers[/caption]

1. Restricted showings or making appointments difficult to obtain. Unless the seller has instructed the listing agent that there be no showings, denying buyers access to the home is not to seller's benefit. It has become the habit of some agents to advertise listings as "drive by only". This is common when selling apartments and similar investment properties where the buyer will not live in the unit and there is nothing wrong with the system. The drive by only rule does not make sense for condos or single family homes because buyers want to see the home before writing an offer. If a stream of buyers at various hours is not desirable due to seller's circumstances or a tenant-related difficulty, restricted days and hours should accommodate both seller and buyer. Who will write an offer without seeing the home? Buyers who must speculate about the condition and thus will lowball on price. The chance that the contract gets cancelled right after the buyer gets to see the home is fairly good. This strategy is never in seller's best interest!


2. Listing agent is unavailable to schedule showings. Sellers should find out before listing their home, how the agent intends to handle showings. The Orange County Association of Realtors mandates that only electronic lockboxes be used, no combo lockbox. Out of area agents often place combo boxes which require the buyer's agent to phone, text or email to get a combo code from the listing agent if the agent does not post the code in agent remarks. What happens if the agent takes the weekend off? No showing because nobody can get in. The home sits on market longer than necessary.


3.  Only posting one photo. A picture is worth a 1000 words. Photos should be flattering to the property. Close the toilet seat! It's listing photo class 101.


4.  A one line description of the home in the multiple listing service. Any property deserves more.

Call me to find out how I serve Orange County home sellers with their best interest in mind.

How to avoid awkward moments when lending money

6:22 PM

Your friend or relative asks you to loan them money. It can be $ 50 or $ 5000. This is a very tricky situation. A YES can get you down $ 5000 if the borrower does not repay you, a NO can imprint an impression on the person who clearly thought you would be good enough to help.

Any JUDGE type reality show will tell you that it is almost inevitable that people in close relationships will interpret the exchange of money differently. Is it a loan or a gift?

Here is what honest people to for each other: You loan your friend or relative money, they should NOT have a problem signing a promissory note. If they do, you know you have a problem because repaying the "loan" is a problem for them. Now you have to make a decision. You either give them the money and never expect to get it paid back (hurrah if they do), or you tell them no, you can't loan money without the signature. Totally your choice. What you should not do is give them the money without a written promise of repayment and EXPECT them to repay you.

How can you ask them to sign for the loan? The easiest is to explain that "if anything were to happen to you or them", how would the family know in the case of death of either of you what the deal was if it's only verbal?

Shakespeare really nailed it when he wrote: Neither a lender or borrower be. It refers to the reality that some people will resent you for lending them money and expect to get paid back. Before lending money, know which you are dealing with.

 

Orange County housing market is recuperating

The Irvine real estate market has seen an average of 20% price decline since the height of the housing market in 2006. That's not earth shattering compared to some other communities in Orange County, or areas in other parts of the USA. Yet to homeowners used to stratospheric home prices, the drop caused as much nausea and panic attacks as any ride at Six Flags Magic Mountain.

My take is that in Orange County we are in the roller coaster phase most comparable to the conclusion of the ride: We survived the panic of free fall and are now gently coasting at the bottom, smiling once again and patting each others' backs for having survived another exciting ride.

Today the housing market is recuperating some of that price weakness of the past. In many areas of Southern California including Orange County, the buyers' market is turning into a sellers' market. Now there seem to be more buyers than sellers. Inventory is ridiculously low and buyers are duking it out on many desirable properties. Cash is beating 3.5% to 20% down. There are still a good number of short sales, and their deceivingly under-market list prices add to the confusion of many buyers. Now more than ever, buyers need the expert advice of a knowledgeable Realtor who knows the LOCAL Orange County housing market. Nothing beats the agent on the ground. Realtors know what's happening with housing 60 days before the statistics come out. Once it's in the news, it's old news.

 

 

You are not a serious homebuyer if....

Occasionally I meet folks who profess that they want to buy a home. Some have been looking for years. Some complain agents calls them back. Most of the time they are first time buyers, but occasionally agents get a call by a  looker who bought a home sometime in the past. Why would anything be different now? Well, Mr. Buyer, in real estate things change about every six months!

Experienced agents know that in order to give 100% service to their buyer clients, they must have a good understanding of the buyers' wants and needs and motivation.

Here are some of the comments expressed by buyers whom I have met and who broadcast like a billboard that they are not serious homebuyers:

Buyer: I will call a lender to get a pre-approval when I find the right house.

Agent thinking: By then it's too late. You will lose that hot deal.

Buyer: I do not want my lender to run my credit because I want no dings on it.

Agent: Okay, that was the first time I heard that one.

Buyer: My parents (spouse, friends) want me to buy now

Agent thinking: Unless the BUYER wants the house, no contract will ever stick

Buyer spouse: My husband handles all the financial matters. He told me he would send you the proof of funds and lender pre-approval

Agent thinking: Husband does not respond to email follow-up. Never called the lender he said he would do "tomorrow morning"

Buyer: We are not in a hurry. We have been looking for two, three, five years (pick one)

Agent: Where are the hills? Quickly. Let me run there!

Buyer: I will only buy if it's a good deal

Agent thinking: It's a HOT market. Get in line and write the best and highest offer

 

If you recognize yourself in any of these comments, you may not be a serious homebuyer. But maybe you ARE and don't know it. Let me help you process the whole home-buying thing. I give you the facts and all the information you need to make a buying decision. Sometimes the first home you see is THE ONE, and sometimes it takes eight months to make an offer stick. If YOU are serious, so am I. And I have clients who can back up that claim.

Happy hunting!