Tax Deferred Exchange An Alternative to Paying Tax Today

An Alternative to Paying Tax Today

The cartoon character Wimpy would say that he’d gladly repay you Tuesday for a hamburger today. Some real estate investors say a similar thing to Uncle Sam to be able to hold on to their proceeds from the sale of an investment and agree to pay the tax later.exchange.png

The benefit of a 1031 exchange is that it allows the investor to defer the tax due from the sale into the replacement property. This allows more money to be reinvested. In the example shown, the investor has 27% more to invest now by deferring the tax into the future.

The property to be exchanged must be like-kind which means real estate for real estate.   Rental property can be exchanged for other rental or investment property.  Personal-use properties like a first or second home are not eligible for exchanges.

There are some critical dates that restrict the validity of the exchange. The investor must identify the replacement property within 45 days of the sale of the relinquished property. The replacement property must be closed within 180 days of the sale of the relinquished property.

  • The replacement property must be equal to or greater in value, equity and debt than the one being relinquished.
  • All net proceeds must be used in acquiring the replacement property.

There are specific rules involved in constructing a valid tax deferred exchange. There are three professionals that should be involved: a tax advisor, a real estate professional and a qualified intermediary who will assist in the acquisition and transfer of both the relinquished property and the replacement property. Additional information can be found in IRS Publication 544.

Til next time… May all your deals be easy ones!
Follow me on Twitter @yourmendorealty

Clint Hanks                                   707-391-6000

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What’s the Difference Between a Comparative Market Analysis and an Appraisal?

Before you buy or sell a house, it’s important to know its market value. As a buyer, you want to pay as little as possible, while still putting in a winning offer. As a seller, you want to maximize the sales price. So how do these two parties ever come to an agreement? Through the use of comparative market analyses (CMAs) and appraisals.

If you’re a seller, you will invariably ask the question, “What’s my house worth?” To which your Realtor should reply, “Let’s look at the CMA I’ve done for your property.” Realtors depend on a database of properties for their market research. The database includes properties of all descriptions that have recently been put up for sale and either sold, remained on the market, or been removed from the market without selling. Your Realtor uses that database to search for properties similar to yours in terms of age, condition, size, style, and location.

In preparing a CMA, your Realtor will review properties that sold, and see how long they were on the market; properties that still haven’t sold, but have remained on the market and may have had price reductions; and properties that never sold and eventually were pulled off the market. Each of these situations provides valuable information about how your property fits into the housing market. The houses that remain on the market are the most interesting to your Realtor, since those are the properties with which your house will compete for the ready, willing, and able buyers. Realtors create CMAs as one of the many services they provide to clients, or even as a way to demonstrate their value to prospective clients. There’s no specific fee for a CMA.

An appraisal, on the other hand, includes similar data but is usually done by a certified or licensed appraiser with hundreds of hours of training and expertise, and most importantly, with no financial stake in the transaction at hand. Lenders depend on this expertise and objectivity to determine the fair market value of a property upon which they make lending decisions. An appraisal is the highest price at which a property is likely to be sold from a willing seller to a willing buyer who both have all the material facts. The cost of an appraisal varies widely from a few hundred dollars to a few thousand dollars (or even tens of thousands of dollars).

Depending on the type of loan and type of property, a lender usually chooses to loan between 50 percent and 100 percent of the appraised value. If you are buying raw land, you can expect closer to 50 percent. If you are buying a commercial property with the first deed of trust, you can expect about 60 percent. If you are buying an owner-occupied, single-family house, you can expect between 75 and 100 percent.

Lenders are not the only ones to use the appraised value. Buyers can use it to negotiate the sales price. In fact, I have a Realtor in my office right now involved in a transaction where the property value is highly subject to opinion. We have sent the seller a letter of intent noting that the buyer is willing to enter into a purchase agreement for whatever the appraised value turns out to be. This particular property will be extremely difficult to appraise and the appraisal will therefore probably cost tens of thousands of dollars. However, with a buyer ready to commit to purchasing the property, the seller may decide the cost of the appraisal is worthwhile.

Neither CMAs nor appraisals are based on exact science. They are both opinions of value, albeit from well-educated sources. Usually, the final sales price falls within 3-5 percent of the appraised value. Now and then a unique property breaks that rule.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

Lower the Rate – Deduct the Interest

Lower the Rate – Deduct the Interest

Credit card debt in America is back to levels prior to the recession. The average credit card APR is just under 16% according to CreditCards.com Weekly Credit Card Report.  33967393-250.jpgHomeowners have an advantage over renters when it comes to getting their arms around debt issues.

Basic money management suggests that higher rate debt be replaced with lower rate debt. Credit cards, personal cars, boats, motor vehicles and other personal property, typically have interest rates higher than that of real estate loans.

Borrowing against a person’s home usually provides the lowest rate of financing. Refinancing a home mortgage to take cash out to retire personal debt is one option. Another would be to secure a home equity or HELOC, home equity line of credit.

An alternative advantage of borrowing against one’s home is that the interest may be tax deductible unlike the interest on most personal debt. Qualified mortgage interest includes acquisition debt which can only be used to buy, build or improve a principal residence and up to $100,000 of home equity debt which can be used for any purpose.

Managing money is a critical life skill that people need to master. While the goal may be to become debt-free, paying the least amount of interest possible can be a good first step. Owning a home provides an asset that allows for options not available to tenants. Seek professional advice to determine your best course of action.

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Rentals are IDEAL

Rentals are IDEAL

Rental homes are the IDEAL investment because they offer a higher rate of return than other investments without the volatility of the stock market. With certificates of deposit and bonds at less than 2%, people need an alternative investment that they understand and with a reasonable amount of control.

In this case, IDEAL is an acronym identifying the advantages of rental properties.Ideal Investment-2.png

  • Income from the monthly rent contributes to paying the expenses and a return on the investment.
  • Depreciation is a non-cash deduction that shelters income for some investors.
  • Equity buildup occurs with amortized mortgages because each payment is composed of interest owed and principal reduction to retire the loan by the end of the term.
  • Appreciation is achieved as the value of the property goes up.
  • Leverage can increase the return on investment by using borrowed funds to control a larger asset.

These individual benefits working together make rental real estate a good investment for today’s economy. Increased rents, high rental demand, good values and low, non-owner occupied mortgage rates contribute to positive cash flows and very favorable rates of return.

To find out more about how rentals might complement your current investment plans, contact your real estate professional.
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Til next time… May all your deals be easy ones!
Follow me on Twitter @yourmendorealty

Clint Hanks                                   707-391-6000

The post Rentals are IDEAL appeared first on Clint Hanks, 707-467-3693.

What NOT To Do When Putting Your House on the Market

I’ve written several columns reviewing what to do when you decide to sell your house, but it occurred to me that I might not have shared what NOT to do. Here are four recommendations to help you avoid expensive mistakes.

  1. Don’t Over-improve

As you contemplate putting your house on the market, think carefully before you take on major renovations. Some improvements are cost-effective and will yield a decent return (you’ll be able to increase the sale price to cover your construction costs and hopefully make a profit); others will not. Be mindful of what potential buyers would be willing to pay for if the house belonged to them. Let that guide your decisions about which improvements to undertake. You should complete needed repairs—if something’s broken, fix it. Go ahead and take care of deferred maintenance—if you need a new roof, now’s a good time. Definitely address pest and/or fungus problems—if you don’t take care of the termites, the new owner will have to.

A mistake I sometimes see occurs when a seller renovates to the point where his or her house no longer fits with its surroundings. In a neighborhood of 2000 square foot homes, don’t add 1500 square feet to make yours a 3500 square foot monstrosity. People looking for big homes want to live in neighborhoods where everyone has big homes. Would your house be as valuable if it were moved to an inner city neighborhood full of housing projects? Nope. While that’s a more dramatic example, the same principle applies to overbuilding in a middle class neighborhood.

Another mistake I see is the choice to convert a garage into a family room. Most Realtors will tell you, the increased value from the additional square footage in the new family room is almost exactly offset by the loss of the garage. It’s a wash. And when you add in the cost of the renovation, it’s a loser.

  1. Don’t Over-decorate

Décor is a personal thing, and it’s highly unlikely that you and the future owner of your property will agree on every style choice. (Most of us can’t even agree with our spouses on paint color.) So when it comes to the décor of a house you plan to sell, neutrals are best. While you may love your daughter’s pink walls and the green shag carpet that looks like the grassy meadow from a storybook, the prospective buyer with three sons is unlikely to be thrilled with these choices. Less is more. If you want to add a splash of color, buy fresh flowers and put them in vases around the house.

 

  1. Don’t Hang Around

Whether your Realtor is hosting an open house or bringing an interested buyer for a tour, your job is to be somewhere else (and take Fido with you). I know it’s tempting to stick around and answer questions about your house and the neighborhood. After all, who knows this information better than you? But trust me, you should leave and let your Realtor do their job. Buyers rarely feel comfortable expressing concerns about the house with the owner present. Instead, they will keep quiet and simply move on to the next house.

 

  1. Don’t Take Things Personally

When your Realtor relays questions from potential buyers, try to keep your emotions in check. When buyers ask for a credit so they can redecorate the princess room you spent years perfecting, try not to be offended. When they come in at a price that seems ridiculously low, recognize that they are simply doing their job: trying to get the lowest price possible. You have three potential responses to an offer: accept it, counter it, or reject it. An outright rejection is foolish. Counter the parts of the offer you don’t like and see where it goes from there.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.