Foreign Buyers Investing In Seven Real Estate Markets

According to a report by the National Association of Realtors, foreign nationals are actively buying United States Real Estate for their own use. The report had several interesting aspects that I would like to bring your attention to.

Citizens of Five Main Countries Are Buying

Although there are representations of seventy countries in the data of buyers, there are five countries showing the highest interest in U.S. real estate – Canada, Mexico, China, U.K. and India. Those countries represent 53% of the transactions.

Buyers are Purchasing in Seven Markets Plus University Areas

The buyers are buying throughout the U.S. but there are seven primary markets –Arizona, California, Florida, Georgia, Nevada, New York and Texas. Those states represented 64% of the total sales to foreigners in 2010. Florida is by far the strongest representing 31% of the sales. California follows close behind with 12% of the sales.

They are buying single-family homes for the most part in the seven primary markets. Many foreigners buy in the U.S. so that their children who attend school here have a place to live while in school. That means that any property in or around a major university is a candidate for sale to a foreigner. We saw that in our project at 4900 Cedar Avenue, Philadelphia. At that building foreign families and students bought our condominiums at a surprising rate.

For the buyers other than university students and their families, who may buy anywhere around a major university in any city or state, the buyers are concentrated in different areas – Canadians buying in Florida and Arizona (likely to escape cold winters), Asian buyers purchase mostly in California, Mexicans in Arizona and Nevada. European buyers are purchasing mostly on the East Coast due to proximity to Europe.

The geographic differences should not come as a surprise. Buyers cite proximity to their home country, air transportation, and climate as their most important factors. The concentrations of buyers from different countries in different parts of the U.S. make sense given the proximity, air travel and climate factors.

Why Do Foreigners Buy Where They Buy?

The report also states that it is likely that existence of a population from their home country is also a factor – due to word of mouth from contacts already owning in the area and we think perhaps due to an established immigrant population as shown by social clubs, restaurants and specialized food markets. This provides some interesting facts we will talk about later in this article because it affects your marketing. Note that the existence of a native population of foreigners or social clubs, restaurants and specialized food markets is not emphasized or necessarily mentioned in the report but we believe those factors can help you know when to pursue a marketing plan to tap into this market.

They Pay Cash

Another interesting fact is that 62% of foreign buyers are buying with cash. The foreign buyers may have an aversion to borrowing (China), or they may simply be unable to qualify because they do not have a U.S. credit score (the credit scoring systems used in the U.S. are not the same as used in other countries) and thus cannot qualify for a loan because the loans are credit-score based.

Foreign Buyers Have Three Top Reasons For Buying

The buyers offer three top reasons for buying – 31% of the buyers view U.S. real estate as a secure investment, 27% view it as a profitable investment, and 43% view it as a good location. And these buyers put their money where their mouth is – paying on average $315,000 for a house. In comparison the average price paid by Americans was $218,000. This means the rich are seeing the value here in the U.S. This would lead one to question what is it that the average wealthy foreign national knows that the native U.S. population does not?

Contact: Sean Heideman, Broker ~ Position Realty ~ Office: 480-213-5251

Reduce Taxes By Investing In Real Estate

Taxes are your biggest expense in your lifetime, so choose your source of income wisely! Real estate has some of the BEST TAX BREAKS of any investment in America!

The more you earn through your job, the more you get taxed, and the system is setup that way to punish hard workers and reward investors. Have you looked at the bottom stub of your paycheck lately and seen how much the government steals from you? Wage income not only requires work, it gets taxed at a very high rate, plus the government takes FICA, which is put into a system that may be bankrupt when you retire.

Real estate has so many tax advantages over wage income:

Capital Gains Rates

The maximum federal tax rate on capital gains is 15%, whereas wage income is taxed at 35%. There’s state taxes, too, and some states offer further discounts on capital gains income. Remember, capital gains requires that you hold a property for 12 months or more before selling and that it was held for productive use (i.e., as a rental, no a long-term fix and flip).

Exemption for Principal Residence

If you sell your residence, the first $250,000 is exempt from gain or $500,000 if you are married. Remember, this requires that the residence was used as such for two of the last five years.

1031 Exchanges

Under IRC Sec 1031, you can roll your profits from a rental property into more real estate and defer paying taxes altogether. Your tax basis rolls into the next property. The rules are rather stringent, in that the exchange must be completed with 180 days and the exchange property must be indentified with 45 days of the sale of the relinquished property (more info at www.1031x.com).

Interest Deduction

You get to deduct interest you pay on debt you have used to acquire your real estate.

Depreciation

For rental properties, you get a tax deduction for the “wear and tear” on the structure, even if the property increases in value! Thus, you can actually break even or make money, but on paper show a loss to offset other income.

No FICA Tax

Your income from real estate is general NOT subject to FICA tax withholding. Regular self employment income is subject to 15.3% tax on the first $97,000, and thereafter your earned income is subject to medicare withholding (which you may never get back in your lifetime the way things are going!).

It’s not just what you make, it’s what you keep… plan wisely where your income comes from, and you will keep a lot more.

National And State Economic Update

Real estate dominated last week’s economic headlines, with March’s existing home sales and housing inventory down, but prices stabilizing, according to the National Association of REALTORS®. Total sales of existing single-family homes, townhomes, condominiums and co-ops declined 2.6 percent to an annual rate of 4.48 million in March from an upwardly revised 4.60 million in February, but were 5.2 percent above the 4.26 million-unit pace in March 2011.

“The recovery is happening though not at a breakout pace, but we have seen nine consecutive months of year-over-year sales increases,” NAR chief economist Lawrence Yun said. “Existing-home sales are moving up and down in a fairly narrow range that is well above the level of activity during the first half of last year. With job growth, low interest rates, bargain home prices and an improving economy, the pent-up demand is coming to market and we expect housing to be notably better this year.”

Total housing inventory at the end of March declined 1.3 percent to 2.37 million existing homes available for sale, which represented a 6.3-month supply at the current sales pace. March’s listed inventory was 21.8 percent below a year ago and well below the record of 4.04 million in July 2007.

The national median existing-home price for all housing types was $163,800 in March, up 2.5 percent from March 2011. Distressed homes — such as foreclosures and short sales sold at deep discounts — accounted for 29 percent of March’s sales (18 percent were foreclosures and 11 percent were short sales), compared with 34 percent in February and 40 percent in March 2011.

Looking at new real estate activity, construction permits issued in March for privately owned housing units were at an annual rate of 747,000, according to last week’s report from the Census Bureau. This was 4.5 percent over February’s revised rate of 715,000, and was 30.1 percent over the March 2011 estimate of 574,000. Permits for single-family homes in March were at a rate of 462,000, which was 3.5 percent below February’s revised figure of 479,000.

Construction starts on privately owned housing in March were at an annual rate of 654,000, which was 5.8 percent below February’s revised estimate of 694,000, but was 10.3 percent over the March 2011 rate of 593,000. Starts on single-family homes in March were at a rate of 462,000, which was 0.2 percent below February’s revised figure of 463,000.

Completed constructions of housing in March were at an annual rate of 600,000. This was 4.2 percent above February’s revised estimate of 576,000 and was 0.5 percent over the March 2011 rate of 597,000. Single-family housing completions in March were at a rate of 440,000, which was 1.4 percent over February’s revised rate of 434,000.

In employment news, initial claims for jobless benefits filed in the week ending April 14 dipped to 386,000, a decrease of 2,000 from the previous week’s upwardly revised figure of 388,000, the Employment and Training Administration reported last week. The four-week moving average was 374,750, an increase of 5,500 from the previous week’s revised average of 369,250.

The total number of insured unemployed workers during the week ending April 7 was 3,297,000, an increase of 26,000 from the preceding week’s revised level of 3,271,000, the Administration also reported. The four-week moving average was 3,317,750, a decrease of 21,500 from the preceding week’s revised average of 3,339,250.

As for Arizona economy, the news is good. In Greater Tucson, resale closings were up 33.0% at an annual rate in February. The median resale price was $144,500. Yet, the median foreclosure price was $93,900. The median price of a new home was $194,021. In Greater Phoenix, R. L. Brown reports resale activity in March down 6.7% from the heavy activity of a year earlier. New permit activity, though, continues to be strong. March permits were 1,036 units, a 60.6% gain from last year’s 645 units. Total new homes sales year to date in 2012 are over 31.2% higher than the same period in 2011 (1,838 vs. 1,401). In addition, the Arizona Regional Multiple Listing Service reported that the average price of a home sold thru MLS increased 17.3% over year earlier levels in March ($139,000 vs. $118,500). Supply/demand pressures and fewer foreclosures are likely to continue to put upward pressure on prices.

Unemployment rate in Arizona ‘s dropped to 8.6% in March after two consecutive months at 8.7%. The U.S. unemployment rate is 8.3%. A year ago, the Arizona rate was 9.6% and the U. S. rate was 8.9%. In March, employment growth in the State stood at 1.9% or 47,000 jobs above a year ago. Most of the Arizona jobs were created in Greater Phoenix which is up 2.3% from a year ago and has created 40,300 new jobs. Virtually all sectors reported gains, with educational and health services, leisure and hospitality, professional & business services and construction leading the way.

5 Reasons To Use A Real Estate Agent In A Down Market

Some people think that in a down market, the last thing they should be doing is paying a 6% commission to sell their homes. But going it alone and doing a “for sale by owner” isn’t a good idea right now. Here’s why.

Your Home Isn’t Going to Sell Itself
I think many people have it backwards when it comes to real estate commissions and the marketplace.

You might think that a down market would be the time to ask hungry agents to lower their commissions in order to earn your business, but that isn’t the case. In a booming market, homes can sell themselves regardless of what an agent does. When the market is terrible, you might actually need an incentivized professional working hard to sell your home.

You Need a Professional’s Opinion on Your Home’s Condition and Appearance
As a long-time resident of your home, you can’t see it in the way potential buyers will. You’re so used to the things that are cluttered, outdated, in disrepair or otherwise less-than-perfect that you’ve become immune to them. Also, unless you’ve been actively shopping for a new home, you don’t know what the competition looks like either.

A good real estate agent, on the other hand, will walk through your home with you before you even put it on the market and tell you what needs to be cleaned up, put away, repaired and upgraded, if anything, and if it will pay off. They will also have specific knowledge of what buyers in your area love and hate, and can suggest how to play these aspects of your home up or down.

A real estate agent’s experienced and unbiased opinion on what repairs and upgrades are worthwhile and how to stage your home will help you to attract buyers and get top dollar.

Good Agents Actually Earn Their Fees
Agents with a proven track record can sell your home for more money in less time. The extra money you get from a higher sales price and the decreased carrying costs from selling your home faster can easily pay for the agent’s commission, and then some.

In this market, it’s more important than ever to hire a full-time, full-service, experienced professional to list your house.

Yes, values are down and sellers have lost equity. But there is more competition and less volume. Buyers are slow to make a decision and getting financing is a challenge.

Sellers need an agent who will provide high-quality marketing services that lead to more showings and who has a proven track record of selling homes faster and for more money than other agents.

You get what you pay for. This is not the market to base your decision on commission alone.

You Don’t Know What You’re Doing
In trying to sell your home on your own, you could fail to sell it or even get ripped off. If that happens, taking over an agent’s traditional duties to save the commission fee isn’t going to help you come out ahead.

As a home selling novice, you don’t know all of the steps it normally takes to get a home sold. Also, how well-versed are you in real estate and contract laws and customs? Unless you plan to use some of your commission savings to hire a real estate attorney, you’re putting the buyer in a great position to out-negotiate or take advantage of you. You could even be setting yourself up for legal troubles down the road, long after the deal has closed.

You’re Not Going to Save as Much as You Think
With the traditional 6% commission you pay when you sell your home, typically only 3% goes to the seller’s agent. Even if you avoid paying the 3% by selling your home yourself, you’ll probably still be paying 1 to 3% to the buyer’s agent. So you’re not really going to save 6%.

If you aren’t willing to pay the buyer’s agent, either, it could be a deal killer. You’d have to convince buyers to work without an agent, which could raise all kinds of red flags. The result is that you might limit your pool of potential buyers to experienced investors who aren’t afraid to represent themselves.

The Bottom Line
When you’re faced with selling your home for less than what you want or need because of a poor real estate market, paying a commission may seem like adding insult to injury, and cutting out the seller’s agent’s commission might seem like the most obvious way to reduce your losses. However, the many valuable services a top-notch real estate agent provides can give you the edge you need to sell your home faster and get you the money you need.

Short Sales Start to Outpace Foreclosures

Nationwide, banks are agreeing to more short sales, and for the first time, short sale transactions are exceeding foreclosure deals, according to the most recent housing data from Lender Processing Services (LPS) Inc.

In January, short sales made up 23.9 percent of home purchases, according to LPS. Meanwhile, foreclosures made up 19.7 percent of sales.

Just one year prior, foreclosures made up the bulk at 24.9 percent of transactions while short sales made up 16.3 percent.

“It’s a fairly recent phenomenon that short sales have been increasing,” Jonathon Weiner, a vice president with LPS, told Bloomberg News.

So why are banks getting more agreeable to short sales? Banks are realizing that short sale transactions usually sell for higher prices than foreclosures. In fact, foreclosed homes tend to sell for 29 percent less, on average, than comparable non-distressed properties. Short sales tend to sell at a 23 percent discount, according to Lending Processing Services data from January.

Banks and government agencies in recent weeks have taken steps to speed up the short sale process, setting new timelines for how long mortgage servicers have to respond to short sales offers. Also, some banks, such as Wells Fargo and JPMorgan Chase, are even offering some home owners cash incentives — up to $35,000 — if they agree to do a short sale instead of let the home fall into foreclosure.

In the Phoenix real estate market, short sale account for 25% of all transaction as compared to 26% for foreclosures. Currently, Phoenix real estate is a hot item for investors and home buyers where the majority of transactions are with traditional home sellers. A year ago, Phoenix short sales accounted for 16% of all transactions as compared to 27% for foreclosures.

Which Is Better? To Fix and Flip or Buy and Hold?

A lot of investors contact me wanting to get into real estate investing and they always want to start with fix and flip because they watched a show on HGTV or DIY about fixing and flipping. In all actually, doing a fix and flips is very time consuming and if you have a full time job, then this might not be the best way to get into real estate investing.

So, is fixing and flipping more profitable than a buy and hold strategy? The average fix and flip investor earns approximately a 10% to 12% annualized “return on investment”. This is because when the market is over saturated with investors it become more and more difficult to find a property that will be profitable. There are a lot of properties on the market but not all of them are perfect candidates for a fix and flip opportunity. Therefore, when a good fix and flip opportunity comes on the market you are often times forced to pay a higher price and accept a lower return on investment. Remember, your profits are made in a fix and flip when you purchase and not when you sell.

If you are not willing to accept a lower return on investment, then you will be waiting months before you can employ your investments dollars and start earning a profit. The longer you wait to employ your investment dollars the lower your annualized return on investment. Also, if you are not a contractor or can’t determine the exact cost of the rehab work, then your fix and flip project might become less profitable due to higher expenses. Furthermore, if you don’t have your own cash and you have to use a “hard money” lender, then you will have interest costs that will lower your return on investment.

Due to increased competition, it could take you three months or more to purchase your first fix and flip deal, it could take you another month to complete the rehab work and another month or two to resell the property. By the time you make a profit, it could be six months or more!

If you purchase a rental property in an appreciating market (the market Phoenix is experiencing), then overall you will earn more money on an annualized basis than the average fix and flip investor. How is this possible? Well, if you purchase a single family home at $90,000 cash and rents in the area are $1,200 per month, then before taxes, insurance and HOA you are earning a 16% return on investment. This does not include the appreciation rate of the home.

For your net return on investment, lets say, taxes are $1,100 per year, insurance is $350 per year and HOA is $50 per month. This would be a 14% net return on investment ($1,200 – $92 taxes – $30 insurance – $50 HOA = $1,028 X 12 = $12,336 / $90,000). If the home is appreciating at a rate of 3% per year, then this is a 17% return on investment per year. Even better if the appreciation rate is higher!!

A buyer and hold investment strategy is much better than a fix and flip because the investment is a “passive investment” (if you hire a property manager) and your return on investment is higher. Also, you can take advantage of a 1031 Exchange or purchase the rental property with a Self Directed IRA to defer the capital gains.

Give us a call TODAY if you are interested in putting your investment dollars to work! 480-213-5251

Interested In Buying Commercial Real Estate?

When you are looking at a commercial real estate deal you will hear terms such as “Cash on Cash return”, “Net Operating Income” or “NOI” and “CAP Rate”.

If you are new to commercial real estate these terms may be foreign to you, so lets get you into the swing of things by teaching you one of the key real estate investing terms for commercial real estate.

CAP rate stands for “Capitalization Rate” and measures the return on an investment in a commercial building. The CAP rate can confuse a new investor because it ignores any debt on the property. That is helpful because it shows the return on the investment in an absolute sense and allows you to compare investment alternatives in different buildings without being confused by the financing on the property, which can muddy the analysis. CAP rate is NOT the same as cash flow, which would take into consideration mortgage payments.

CAP Rate is calculated by taking the income and deducting all expenses other than the mortgage, then dividing that into the purchase price. For example:

If you had rental income of $120,000 per year, expenses (other than mortgage interest) of $30,000 per year you would have $90,000 per year leftover. The expenses that you include are regular expenses like electric, gas and oil paid by the landlord as well as irregular expenses like periodic repairs and maintenance.

In the example above, if you paid one million dollars for the building and had annual cash flow after expenses other than mortgage interest of $90,000 then you would have a cash return of $90,000 on a million dollar investment – which would represent a nine percent return. ($90,000/$1,000,000 = 9%).

CAP rate is a good way to compare investment alternatives. The higher the CAP rate the better because a higher CAP rate refers to a higher return for you.

Retail priced properties have CAP rates that vary by area and type of property. CAP rates can be as low as 5% – for example a unit of Goldman Sachs is asking $42 million for the 250 Unit Palladium in Scottsdale Arizona – a beautiful class “A” apartment building in a hot rental market or CAP rates can exceed 10% for class “B” and “C” apartment buildings in less desirable cities and in older buildings.

In other classes of buildings that are also class “A” CAP rates can be higher. For example a Wells real estate partnership (REIT out of Georgia) is the 275,000 square foot Highland Landmark 3 in Downers Grove Illinois at a 7% CAP rate. That building is 97% occupied and is also a class “A” building having been built in 2000 and featuring modern system, aesthetics and functionality.

CAP rates are market and building type specific so you will need to learn your market by looking at asking prices, comparable selling prices and speaking with market participants (investors, bankers, brokers) to see what your market is like.

For most small investors your best purchases will be class “B” apartment buildings where CAP rates are at least 10%. You will note that a 10% return is MUCH higher than any bank will give you and probably the highest return on a safe investment that you can find today. That is, in a nutshell, why cash flow investing in apartment buildings and other commercial properties is so attractive.

Arizona’s Jobless Rate Drops

An increase of 18,900 jobs last month helped drop Arizona’s unemployment rate to 8.6 percent from 8.7 percent, the Arizona Department of Administration said today.

That was the largest over-the-month gain since 2006 and higher than the average 12,300 recorded monthly from 2002 through 2011.

Arizona’s total number of non-farm jobs in March grew by 47,000 over the same period a year earlier, a gain of almost 2 percent.

Especially strong gains were reported in the leisure and hospitality and construction industries, thanks to such factors as spring training and building of a new Intel plant in Chandler and outlet malls in Glendale and the Gila River Indian Reservation, said Aruna Murthy, an economist with the department of administration.

Although the state’s unemployment rate is above the U.S. rate of 8.2 percent, she said the leisure and hospitality, health care, and construction sectors are adding jobs at a faster pace in Arizona than the nation.

10 Inexpensive Ways To Spice Up Phoenix Rental or Home

It’s easy to fix up your properties if you have unlimited cash. However, you need to keep your repairs to a minimum especially if the home is a rental property or you are planning to sell the home. There are the basic improvements, such as carpet and paint, but these can still costs thousands of dollars. The following are some inexpensive ways to improve your properties with very little cash.

#1) New Electrical Switch Plates

This is such a minor, yet overlooked improvement. Most rental owners and rehabbers paint a unit and leave the old, ugly switch plates. Even worse, some even paint over them.

New switch plates cost about 50 cents each. You can replace the entire house with new switch plates for about $20. For the foyer, living room and other obvious areas, spring for nice brass plates. They run about $5 each – not much for added class.

#2) New or Improved Doors

Another overlooked, yet cheap replacement item is doors. If you have ugly brown doors, replace them with nice white doors (you can paint them, but unless you have a spray gun it will take you three coats by hand).

The basic hollow-core door is about $20. It comes pre-primed and pre-hung. For about $10 more, you can buy stylish six-panel doors. If you are doing a rehab, the extra $10 per door is well worth-it. For rentals, consider at least changing the downstairs doors.

#3) New Door Handles

In addition to changing doors, consider changing the handles. An old door handle (especially with crusted paint on it) looks drab. For about $10, you can replace them with new brass finished handles. Replace the guest bathroom and bedroom door handles with the fancy “S” handles (about $20 each).

#4) Paint/Replace Trim

If the entire interior of the house does not need a paint job, consider painting the trim. New, modern custom homes typically come with beige or off-white walls and bright-white trim. Use a semi-gloss bright white on all the trim in your houses.

If the floor trim is worn, cracked or just plain ugly, replace it! Home Depot carries a new foam trim that is pre-painted in several finishes and costs less than 50 cents per linear foot. Create a great first impression by adding crown molding in the entry way and living room.

#5) New Front Door

You only get one chance to make a first impression. A cheap front door makes a house look cheap. An old front door makes a house look old. If you have nice heavy door, paint it a bold color using a high-gloss paint. If your front door is old, consider replacing it with a new, stylish door. For about $125, you can buy a very nice door.

#6) Tile Foyer Entry

After the front door, your next first impression is the foyer area. Most rental property foyers are graced with linoleum floors. Consider a nice 12″ Mexican tile. An 8′ x 8′ area should cost about $100 in materials.

#7) New Shower Curtains

It amazes me that many landlords and sellers show properties with either no shower curtain or any ugly old shower curtain in the bathroom. Don’t be cheap – drop $40 and buy a nice new rod and fancy curtain.

#8) Paint Kitchen Cabinets

Replacing kitchen cabinets is expensive, but painting them is cheap. If you have old 1970′s style wooden cabinets in a lovely dark brown shade, paint them. Use a semi-gloss white and finish them with colorful plastic knobs. No need to paint the inside of them (unless you own a spray gun), since you are only trying to make an impression.

Americans spend 99% of their time in the kitchen (when they are not watching TV). A fancy modern faucet looks great in the kitchen. They can run as much as $150, but not to worry – most retailers (Home Depot, Home Base, etc) often run clearance sales on overstocked and discontinued models. I have found nice Delta and Price Pfister faucets for about $60 on sale.

#9) Add Window Shutters

If you have ugly aluminum framed windows, consider adding wooden shutters outside. They come pre-primed at most hardware retailers and are easy to install. Paint them an offset color from the outside of the house – (e.g., if the house is dark, paint the shutters white. If the house is light, paint them green, blue, etc.).

#10) Add a Nice Mailbox

Everyone on the block has the same black mailbox. Stand out. Be bold. For about $35 you can buy a nice colorful mailbox. For about $60 more, you can buy a nice wooden post for it. People notice these things….and they like them!

How To Complete A 1031 Tax-Deferred Exchanges

This article is meant to be an introduction on the topic of performing tax-deferred exchanges. There are a number of legal hoops that the IRS makes you jump through to complete a tax-deferred exchange, but they are actually not that complicated once you study up on them a bit.

A tax deferred exchange allows us to sell a piece of investment (i.e. rental), trade or business property, buy a new property with the gain or profit from the sale, and not owe taxes on the sale immediately. If you eventually sell the new piece of property, you would owe taxes at that time. Generally, all gains and losses on sales of real estate are taxable, but an exception lies where the property sold is traded or exchanged for “like-kind” property. The new property is seen as a continuation of the original investment, so taxes are not due at the time of the sale.

Many people view tax deferred exchanges as being for huge corporations, or only for professional investors. I believe that everyone should take advantage of these where they can. Strategy — purchase a rental home below market value, rent it for a year, sell it, and buy two rental properties with your gain. Note that if you do this too many times, the IRS may take the view that you are not a long term investor, and disallow such exchanges. When you get ready to do a tax-deferred exchange, you will need the services of a qualified CPA or Attorney. This is a basic introduction only, and you should always get professional advice from someone who has all the details on your deal, since so much liability is at stake. In my course I list the company that I use for these real estate exchanges. They are a national company and can help you out wherever you are in the country. I have used them for several deferred exchanges, and they have been an excellent resource and extremely competent.

Let’s look at how one of these deals would work. Assume that you own a rental property that has gone up in value. You’d like to sell this property and then reinvest the proceeds into some other rental real estate. You can avoid the tax bill if you can find suitable property to exchange for. The difficulty of the tax deferred exchange is that the property you are going to purchase must be identified within a certain amount of time, and it must be closed within a certain amount of time after it is identified. Unfortunately, no extensions are possible.

Identifying Property

You must identify property in a written document signed by you, and delivered to the party assisting you with the exchange (cannot be related to you!) on or before 45 days from the date you sold the original rental property. There is a growing body of support for identification of properties, and closing of new properties before the original property is sold. This is somewhat controversial and outside the scope of this discussion.

Technical Note: You can identify more than one property as the replacement property. However, the maximum number of replacement properties that you may identify without regard to fair market value is three properties. You may identify any number of properties provided that the total value of these properties is not more than 200% of the value of the original property you are selling. Note that you don’t have to close on all the properties you identify. You can name several if you’re not sure what will close, or not close, but you have to observe the rules in this technical note in terms of the value of properties you identify. If at the end of the identification period you have identified more properties than you are allowed, you are generally treated as if no property was identified. This means that you pay taxes!

Time Limits For Completing the Exchange

If you have correctly complied with the identification phase of the exchange, you have up to 180 days to complete an exchange, but the period may be shorter. Specifically, property will not be treated as like kind property if it is received more than 180 days after the date you transferred the property you are relinquishing, or after the due date of your return (including extensions) for the year in which you made the transfer.

For multiple property transfers, the 45 day identification period and the 180 day exchange period are determined by the earliest date a property is transferred.

Avoid Boot!

Boot is defined as any money or any type of property of unlike kind (example, a car received as part of down-payment). You will be taxed on this boot regardless of whether or not you carry out the exchange correctly. You will want your exchange company, or attorney to examine your transaction closely to make sure you don’t receive anything that could count as boot. Special rules apply for exchanging property with assumed mortgages.

Summary

The tax-deferred exchange is a great way to maximize your wealth. By keeping your investments growing without immediately paying taxes, you can do wonders for your net-worth. You will need to search out a good intermediary. I am happy to provide you with a few names and number of the Arizona 1031 Exchange companies our client’s use. This may seem like a dry subject, but it is important to understand when you begin to accumulate some rental properties.

Remember that this article is to provide basic information only. If you are planning on doing a tax deferred exchange, you really need to speak with a professional that handles these transactions on a regular basis. Information here is subject to change by IRS regulations or statute, so be sure to use current information provided by your accountant or other professional when planning a strategy involving tax deferred exchanges.

Results No Excuses

Monthly Archives: April 2012