Thursday, December 31, 2009

Happy New Year!

The Exeter Learning Institute team would like to wish you and your family a very Happy, Healthy, Safe and Prosperous New Year. Happy New Year everyone.

Wednesday, December 30, 2009

Dear President Obama: I Think You Have A Problem.

This is a great letter drafted by my good friend Alan Nevin with MarketPointe Realty, and I thought I would share it with you.  You can read the original letter posted on the Wealth & Legacy Series blog on The Center for Wealth & Legacy Studies.  Alan Nevin is one of the co-founders of The Center. 

Dear President Obama: I Think You Have A Problem! 

In about a year from now, you will have to start running for your second term. No doubt it would wound your ego to no end to be a one-term president and yet it would be very difficult for you to be elected to a second term if the economy continues to be in a moribund state.

I really don’t want the word “sickonomy” to be the byword of your administration.

Now, we have all read in the business section that our gross national product is rising; that productivity is just plain great; that the stock market is solid; oil prices are stable; our interest rates remain low; Walmart and McDonald’s are bursting with economic vitality; and that our leading lending institutions are healthy once more.

Unfortunately, all of these wonderful things happening to our economy are without the benefit of new jobs.

And frankly, Mr. President, without new jobs, you don’t have a shot at a second term.

It appears to me that your gnomes in the West Wing are spending all their time working on the auto industry, a category that at best is a minor player in the national economy, especially when you consider that at least a quarter of the sales are of vehicles made somewhere besides the United States, or substantially containing parts made outside the country.

Automobile manufacturing employment in the United States in 2008 totaled 877,000 jobs.

Now let’s talk about America’s really important industry: housing construction. Now there’s an industry that deserves your full and immediate attention and is barely a footnote in your economic stimulus agenda.

In a year in which construction is healthy, homebuilding employment is almost 10 million, more than 10 times that in the automobile manufacturing industry; and, in that 10 million I am not counting the multitude of jobs in industries that directly relate to construction or manufacturing the materials that go into the construction of a home.

Before the housing industry fell apart, there were more than 9000,000 firms in the construction-related businesses.

New housing constitutes more than 80 percent of construction employment in this nation and that industry is really hurting right now, and that’s a shame, because it it the one industry that can put you back in the White House in 2012.

Let me share a few facts with you:

First, the residential construction industry has twice the economic multiplier of virtually any other industry in America (according to the economic model developed by the U.S. Department of Commerce).

There’s a good reason for that, or I should say, four good reasons:

First, it is a highly leveraged industry, which means that a relatively small amount of equity will cause a whole house to be built. So a small investment generates large amounts of material purchases and new jobs.

Second, virtually all materials used making a home are created within the 50 states.

Third, it is a labor-intensive industry. Typically, 50 percent of the cost of a new home is the labor component and all that labor is local. A new home is a genuinely a “made in the U.S. A.” product.

And fourth, the purchase of a new home sets off an amazing round of purchase activity that is home-related. A multitude of jobs are created in the escrow, title, finance, landscaping and home improvement industries.

In addition, typically, every time someone buys a new home, there are four resale homes sold. And those sales, as well, create another multitude of jobs in the industries noted above.

The home remodeling business, when things are good, is far larger than the automobile manufacturing business.

Housing construction has plummeted from almost 2 million units in 2005 to fewer than 500,000 unties in 2009. Imagine that, Mr. President. America’s most potent economic job generator is down 75 percent and your administration is doing virtually nothing to change the situation.

And I won’t even bother to mention the impact of the home construction industry on the construction of and demand for retail, office and industrial space.

The big question is: “What can you do to generate a massive increase in new home construction?” I am going to tell you in my next article right here in The Daily Transcript.

Tuesday, December 29, 2009

Dear President Obama: I Think You Have A Problem!

I just read a fantastic letter addressed to President Obama.  It's entitled "Dear President Obama:  I Think You Have A Problem" by my friend, economist and demographer, Alan Nevin with Marketpointe Realty.  I highly recommned a quick read of the letter.

Monday, December 28, 2009

The Demise of the Private Annuity Trust or PAT

Private Annuity Trusts, or PATs for short, were sometimes used (prior to 2007) to defer capital gain taxes upon the sale of highly appreciated real estate or personal property.  The Private Annuity Trust allowed taxpayers to transfer property, whether it be real property or personal property, into a Private Annuity Trust by conveying or transferring it to the Trustee of the Private Annuity Trust.  The conveyance or transfer of the property had to be completed prior to the sale of the asset. 

Sale of Real or Personal Property

The Trustee of the Private Annuity Trust would then sell the real or personal property to the end buyer and deposit the sale proceeds into the PAT.  The taxpayer was the Beneficiary of the Trust, which was part of the reason for the demise of the PAT that will be discussed shortly. 

Capital Gain Deferred Into Future

Capital gains from the sale of the real or personal property were deferred into the future since the Beneficiary (Taxpayer) did not receive any of the funds from the sale of the asset.  The Beneficiary would only recognize a portion of his or her capital gain as they received principal payments from the Private Annuity Trusts. 

IRS Rules Against PAT

The IRS ruled against the Private Annuity Trust on October 17, 2006.  The IRS ruled that “Private Annuity Trusts or PATs have been relied upon inappropriately in a number of transactions that are designed to avoid U.S. income tax,” according to an IRS press release.

In Buckmaster vs. CM TC Memo 1997-236, there were four (4) elements used to determine whether or not a trust of any type was actually a "sham trust".  These four (4) elements were the Taxpayer’s relationship to the property or asset in question; the independence of the Trustee; whether or not an economic interest was transferred to other beneficiaries of the trust; and restrictions placed on the taxpayer by the trust.

Private Annuity Trusts can not meet this test, and therefore can no longer be used to defer the payment of a taxpayer's capital gain taxes after October 17, 2006.  Transactions which have been properly structured under the old rules prior to October 18, 2006 will be permitted to stand, but the Internal Revenue Service will not recognize future transactions structured as Private Annuity Trusts for income tax deferral purposes.

However, Private Annuity Trusts can still provide some important estate planning benefits when used appropriately, so consult with your estate planning professional for further details. 

Sunday, December 27, 2009

Is It Better To Sell My Relinquished Property in 2009 Or Postpone Until 2010

Taxpayers have only four more business days to get transactions structured and closed until 2010 hits us right between the eyes.  First of all, yikes, where did 2009 go?  Second of all, thank God we are moving into 2010, which promises to be a much better year than 2009.

Closing By Year-End

Now to the question of when to close on the sale of your relinquished property.  It has always boggled my mind during the 24 years that I have been in the 1031 Exchange industry that so many taxpayers want to close on their relinquished property before year-end when they are structuring a 1031 Tax Deferred Exchange. 

Why put so much pressure on yourselves?  Its a tax-deferred exchange, so its tax deferred and it shouldn't matter when you close on the sale of your property assuming that all other relevant factors are equal.  However, let's discuss some of the basic reasons why, and then get to the question. 

The Buyer

Certainly, the buyer may wish to close by December 31st in order to obtain any number of benefits, including tax benefits, of owning the property before year-end.  The tax benefits can often be tremendous, or losing tax benefits that may expire at year-end may be very expensive.  So, the buyer may have motives for doing so. 

There may be other reasons as well, such as deploying investment capital by year-end, shoring up the balance sheet ("window dressing") for year-end financial statements, etc. 

The Seller

Generally, the seller completing the 1031 Tax Exchange shouldn't care, but some of the same reasons my apply.  They may want to get the property off their balance sheets by year-end, may want to reduce the amount of outstanding debt before December 31st, etc., just to name a few of the more obvious reasons. 

When to Sell/Close

One or both parties may wish to close on the property for some of the reasons stated above, or other reasons, in which case, it certainly does make sense to sell and close on the property before December 31st. 

However, barring other benefits, detriments, or issues not mentioned here, there is no real benefit from a 1031 Exchange perspective to closing in 2009 or 2010, unless you are concerned that your 1031 Tax Exchange may fail (i.e. you are not able to acquire replacement property). 

A failed or incomplete 1031 Exchange is generally taxable in the year of sale or the year in which the taxpayer has the right to receive their 1031 Exchange proceeds from the Qualified Intermediary.  This is the one main issue that taxpayers should consider when selling relinquished property in order to answer the question when should they close because it may affect their income tax situation. 

As yourself the following questions:
  • Will closing in 2009 versus 2010, or vice versa, potentially place myself in a higher income tax bracket because of the 1031 Tax Deferred Exchange?
  • Will closing in 2009 trigger my 45 day and 180 day deadlines before I am ready to?
  • Would closing in 2010 buy me more time to look for and identify suitable replacement properties to be acquired through my 1031 Exchange? 
  • Will closing earlier or later help or hurt my borrowing position? 
  • Will closing in 2009 hold up the filing of my income tax return if I have not completed the acquisition of my replacement property?
There are probably many more question like this that should be addressed, so you should always consult with your legal and tax advisors before proceeding with your 1031 Tax Deferred Exchange. 

Saturday, December 26, 2009

Didn't Get What You Wanted For Christmas? 1031 Exchange It!

O.K.  So you didn't receive exactly what you wanted for Christmas.  It happens to many of us each and every year, and we head right to the stores in order to return and/or exchange the gifts for something that we do want or need.  Do you realize that today, the day after Christmas, is historically the biggest shopping day of the year in terms of returning and exchanging gifts. 

Personal Property 1031 Exchanges

This shopping day, or more accurately, day of returns and exchanges, reminded me that many taxpayers do not realize that you can 1031 Exchange personal property.  The 1031 Exchange strategy is not just limited to real estate; that's right, it also applies to personal property that has been held and/or used as rental/leased property, investment property or used in a trade or business. 

Exchange Into a More Productive Property

The concept of a 1031 Exchange of personal property is similar in concept to the day after Christmas.  The personal property owned, rented or leased out or used by the taxpayer in his or her trade or business has become obsolete and/or less productive.  Some examples of personal property that might be a good candidate for a 1031 Tax Deferred Exchanges are:
  • Aircraft or aviation equipment
  • Shipping vessels
  • Fleets of trucks or automobiles
  • Machinery or equipment
  • Franchises
  • Livestock
The taxpayer wants to return or exchange the asset for a better, more efficient, and more productive asset without incurring any income tax consequences by structuring a 1031 Tax Deferred Exchange.

Like-Kind Replacement Property

1031 Exchanges of personal property can be more complicated than an exchange of real estate due to the fact that the definition of like-kind property is applied by asset class or line-item by line-item, if you will. 

You will be fine as long as you are working with a Qualified Intermediary that possesses the necessary experience and expertise in the areas of LKE Program Exchanges (i.e. personal property like kind exchanges). 

Friday, December 25, 2009

Merry Christmas

Merry Christmas from The Exeter Learning Institute! We hope that you have a very Merry Christmas with you and your family.

Thursday, December 24, 2009

It's Not Too Late For Year-End Tax Planning With 1031 Exchanges

Those of you who are familiar with 1031 Tax Exchanges and perhaps have completed a number of them yourselves are probably wondering what this blog is all about.  You are probably asking yourselves "how can you possibly use a 1031 Tax Deferred Exchange for any kind of tax planning at year-end?"  The answer is actually quite simple. 

Failed 1031 Tax Deferred Exchange

1031 Tax Deferred Exchanges are all about tax planning.  The 1031 Exchange allows a real estate investor to sell rental or investment property and defer the payment of his or her taxes by structuring a 1031 Tax Exchange and buying like-kind replacement property. 

Year-End Tax Planning for Failed 1031 Exchanges

But, there are special year-end tax planning opportunities that come into play when you have a 1031 Exchange in progress and it fails.  In other words, you are not able to complete your 1031 Tax Deferred Exchange because you did not identify any replacement properties or you were not able to acquire any of the properties that you did identify.

Investor's Right to Receive 1031 Exchange Funds

The issue at hand when a 1031 Tax Deferred Exchange fails is when exactly is the sale of the relinquished property taxable since the 1031 Exchange failed?  The answer depends on many factors, including, and especially, when the investor actually has the right to receive or control or receive the benefits to his or her 1031 Exchange proceeds held by the Qualified Intermediary. 

Capital gains will be recognized in the year in which the investor has the right to receive his or her 1031 Exchange funds provided the 1031 Tax Deferred Exchange transaction and related 1031 Exchange documents and agreements were structured properly.  This means that the capital gain might be recognized in the following year rather than the year of sale under the right circumstances. 

Tuesday, December 22, 2009

Can I Pay Off Credit Card Debt at Closing if I'm Using a 1031 Exchange

This question has been raised more than usual recently because of the economic recession that we are all going through, and it makes complete sense. Taxpayers are trying to downsize their own financial position and "de-leverage" by paying down or paying off their debt, including the pay off of credit cards when they sell real estate.

Debt Paydown When Selling Investment Property

It is only natural to want to payoff the credit card debt when you are selling real estate, and to have it done through the closing process. However, it gets more complicated when you are selling investment property and structuring a 1031 Exchange and also want to pay off credit card debt, or any type of personal debt for that matter, through or at the real estate closing.

Personal Debt Payments Create Taxable Boot

The pay down or pay off of personal debt is considered a taxable event when you are selling investment property and structuring a 1031 Exchange. It is technically referred to as cash boot because you are pulling cash out of the transaction and not reinvesting the cash (equity) into your replacement property.

In other words, the payment of personal debt such as credit card debt is a non-permissible expense when paid through a 1031 Exchange transaction. The payment of personal debt therefore means that 1031 Exchange equity has been diverted and is now taxable boot.

Consider Refinancing Your Replacement Property After Acquisition

You might want to consider not paying off the debt at the closing, completing the acquisition of your replacement property and then refinance the acquired property after a few months have passed in order to pay off any personal debt. However, the lender may insist upon the immediate pay off of the debt as a condition to the lender's new loan, in which case you may not have a choice.

Monday, December 21, 2009

IRS Form 8824 for 1031 Exchange Reporting Now Available

The IRS Form used to report 1031 Exchanges, IRS Form 8824, is now available for download.

Sunday, December 20, 2009

Wise Real Estate Investors Always Know Their End Game

I was speaking with a real estate investor this morning and he was completely stumped when I asked him what his end-game was. A wise real estate investor always has an end-game in mind. You know, an exit strategy. You should always know how you are doing to get out before you get in.

Granted, the market may move against you and you may have to alter your end-game, but you should always start off with an exit strategy in mind. You can refine it as you go, especially as your needs change.

It might be to continually diversify your risk by trading up (1031 Exchanging) into more properties (quantity) with an emphasis on capital appreciation while in your younger (working) years and then repositioning your real estate portfolio so that it focuses more on income (cash flow) for your retirement years. This may include a consolidation approach so that you are trading into out of the many properties you have build up into fewer, more manageable properties.

In any event, give it a lot of thought, and know your end game.

Saturday, December 19, 2009

Economic Outlook from our Friends at Goldman Sachs & Co.


Near-term inventory and stimulus-led growth should remain brisk, especially after last week’s data on trade, inventories, and retail sales. In the longer term, headwinds persist in the form of labor weakness, stagnant incomes, higher savings, state and local fiscal drag, housing supply, unused industrial capacity, and limited credit demand/availability.


The “jobless recovery” pattern established following the last two recessions provides a reasonable template for corporate hiring decisions over the next few years. We expect the unemployment rate to peak at approximately 10¾% in early 2011.

We have raised our 4Q09 GDP estimate to a 4.0% annual rate. As we look ahead into 2010, recovery is apt to be anemic at 2.1%, but reaccelerate in late 2011 as rising asset prices, improved credit availability, and better hiring facilitate a pickup in real GDP.


Although highly expansionary fiscal and monetary policies have caused many to worry about inflation, we believe that the large gap between potential and actual output will tame prices for at least the next few years.

Fed Policy

We remain far from consensus in our view that the FOMC will maintain a 0-¼% federal funds range in 2010 and probably 2011. There are three key reasons for this view: 1) the state of labor, inflation, and fading stimulus suggests Fed policy still remains too tight…even at effectively 0%, 2) it is better to be late than early with policy tightening as it’s much easier to intercept inflation than to defeat deflation, and 3) the Fed’s exit strategy will likely start with a reduction in quantitative easing rather t easing, than a hike in the federal funds rate.

Research - Risks to Our View

We see two plausible risks to our forecast: 1) much stronger and sustained growth above 4.0% that would lower unemployment quickly, and 2) a big run-up in asset prices that could ignite a bubble response from the Federal Reserve.

Friday, December 18, 2009

Highlights from an Economic Luncheon

There are so many economic opinions circulating today that you have to wonder who to believe, who's right, and who's way, way off. I attended a luncheon this week hosted by the Strategic Trusted Advisors Roundtable, and the key note speaker was none other than Dr. Lynn Reaser.

Dr. Lynn Reaser

Dr. Lynn Reaser was formerly the chief economist of Bank of America's Investment Strategies Group, and she is currently the president of the National Association for Business Economics (NABE) and has just joined the Fermanian Business Center with Point Loma Nazarene University.

Economic Comments

I made some notes from Dr. Lynn Reaser's comments and thought I would share them with you in bullet point format:
  • We definitely out of the recession - our GDP numbers have been up since June 2009.
  • Third Quarter GDP was up about 3%
  • Fourth Quarter GDP concensus is 4%
  • Recovery will absolutely continue
  • Inflation will be tame in 2010 - no signs to indicate otherwise
  • Employment is already improving with increase in number of hours worked, etc.
  • However, full employment will not be back until 2012 or 2013
  • We should experience an increase in new jobs during the first quarter 2009
  • Interest rates should begin to increase in late spring or early summer

Her Recommendations

  1. Refinance and lock in the historically low interest rates if you have not already done so.
  2. Buy real estate now if you have not already done so.
  3. Take care of your employees if you are an employer to make sure that you keep them later when jobs are more abundant.
  4. Integrity is king today. We have seen too many sleezy things, many of which led to this downturn.

So, there you have it. We have certainly seen many signs that lead me to believe Dr. Reaser. I hope these comments help you get a handle on what you might want to consider doing.

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Thursday, December 17, 2009

Federal Regulation of 1031 Exchange Industry Maybe Here

U.S. Government Regulation over the 1031 Exchange industry may finally be here. New regulations designed to protect real estate investors that retain 1031 Exchange Qualified Intermedairies to administer their 1031 Exchange transactions have been included in the recently passed U.S. House of Representatives Bill that would create a Consumer Finance Protection Agency ("CFPA"). The Bill would establish the CFPA as the primary regulatory body over 1031 Exchange Qualified Intermediaries.

The Act's amendment calls for the Director of the Consumer Protection Agency to review Federal laws and regulations relating to the protection of real estate investors that retain the services of 1031 Exchange Qualified Intermediaries, and subsequently recommend changes and/or improvements to the U.S. Congress.

Wednesday, December 16, 2009

FOMC Leaves Fed Funds Rate Unchanged Today

The Federal Open Market Committee provided a more encouranging appraisal of the United States economy today. However, FOMC members still voted to keep the closely watched Federal Funds interest rate unchanged and there was no indication that the Federal Reserve Bank would raise rates anytime soon despite better-than-expected November 2009 employment numbers.

The Federal Reserve Bank said it will continue its plans to withdraw certain lending programs over the next few months — an indication that the Federal Reserve Bank may start to unwind more significant asset purchases shortly thereafter.

The Federal Reserve Bank and its policymaking colleagues at the FOMC said that "the deterioration in the labor market is abating." This was the Federal Reserve Bank's first formal declaration that an very difficult employment outlook is actually brightening. The national unemployment rate slipped to 10% in November 2009 from 10.2% in October 2009.

The Federal Reserve Bank also stated that, "Financial market conditions have become more supportive of economic growth," in an indication stringent credit markets are loosening a bit. Also, consumer spending seems to be "expanding at a moderate rate," the Federal Reserve Board said, describing income growth as "modest."

Both statements represent upgrades over prior month statements. And, there have been many encouraging signs recently that the economic recovery is building.

1031 Exchange of Foreign Property or Assets

London Property Exchanged for London Property
I just completed a 1031 exchange that involved the sale of a London Flat as the taxpayer's relinquished property and the purchase of another London Flat as the replacement property. The two properties are being treated and used as rental properties.

1031 Exchange of Foreign Property
You are probably wondering how this can be. You are not alone. There are many who do not realize that you can 1031 exchange foreign property for other foreign property.

Properties Must Be Qualified Use Properties
The key is that both properties must be "Qualified Use Properties" (i.e. held for investment, rental or use in a business) in order to qualify under Section 1031. The other issue is that there must be a United State income tax consequence in order for the 1031 Exchange to provide any benefit.

So, as long as the taxpayer is a U.S. taxpayer that will have a U.S. tax consequence upon the sale of the foreign property and the property is held as investment property, it can be exchanged for other foreign property.

Properties Must All Be Foreign Properties
You can not sell foreign property and exchange into domestic property (i.e. U.S. property) or sell domestic property and exchange into foreign property. The properties involved in a 1031 Exchange must either be all domestic properties (all U.S. properties) or all foreign properties (all non-domestic properties).

Tuesday, December 15, 2009

This IS and WILL be the BEST Market to Trade Up in Your Lifetime!

I just read a blog post on Active Rain (a social media website for real estate professionals) that I could not agree with more. It is all about trading up and buying now. It's about getting into the game before the prices start going back up.

The blog post was discussing residential property to be used as your primary residence, but the same can be said for investment property, too. I've posted about this topic before. This is and will be the most important buying opportunity that most of us will ever see during our lifetime. The real estate market, and most other markets for that matter are on sale, and available for those who jump on it.

Now, I'm not professing that the market is going to jump and bounce back so fast that you will make a quick buck. I think this will be a slow crawl out of the hole kind of a recovery, but I've seen the same mistakes during the 70's, 80's and 90's. Investors wait until it feels right and then realize that they have missed the market and then they decide to wait until it comes back down. The markets have dropped so much, now is the time.

What if it drops another 5% or 10% you ask? It might, but it has already dropped 30% to 50% in many markets. You can acquire now and lock in the 30% to 50% discount and then hold tight until the market does come back.

Most people who sell investment property and then buy replacement property through a 1031 Exchange either want to diversify or consolidate their holdings, but the new trend in today's market is to reposition your real estate portfolio. Take advantage of these prices to get the properties that you want.

Monday, December 14, 2009

Reverse 1031 Exchanges Are NOT Monsters

I just finished reading an entire message board thread that started with a post by a member of the board that wanted to structure a Reverse 1031 Exchange but was concerned that everyone seemed to call Reverse Exchanges "Monsters."

Reverse 1031 Exchanges NOT Monsters
Now, I've been administering Reverse 1031 Exchanges for many years now, and I can tell you that they are more complicated and absolutely do require more proactive planning compared to regular forward 1031 Exchanges if you want to be successful with your Reverse 1031 Exchange. And, Investors that merely jump into a Reverse Exchange without any planning and good understanding of what is involved is asking for a difficult and challenging Reverse 1031 Exchange. I do not deny any of that.

Powerful 1031 Exchange Strategy
However, when Reverse 1031 Exchanges are used properly and are planned for well in advance, they can be a very powerful strategy in reducing the amount of risk involved with locating, identifying and acquiring suitable replacement property in your 1031 Exchange. I prefer to use the Reverse 1031 Exchange when ever possible so that I can acquire first and not have to worry about whether or not I will be able to acquire my replacement property.

My advice
Just do you homework, ask lots of questions, retain the services of an experienced Reverse 1031 Exchange services provider, make sure that you have a clear picture of what will happen in your Reverse 1031 Exchange, and absolutely do not pick your Reverse 1031 Exchange service provider merely based on fees, or you will be sorry. You definitely get what you pay for in the Reverse 1031 Exchange field. Experience and expertise and priceless for a smooth Reverse 1031 Exchange transaction.

Wednesday, December 09, 2009

Holding Real Property in a Partnership or Multi-Member LLC

This is just a quick note about issues involved with property held in a general partnership, limited partnership, or multiple member limited liability company and the complex problems that can arise when the underlying partners want to dispose of the real estate and subsequently structure a 1031 Exchange.

It is important to note that the entity itself (i.e. the partnership) is the owner of the property, and therefore any 1031 Exchange structure should be completed at the entity level. The underlying partners do not own an interest in real estate. The partners own an interest in the partnership (partnership interest), which is personal property and not real property.

There are solutions for these scenarios, but it generally takes advanced, proactive planning in order to properly structure a solution. I would recommend that you speak with your legal and tax advisors today if you already own property in a partnership or other separate entity in order to discuss how to restructure your ownership position now before it becomese a problem at the time of actual disposition.