Friday, June 25, 2010

Last Minute 1031 Exchange Closing Tip

I was speaking to one of my clients today who is trying to close on the sale of her relinquished property before the end of the month - June 30, 2010.  I realized as we were discussing her 1031 Exchange transaction that she really did not have any specific reason for closing by the end of the month. 

I suggested that she wait and close on the sale of her relinquished property and start her 1031 Exchange after June 30, 2010 instead of before month end.  The reason is simple.  You never know whether you will be able to complete your 1031 Exchange.  The sale of your relinquished property and the start of your 1031 Exchange triggers your capital gain tax.  Your 1031 Exchange will fail if you can not acquire replacement property with the 180 calendar day exchange period, and the failed 1031 Exchange becomes a taxable transaction.

However, your taxable gain can be pushed into the following tax year if you do not have the right to your 1031 Exchange funds until after your 180 calendar period has passed and the 181st day lands in the following tax year.  This is the reason that I recommended that she wait to close on the sale of her relinquished property until July 2010.  Closing after month end would push her 180th day into 2011 and would at least allow her to defer her capital gain into 2011 even if her 1031 Exchange fails.  This is a little known tax planning tool that is relatively easy to implement unless you absolutely need to close by month end for other reasons. 

Thursday, June 24, 2010

Transaction Closing Saved by the Cash Holding Escrow

The parties involved in the purchase, sale and refinance of real estate are often confronted with obstacles that can hold up the closing of the real property transaction. One solution is to have the parties agree to have cash held back at the transaction closing in a Cash Holding Escrow or Cash Holdback Escrow pending the resolution of the problem. Cash or closing proceeds can be set aside and held by an independent third party or escrow agent until the pending items are completed or conditions have been met or resolved.

The Cash Holding Escrow or Cash Holdback Escrow is a very simple escrow solution to an often complicated problem. These problems often arise at the last minute and can delay, complicate or even result in the cancellation of some already fragile real estate transactions.

Putting a Cash Holdback Escrow or Cash Holding Escrow in place at the last minute can save these transactions. But, many independent escrow companies, title insurance companies, trust companies, banks and other financial institutions will often decline to administer these Cash Holding Escrows or Cash Holdback Escrow account transactions because they do not have adequate systems to track the various requirements for the Cash Holdback.

Friday, June 18, 2010

Emissions Credits are Classified as Like Kind Property for 1031 Exchange Purposes

Like kind property as defined for tax-deferred exchange treatment under Section 1031 of the Internal Revenue Code is not always an easy call to make and often involves grays areas until the IRS clears up the issue for us. 

This is the case for Nitrogen Oxide Emissions (NOx) and Volatile Organic Compounds (VOC).  The question was whether they were like kind to each other for 1031 Exchange purposes.

The Internal Revenue Service issued Private Letter Ruling (PLR) 201024036 today, which concludes that the underlying nature and character of the rights conferred by emissions credits for nitrogen oxide emissions (NOx) are like-kind to the rights conferred by emissions credits for volatile organic compounds (VOC). 

The Internal Revenue Service concluded in PLR 201024036 that the underlying nature and character of the emission credits were of like-kind property to each other and therefore qualified for tax-deferred exchange treatment under Section 1031 of the Internal Revenue Code.

Tuesday, June 08, 2010

The National Debt, How It Affects You

The national debt has become a central focus of US domestic policy discourse. Considering the amount of fiscal stimulus that has been injected into the US economy in recent years, it is no wonder people are waking up to the subject. It is becoming very relevant, very personal.

To understand this issue we have to recognize that the National Debt and budget deficits have everything to do with each other.

Simply stated, a budget deficit is created when the government spends more than in takes in revenue. In other words, the larger the budget deficit is - the larger the national debt will be. Running consecutive budget deficits will grow the national debt.

In this scenario the government, since it creates no goods or services, has to look to others for the money. It has very few options: 1) it can tax its citizens; 2) flood the economy with more Fiat, printed currency, which is backed by little more than its good will or; 3) borrow money from other nations such as China.

The issuance of debt is typically accepted by the public, so long as the proceeds are used to stimulate the growth of the economy in a manner that will lead to long-term prosperity.

The National Debt affects everyone

First, as the national debt increases so does the likelihood of default. In order to attract investors the Treasury Department will have to raise the yield on newly treasury securities. This will reduce the revenue available to spend on other government services in order to support the growing debt service.

Second, businesses operating in the US will be viewed as riskier, thus the higher yield will be required on their newly issued bonds. This in turn will push up prices in order to meet higher debt service and eventually, the consumer will be paying more for the same goods and services ... this will fuel inflation.

Third, as the yield on treasury securities increases so will the cost of home mortgages, which are directly tied to short-term interest rates, set by the Federal Reserve. Given the interrelationship, an increase in interest rates will push home prices down ... this spells extended recession and slow housing recovery.

Fourth, since the yield on US Treasury securities is currently considered a risk-free rate of return any bump in the yield will make it harder and more expensive for the private business sector to borrow and raise capital. Historically, this environment grows the size of government while shrinking the size of the private sector.

Finally, the risk of a country defaulting on its debt service increases the risk of its losing it social, economic and political power, thus turning a national debt dilemma into a national security issue.

The US National Debt currently approaches $40,000 per capita and is rapidly rising.

Monday, June 07, 2010

Deals That Won’t Wait: Investment Strategy for Today’s Real Estate Market

Today's rapidly evolving real estate market offers a multitude of investment opportunities for the real estate investor. Opportunities can be found in fire sales, short sales, foreclosures (Trustee sales) or deeds-in-lieu of foreclosure.

But, it’s all in the timing. The real estate investor must move quickly to close on the really good (i.e. well priced) real estate deals. Cash is certainly king in today’s market place. For real estate investors that can pay all cash and close quickly the deal is a huge win. For those who can’t pay cash or move quickly it’s lost opportunity. Or is it?

Many times real estate investors want to sell some of their existing property to pay for their new acquisitions and they want to defer their capital gain taxes via a 1031 Tax Deferred Exchange transaction…but, the deal won’t wait. The well priced, and therefore really good real estate deals, will not last while the investor get’s his or her current properties listed, sold and closed through a 1031 Exchange transaction.

The challenge is finding a way to structure the acquisition so that investors can acquire the new investment property immediately, and then worry about selling their existing rental properties after they close on the deal.

A Reverse 1031 Exchange strategy is the answer. The real estate investor doesn’t have to wait to sell his or her existing rental property. They can close on the new acquisition first, and then market their existing properties following the acquisition.

Although the Reverse 1031 Exchange strategy is more complicated and costly, it provides a solution for a rapidly evolving real estate market so that the more astute investors can take advantage of opportunities as they come along, according to William L. Exeter, co-founder of The Center for Wealth & Legacy™ and founder of The 1031 Exchange Institute™.