AM I EVER GOING TO BE ABLE TO RETIRE?

From the Wall Street Journal--Monday Feb 27, 2006, Page A2- "Aging Baby Boomers May Be a Boon for Bond Market"---"Much has been said about how the aging baby boomer is an economic time bomb.  The heavy burden associated with paying for their retirements--including Social Security and Medicare benefits--could one day prompt a financial crisis, the reasoning goes.  But there's another potential economic impact of having an aging population:  Baby boomers could switch their nest eggs out of stock and into safer bonds, helping to keep long-term interest rates low."  I like many other baby boomers were going to get out of the stock market and put my "safe" funds for retirement into bonds.  Oh well, if the interest rates do decline, I guess I'll just have to work a little longer--thank goodness for my real estate investments.

Advertising Plugs

Last Tuesday, February 21, the Wall Street Journal had an article about J.P. Morgan Chase putting ads around electrical sockets in airports.  What a neat idea.  Great advertising.  So on my trip to Phoenix I looked for these ingenious advertising gimmicks.  I noted in the article that the ad agency hired by Chase had installed 90 of these 2 foot long sticker around outlets in the Indianapolis airport's departure lounges.  To my disappointment, none were to be found in Miami or Phoenix.  This is a wonderful way to find or get new customer's attention, or at least I think so.  Alas, I guess Miami is a long way from seeing this inventive marketing device.

Phoenix - A Success!

Phoenix is rapidly growing.  I know most everyone in the real estate industry are already aware of this fact.  Just yesterday, my office, Bayview Financial Exchange Services, LLC opened our west coast servicing office in Phoenix.  We celebrated by having an extravaganza of a party.  The hotel was gorgeous, the food sumptuous and everyone in attendance had a great time.  To me, the best part was getting to meet face to face with our clients.  I will especially remember the gentleman who has closed 28 tax deferred transactions with us.  His comment is fitting:  Doing a 1031 exchange with Bayview 1031 is a no brainer.  I couldn't  have said it better.

Scottdale, Arizona Here I Come!

Today I leave for Scottsdale, Arizona to attend the opening event of Bayview Financial Exchange Services, LLC's west coast servicing office.  I'm truly looking forward to this opportunity to meet  many of our existing clients.  It was a short 2 years ago when Adam Mishcon and myself opened the east coast servicing office in south Florida.  From just the two of us, we have grown to over 80 full time employees and with the opening of the Scottsdale office, we will be adding 10 more employees during the next few months.  Our growth has been extraordinary.   

What will make this trip even more interesting is meeting with some of our clients who have worked with us over the past two years.  I look forward to meeting with Ed, who has completed 15 Bayview 1031 transactions in the past four months.  I also look forward to meeting with the numerous Realtors® who have repeatedly confirmed that our service is “superior.”  Finally, I look forward to meeting with the CREW members and mention herein their continued support for Section 1031 tax deferred exchanges. 

Bayview 1031 selected Scottsdale, AZ to handle the west coast servicing because of the exceptional growth in the surrounding area.  Although we have 16 offices on the west coast, the Phoenix area is the fastest growing area of all of our west coast offices.   Our staff has prepared a wonderful reception event, but since I am on a diet, I will not be able to partake of the food.  I will however, be able to meet and greet new and old friends.  In fact, my old study buddy from law school will even be in attendance.  The party is being held at the Westin Kierland Resort and Spa on the February 22, at 5:30 p.m.  Should you be in the neighborhood and wish to attend, please call (408) 614-4700 for reservations.

1031 Questions and Answers

I was asked to write some general true and false questions that address the subject of a 1031 exchange, for a CPA journal.  Test your own knowledge on 1031 basics.

1) To conduct a like-kind exchange under existing regulations and/or statutes, the minimum investment is $100,000. 

2) When conducting a like-kind exchange under existing regulations and/or statutes, the investor may select no more than three properties as possible replacements for his/her relinquished property.

3) The replacement property must be identified within 45 days of the sale of the relinquished property and purchased within 180 days of the property identified. 

4) The existing regulations and/or statutes allow for the like-kind exchanges of contracts for unbuilt condominiums as well as for like-kind exchanges of real property.

5) Like-kind exchanges were unlawful until 1991.

6) The party selling the relinquished property does not have to be the same party purchasing the replacement property. 

7) You must exchange one property for another simultaneously. 

8) The property purchased does not have to be the same type of real estate as the property sold. 

9) Through a 1031 exchange, I never have to pay the capital gains taxes that would otherwise be payable. 

10) The taxpayer must buy a property of equal or greater value to the property sold in order to completely defer the applicable capital gains tax. 

ANSWERS:    1)  FALSE   2) FALSE  3)  FALSE  4) TRUE  5) FALSE  6) FALSE  7) FALSE 8) TRUE
9) FALSE   10) TRUE

How well did you do on the quiz?  If you have a question that I did not address, please submit it and I will answer it.

Don't You Just Love the Media?

Don't you just love the media?  In today's Wall Street Journal (Feb 14, 2006) page A-2, their top headlines read as follows:  "Report Plays Down Economic Woes---Bush Advisers Stay Upbeat Amid Record Trade Deficit, Low Personal-Saving Rate."  The article right next to it reads:  "KB Homes's Orders Decline as Housing Could Be Cooling."   In the first article written by reporter Greg Ip he states:  "The U.S.'s rock-bottom personal saving rate and record trade deficit are not major worries, the White House said, in its latest economic review."  However later on he writes:  "Last year, household spending exceeded after-tax income, producing a negative saving rate for the first time since the Great Depression.  The rate of household savings in 1980 was 10%".

In the adjacent article, the writer Janet Morrissey writes:  "Home builder KB Home reported a surge in cancellations and a drop in orders in the past two months, the latest indication that the hot housing market appears to be cooling and a sign that the softening may not be limited to the luxury segment.  The disclosure from KB Home follows last week's announcement from high-end builder Toll Brothers Inc. that new orders fell sharply in the first quarter."

There is no question that the housing market has slowed (see my blog from 1/30/06 ).   No matter what type of spin the White House wants us to believe, the true facts and figures of the housing industry, which is what has held up our economy for the past 4 years, reflects a major downturn.  As a Qualified Intermediary, I handle thousands of tax deferred exchanges each year.  Should the slow down in the new home industry continue, one would think there would be a slow down in the 1031 industry.   Who said only time will tell?   I can acknowledge this, if the 1031 industry sees less exchanges, then very soon thereafter, the press will be acknowledging a decline in all of the major real estate industries.  That will then be seen in the products the real estate industry uses (steel, lumber, concrete, glass, electrical, plumbing, etc), as well as future declines in employment.  Who said only time will tell?  But an economist I know projected that he foresees :  "Not a pretty picture".

Investment Intent

I recently wrote a blog about "investment intent."  Since then, I have received a couple of e-mails requesting a more thorough discussion of "investment intent" and Section 1031 tax deferred exchanges, so here goes.

Property involved in a 1031 exchange must be held for investment or productive use in a trade or a business.  When looking at "investment intent," the courts will often look to the period of time over which the property was held.  That being said, there is no specific holding period requirement for either the relinquished property, or the replacement property. Taxpayers who hold their relinquished property for two years satisfy the requisite intent for a 1031 exchange (or two tax reporting periods, since in an audit the IRS may look backwards and forwards for two years).  A holding period of over a year has generally been accepted but may be subject to review by the IRS. 

A much shorter holding period has been accepted where a change in circumstances indicates that the taxpayer had intended to hold the property for a longer time period.  In most cases the IRS, when reviewing the "investment intent," labels a taxpayer who's quickly flipping property as a "dealer" not an investor.  The best example of a short time period transaction that was approved by the 9th circuit involved an investor who bought a piece of property facing the Pacific Ocean. He started building on the property the day after he closed on the purchase.  Three months after his purchase, a prospective buyer sees the property and asks the builder for the owner's name.   They talk and a deal is consummated for the sale to the purchaser, giving the taxpayer a million dollar profit. 

The taxpayer tries to conclude a 1031 tax deferred exchange.  The IRS takes the position that the taxpayer did not hold the property for a "reasonable time".  The Tax Court found in favor of the taxpayer pointing out that the taxpayer did not have the property up for sale; had no listing agreement with any Realtor and never put an ad in the newspaper.  The taxpayer was going to build a home of 7,500 square feet that he would rent for up to $25,000 a month.  He, as the court determined, had the intent to keep the property as an "investment" not for immediate resale.  This case is an exception to the two year position held by the IRS.

Baby Boomer Tsunami

In Friday's edition of the Wall Street Journal, an article entitled, "BUDGET WISH LISTS COME AND GO, BUT “ENTITLEMENTS” OUT WEIGH ALL," the Wall Street Journal pointed out:  “Some 84 cents of every dollar the government spends is essentially committed before …the President… and the legislators even have at it.  That is the amount that goes to three all-but-untouchable elements: interest on the federal debt; defense and homeland security and, above all, “entitlements” programs such as Medicare, Medicaid and Social Security.”

“It leaves just one-sixth of spending for nearly everything else the government does domestically, from secretaries’ salaries to research—what is known in budget jargon as “discretionary” spending.  Entitlements are the real elephant in the room.  Formulas for spending on these social programs are set by law.  Anyone eligible can collect.  And the programs are growing aster than either inflation or the economy, some 8% a year.”

“Medicare, at $391 billion this year, is close to equaling the entire domestic discretionary slice of the budget.  Add in Social Security and the federal share of the state-run Medicaid program for the poor, and the big-three entitlements total $1.1 trillion for this year--$3 billion a day.  This spending is the big issue in the federal budget, not post-Katrina rebuilding...or even the costly war in Iraq.”

“The 2005 Pig Book” …identified 13,977 projects costing $27.3 billion.  Yet even if Congress repealed every one of them, it would cut just 1/100^th of the budget…" "Similarly, Mr. Bush said in his State of the Union speech Tuesday he has identified 140 programs to cut or discontinue."  “We will save the American Taxpayer another $14 billion next year,” he said.  He got applause, but that is 0.005% of the budget.”   “Social Security spending now equals 4.2% of the gross domestic product, the value of all goods and services the U.S, economy produces.  Under current policy, it will rise to 6.4%.”  “…Budget-watchers have long used metaphors such as tsunami or iceberg to warn of the fiscal problem looming as the post war baby-boom generation near retirement….The budget surplus Mr. Bush inherited from Mr. Clinton could have eased the pain of transforming the program.  But Mr. Bush pursued a different priority, cutting taxes by nearly the same amount as what was, in 2000, projected as a 10-year surplus of $1.6 trillion.

”O.K. so the tax cuts obviously have not worked.  Instead of a surplus that we had as a result of the Clinton administration, we now have a very large deficit.  The question at hand is:  how is the present administration going to handle the above financial situation?  When the Wall Street Journal, known as the conservative stalwart for financial publications, questions the Bush administration and the Republican Congress about the budget deficit and entitlements, then I get worried—after all, I am 61 years old and part of the baby boomer age group that will help increase the entitlements problem.

Proving You're an Investor

The January 31, 2006 edition of Realtor Magazine on Line discussed the issue of investors becoming dealers because they have bought or sold 5 or more proerties in any one tax year (Too Many Flips Back Investors Into Tax Corner). This issue is brought up all time when we handle Section 1031 tax deferred exchanges. How can I prove that I am an investor? What if I am in the business of selling real estate, can I still be an investor?

The answer is two fold: #1--facts and circumstances test--as partially described in the aritcle and #2--taxpayer's "intent". Read the article and it will partially explain the facts and circumstances provision, but "intent" is harder to prove. I could be a developer making my living from investing in real estate and at the same time, have "investment" property. Nothing can stop anyone from having the opportunity of being an investor.

Intent can be shown by "action". For example: I may have sold a property a couple of months after I purchased it. Could I still be held as an "investor"? The answer is yes and no. It depends upon the intent. Did I have the property up for sale--did I have a for sign on the property? Did I put an advertisement in the newspaper trying to sell it? Did I give a listing to a real estate broker in order to sell it? If the answer is no to all three of the above and a buyer came to you independently--you have a good argument that this was an investment property. There are three 9th Circuit cases confirming the "intent" questions above.

Disappearing Condos

Last Sunday, the NY Times had an article ( The Disappearing Las Vegas Condos) covering the possible legal action of a purchaser who was suing his developer, because the developer had cancelled his contract to purchase. The exact factual pattern was that the developer cancelled the entire project and the purchaser felt he should be reimbursed for the profit he thinks the unit would have brought him, if he had been able to close on same. Most developers have provisions in their contracts for increased costs, force majure and other "happenings" beyond their control. I don't believe this particular "purchaser" has a leg to stand on because there is no question, that the developer has numerous "escape" clauses in the purchase and sale contract. I have a better name for these "escape" clauses -- and that is "success" clauses -- because these type of clauses will make sure that the developer is successful. This type of legal action is more a "nuisance" action and from what I read has no merit. I sure hope the purchaser's attorney did not take this case on a contingency.