FORTUNE MAGAZINE PREDICTS

The special edition of Fortune Magazine, entitled “Investors Guide 2007” is now on the newsstands.  They interpret the 2007 real estate marketplace as follows:  "This time last year the big question was whether the real estate market was going to slow down.  Today its "How bad will it get?"   

Fortune Magazine predicts the following 15 areas to be the biggest gainers (to increase in value in 2007): McAllen, Texas; El Paso, Texas; Albuquerque, New Mexico; Salt Lake City, Utah; Syracuse, New York; San Antonio, Texas; Rochester, New York; Baton Rouge, Louisiana; Fort Worth-Arlington, Texas; Birmingham, Alabama; Houston, Texas; Dallas--Irving, Texas; Buffalo, New York; and Tulsa, Oklahoma.

Reviewing my map, it looks like upper state New York and Texas are in for gains.  So who does Fortune Magazine predict to have the biggest declines?   Fortune says, 8 of the top 15 losers will be in the State of California and they are:  Stockton; Bakersfield; Santa Ana--Anaheim; Los  Angeles--Long Beach; Oakland; Fresno, Riverside; and Sacramento (actually I could also include San Diego and Oxnard if I wanted to increase the list to the bottom 17 areas). 

Unfortunately, I can't leave my home State of Florida out of the projected top 15 "loser's" bracket because Miami--Miami Beach; Sarasota--Bradenton; Fort Lauderdale; and West Palm Beach--Boca Raton, Florida all made the list.--There were a couple of other cities that made the top 15 "losers" list and they are:  Washington D.C.; Bethesda--Gaithersburg, Maryland; Phoenix, Arizona; and Las Vegas, Nevada. 

O.K.--so what does all this mean? I am reminded of the quote in my book, Buying Right--Getting Started in Real Estate Investments, in which I said 20 years ago:  "Problems are Opportunities in Disguise."  Well, Fortune Magazines comments are only projections-but if correct, there could be some very good "buys" in the next 12 to 18 months in that "loser’s” bracket.

Finally, here is a comment from a friend of mine, who is an executive at one of the largest home builders in the country.  Insightfully he has informed me that sales will go up in the next 3 to 4 months and the reason for upswing of sales on" new " homes is that the builders have been giving very large “incentives” to unload their existing inventory.  Everyone in the real estate industry will be examining how this rise in sales of "new" homes will affect the backlog of existing homes in the resale marketplace.

ASSOCIATED PRESS SAYS FUEL ECONOMY ESTIMATES TO DROP

My wife is about to purchase a new car.   Because she puts on a lot of miles per year (approximately 22,000 per year), she started looking for a more fuel efficient auto than the automobile she is presently driving.   

The Associated Press reported recently, "Car buyers will face a new form of sticker shock when they browse dealer lots next year:  Mileage estimates will be down, reflecting the way people actually drive."  It seems that the EPA (Environmental Protection Agency) has started new testing procedures which will reflect on most new autos an average drop  "...of 12% for city driving on most 2008 model year vehicles, and 8% for highway driving...The changes respond to consumer complaints that fuel economy estimates are frequently less than advertised.  EPA's new system will take into account data from vehicle tests designed to more accurately assess high speed driving, rapid acceleration, the use of air conditioning and driving in cold temperatures."   It was further pointed out that these newer test methods from the EPA "...will help bring the estimates on the window stickers closer to the miles per gallon that drivers achieve on the road."   

My bloggers might want to go to the following automotive manufacturer’s web site:
www.mileagewillvary.com for more information.  In our case, we are going to wait to see what the new reports show for mileage, before we purchase a new vehicle.

WHAT IS THE DIFFERENCE BETWEEN A FACILITATOR, AN ACCOMMODATOR, AND A QUALIFIED INTERMEDIARY?

Nothing!!!   I could, of course, end this discourse with that one word—nothing, but I won't do that to you. 

They all mean the same thing.  In fact, the governing organization for Qualified Intermediaries is called the Federation of Exchange Accommodators (FEA)--not Federation of Qualified Intermediaries.
Since most of the financial world knows us as Qualified Intermediaries maybe our governing organization should change the name to Federation of Qualified Intermediaries.  I am on the Board of Directors of the FEA, and I might just suggest that. 

So then what is a Qualified Intermediary? In order to have a "safe harbor" transaction, a transaction that IRS recognizes as valid for a Section 1031 tax deferred exchange, the taxpayer should use an independent Qualified Intermediary (QI).   

The QI's role in the transaction is not that of a legal or tax advisor.  The QI should remain completely independent.  Their job is to prepare the necessary exchange documentation, not the closing documents, the exchange documents. The QI receives the proceeds from the sale and then disburses the proceeds when the taxpayer closes on the purchase of the replacement property.  By accomplishing those and other tasks, the QI is able to convert the taxpayer's sale and purchase into a tax deferred exchange.  We (the QI) do a lot of work, for a small sum of money. But it's a lot of fun, especially, since our clients are happy because at closing they don't have to pay any taxes.   Is this a good job or what!!!

CREDIT CARDS--MINIMUM PURCHASE REQUIRED IN ORDER TO USE?

As most of my bloggers are aware, every other topic on this blog is consumer related topic with the other topic relating to section 1031 of the Internal Revenue Code.  So here is just a plain wrapper, consumer issue sent to me from my friend Chris Weir, at Countrywide Home Loans.   I will quote the information exactly as he sent it to me. 

"Ever been faced with this dilemma when out shopping? You walk up to the register to pay for an item that costs $8. The cashier rings it up, and when you reach into your wallet to pull out a credit card to pay, the cashier explains that the "store policy" requires a minimum purchase of $25 when paying with a credit card. Frustrated and embarrassed, you realize that you are short on cash, do not have a checkbook, and are forced to either pass on the item or make a mad dash to the closest ATM, pull out the cash, and maybe even get hit with a service charge for using the ATM.

But did you know that retailers cannot require a minimum charge for merchandise? Here is the scoop.
Many of us think that when a retailer refuses to accept a credit card for a small purchase, it is the credit card company that is enforcing this policy. Not true. This is simply a policy that has been put in place by the store. Basically, the store is charged a fee by the credit card company for each purchase that is made by credit card. Sometimes the fee eats into the profit the retailer would make on a purchase, and therefore, many stores require a minimum charge to ensure that the profit will cover the service charge. But the reality is that any store which accepts Visa or MasterCard cannot require a minimum purchase. Credit card companies want their customers to use credit cards, no matter how big or small the purchase may be.

So what does a consumer do to overcome this obstacle when shopping?
Ask to speak to the manager, and explain that credit card companies do not require a minimum purchase and stores have to accept a credit card as form of payment, no matter what the amount of the charge. If the store still insists on a minimum purchase, contact the issuer of the credit card and report the merchant. Small purchases add up, and with more and more people using credit cards to rack up miles or earn points for cash or rewards, knowing the facts about what you can charge could payoff big in the long run!"

WAYNER QUOTES WAYNER ANSWERING---WHAT WAS THE ORIGINAL PURPOSE OF SECTION 1031?

In an article I wrote last year for a major real estate periodical, I was asked, “What are the benefits of Section 1031.”  I answered,   "Section 1031 Exchanges do wonders for the economy: they spur development, generate jobs, create wealth, and allow an individual to increase his or her net worth.  They do not deprive the Treasury of tax revenue; they merely allow investors to defer their capital gains taxes, not avoid them. Of course with appropriate estate planning, estate taxes may be avoided as shown above (example deleted in this blog). 

While policymakers and tax experts wrestle with reforming the tax code to make it fairer and simpler, Section 1031 stands as an example of tax policy that really works.  It permits those with modest amounts of capital to transform themselves into financially successful and secure people, with positive ripple effects throughout the economy.”

RENTS TO DECREASE?

According to an article in the December 6, 2006, edition of The Wall Street Journal,  "...Apartment inventories have crept up since this summer for the first time in two years due to the failure of condo conversions"  and the slowing housing market.   Additionally, the article pointed out that "...many rental buildings that were converted to condos are returning to the rental market amid slowing condo-sales---and that could put a dent in the healthy rent increases many landlords are hoping for next year."  The question to ask is how will this affect the renter?  The WSJ says,  "To be sure, a slowdown in rent increases is good news for renters." 

In this blogger's opinion, the next 18 months will define the amount of the decrease in rental rates.  Should a number of condo units that were sold to "investors" not be sold and, as a result, be put into the rental market, a decline in the amount of rent charged will follow.     This may be a localized problem.  I believe some of the major areas to watch are Washington, D.C., Phoenix, South Florida, Denver, Las Vegas, and major population locals in California.

THE NAPKIN RULE

A number of our readers have asked about the Napkin Rule.  We answer that question and many others in the resources section of our company's website, www.bayview1031.com.  My suggestion to of all our bloggers is to go to that site for all of your 1031 information questions.  Below is an excerpt from the resource section, on the subject of the Napkin Rule.

Q. Do I have to acquire a property of equal or greater value?

Yes, you do in order to completely defer the applicable capital gains tax. To the extent that you purchase a property of lesser value, you will be taxed on the difference.

Q. Do I have to use all the cash proceeds from my sale on my purchase?
Yes, you must use all cash proceeds from the transaction in order to completely defer the applicable capital gains tax. To the extent you do not use all your proceeds on the purchase, you will be responsible for any tax on the difference.

Q. Do I have to obtain a mortgage on my replacement property in the same amount or same percentage of debt as I had on my relinquished property?

No. Just follow the above rules.

Q. Does Seller Financing jeopardize my exchange?

Seller Financing is considered boot, which means it is taxable in the year(s) that it is paid (considered an ‘installment sale’). There is a possibility that the Seller Financing (Note) can be placed into the exchange without paying taxes, but the note would have to be paid off or sold before the purchase of the replacement property.

FYI: These rules are often referred to as the Napkin Rule, because they were allegedly originally written on a cocktail napkin by the drafters of the rule.

IS THE TWO DOLLAR BILL MAKING A COMEBACK?

Chris Weir, at CountryWide Funding sent me the following information on $2 bills:

"The $2 bill - once stashed in souvenir drawers and birthday cards or tucked away in hopes of becoming a collector's item - is back in action."

"The $2 bill dates back to 1862, was redesigned several times, and was even discontinued in 1966 due to the bill's low use and unpopularity.  How can currency become unpopular? Retailers often mistook it for a $20 bill and gave incorrect change...not to mention the problem of where to put it in the cash register drawer!

"But now, the $2 bill is shedding its unpopular past and being used more and more every day - why?  Partly due to inflation - those little services or items that once cost a dollar or less have now crept over $2 due to inflation. And how about small tips, such as when you're checking into a hotel? Not too many years ago, a patron may have tipped a bellman with $1 bills for bringing up the luggage. But with inflation on the rise, patrons today are pulling out $2 bills and handing them to the bellman for the exact same service. And the $2 bills take up less room in your wallet than the wad of $1's often carried for tips. Additionally, the $2 bill is common in other currencies - so visitors or incoming residents from other countries are accustomed to using $2 bills, and commonly ask for $2 bills when exchanging money."

"So if you decide to pull out that stash of $2 bills from the souvenir drawer and go on a spending spree, watch your change carefully, as many retailers and cashiers are still not used to exchanging money with the two-dollar denomination. And believe it or not - don't be alarmed if the cashier refuses to accept the payment at first...a recent Taco Bell patron attempted to pay for a burrito with a two dollar bill, and the cashier and manager both refused to accept it as valid currency. When the patron insisted, the cashier and manager phoned security. The security guard actually had to inform the cashier and manager that yes indeed - two dollar bills are actually valid US currency."

5 TEASER QUESTIONS ON SECTION 1031

1.   Section 1031, which allows tax deferral of capital gains taxes on investment property or property used in a trade or business has been available to taxpayers since:                                     
a) 1986
b) 1991
c) 1945
d) 1921

ANSWER:  d)  In 1918, income taxes were imposed on the gain or loss of all dispositions of property.  But in 1921, the non-recognition of gain or loss on an exchange was added to the Internal Revenue Code.

2.  The following properties DO NOT qualify for a Section 1031 tax deferred exchange:

a)  stock in trade or property held primarily for sale
b)  stocks, bonds, or notes
c)   interests in a partnership
d)   personal property

ANSWER: a, b, and c do not qualify for a Section 1031 exchange.  Personal property is allowed to be exchanged for “like kind” personal property used in a trade or business under section 1031 (a)(1), but the definition of “like kind” is much more restrictive than for real property exchanges.

3.  Examples of a “like kind” real property section 1031 exchange are:
a) An apartment building for a piece of raw acreage
b) An apartment building for another apartment building
c) An apartment building for a condominium
d) An apartment building for the ownership of a 30 year lease
e) All of the above

ANSWER: The correct answer is (e) All of the above.  All real estate is defined as like kind with all other forms of real estate; so, yes, an apartment building is “like kind” under Section 1031 with raw acreage, another apartment building, a condominium and even a 30 year lease which in every state has been defined as real estate.

4. In order for there to be a valid Section 1031 Tax Deferred Exchange, the following must occur:
a) Both the Seller and Buyer must want each other’s property
b) Both of the taxpayers must exchange on their respective properties simultaneously.
c) Both the Seller and Buyer must be related to each other
d) The taxpayer that is exchanging must exchange for “like kind” property

ANSWER:  d)  The beauty of Section 1031 is that the taxpayer does not have to purchase the replacement property immediately. In fact, the taxpayer has up to 180 days to close on the replacement property from the date of his sale and does not have to purchase that property from his Buyer or a relative.  But the taxpayer must purchase property that is “like kind” to the property he relinquished.

5.  Which of the following will qualify for “like kind” status under Section 1031?
a)  a piece of raw acreage exchanged for a motel
b)  a farm for a tractor and trailer
c)  a bus for a SUV
d)  a typewriter for a computer

ANSWER:  a and d are like kind.  Any type of real estate for any type of real estate has been determined as “like kind” under Section 1031.  A typewriter, which was the precursor to the computer, has been classified as “like kind” to the computer, but a bus is not classified as like kind with a SUV.  Remember, personal property exchanges, are very restrictive.