MAKE SURE YOUR QUALIFIED INTERMEDIARY HAS THE RIGHT TYPE OF BONDING AND INSURANCE.

As most of you know, as First Vice President of Bayview Financial Exchange Services (BFES), I act as a Qualified Intermediary(QI).   What is a QI?  An independent party, who holds the exchange funds until the exchange is completed and helps facilitate the exchange process.  My readers realize there are many reasons whey the knowledgeable investor wants to defer the payment of any and all taxes but are you aware that the Qualified Intermediary Industry is not regulated, yet an essential function that is performed by the QI who is the holding the sales proceeds, until the taxpayer closes on the purchase of the replacement property.   There is always the potential for abuses and losses, because as astutely recited in the CES Study Guide there might be:  "...simple carelessness, neglect, stupidity or outright theft...Because there are no mandated protections for taxpayers doing exchanges, some Qualified Intermediaries address this issue by carrying insurance protection for the taxpayers they represent in their exchanges.  The most typical type of insurance that is carried is insurance that protects the taxpayer from the risk of theft or misappropriation by the QI.  This is called a Fidelity Bond and will have a policy limit for a loss do to those acts by the Qualified Intermediary.  The Qualified Intermediary may also carry insurance that covers their negligence in discharging their responsibility.  This is called Errors and Omissions Insurance and this will likewise have a policy limit."    Whether your QI is a friend, your Lawyer or CPA (I certainly hope not as that is a violation of the Code--remember the QI must be completely independent), make sure your QI has both a Fidelity Bond and an Errors and Omissions Policy and make sure they have adequate coverage.  FYI--BFES has $20 Million coverage on both Fidelity Bond and Errors and Omissions per claim.  I am happy to say, that is one of the higher coverages in the industry.

WANT A GREEN HOUSE?

A major advertisement in our local newspaper announced: "Large Green Office Building to be Constructed in South Florida". Why would anyone want to purchase a Green Office Building? Why not a grey, or yellow, or stone colored building?

You know there is a catch, don't ya. I will give you the answer by quoting from another article written by Jim Carlton in the Wall Street Journal, which talks about the "greening" of the housing market and I quote: "The housing downturn is leaving one part of the construction industry remarkably unscathed: makers of so-called green building materials. Purveyors of such building components as foam insulation and faux wood shingles are continuing to see gangbuster sales, almost as though the housing boom that ended a year ago were still at full tilt.

Materials are considered "green," in industry parlance, when they generally help reduce energy use more than conventional materials or are manufactured in a way that has less of an impact on the environment. For example, some green shingles are made from recycled rubber. Homes that contain a lot of green features typically cost anywhere from 3% to 5% more to build than a traditional home, industry officials say, but the homeowner usually can recoup the costs through cheaper power bills.

The push toward green construction is driven in part by rising awareness of things like climate change, but many green vendors say the chief reason they are doing so well is probably that the rising price of oil has driven up the cost of heating and cooling homes." I and many other believe that the future will see a lot more "greening" in the building industry--and that's probably a good thing.

MULTI-ASSET EXCHANGES---MY NAME IS MC DONALD, AND ON MY FARM...

Let's pretend your name is McDonald and on your farm, E - I, E - I, O, you have 40 acres of farm land and a lot of farm equipment. Could you exchange the farm land for other real estate and if you wished could you exchange the farm equipment for other similar farm equipment?

This is called a multi-asset exchange and the answer is you could do both exchanges. The Farm land could be exchanged for any type of real estate; you might decide you want to become an owner of shopping centers--go to it--because under Section 1031 you can exchange investment real estate or real estate used in your trade or business for any other type of real estate used as an investment or to be used in your trade or business. In our example, you are trading farm land that was used in a trade or business for a shopping center, which is going to be an investment. That is "hunkey dorey" with the IRS. The farm equipment however, since it is personal property, must be exchanged for similar farm equipment, or else you will have to pay any tax due on its sale, presuming there was a profit on the farm equipment. For a more thorough discussion on this subject, go to our website: www.bayview1031.com.

CAN I EXCHANGE PERSONAL PROPERTY?

For those of you that know me, for that matter for those of you that don't know me--I am an investor in ART and Real Estate. I was recently asked by another art investor whether she could sell her investment art and do an exchange into another piece of art.

The answer is a resounding YES. Taxpayers can exchange property that is an investment or used in their trade or business for other property that was used in a trade or business or was an investment. The problem is, that when it comes to personal property, you must exchange exactly the same type of personal property that you relinquished. For example: I could exchange a painting for a painting, but would not be able to exchange a painting for a sculpture. I could exchange a piece of manufacturing equipment used in my trade or business for another piece of manufacturing equipment to be used in my trade or business, but they must be in the same asset classification in the NAICS manual.

When it comes to real estate exchanges, it's a lot easier. I can exchange any type of real estate for any type of real estate, as long as they were used for investment purposes or used in a trade or business. For example: I could sell a piece of raw acreage and close on an apartment building for my replacement property. So it is a lot easier to do a real property exchange. Having said that about real property exchanges, I am now getting heavily involved in the exchange of art for art and have just finished writing, for the art industry, a thorough article on the subject.

GOOD CREDIT--YOU MAY STILL HAVE A PROBLEM

The Wall Street Journal pointed out that even if you owe zero in debt, receive a hefty salary and own a very large stock portfolio, you may still have a low credit score.  How can this happen?  By not using your credit cards and therefore not showing any credit history. 

It is estimated that over 50 Million Americans don't qualify for a "Credit History".   What is the solution?  "...As a precaution, occasionally wipe the dust off your credit cards, give them a little exercise at the local mall and then promptly pay off the resulting bills.  Sound silly?  Consider it financial self-defense."  FYI -- There are different methods used to create a credit score, but the most widely used method is called a FICO score, which was developed by Fair Isaac Corp. 

The FICO scores range from 300 to 850.  "If your score is 750 or higher, you should be able to borrow easily at the best rates available."  FICO scores are "...hurt by things like high credit-card balances, bankruptcy and paying bills late".   What other key factors make up your credit score?  Whether you pay your bills on time; how much you owe; and how long you have been using this credit source.

HOW DO I DEFER ALL OF THE TAX?

Taxpayers are often confused about such issues as:  How do I make sure that the transaction is tax deferred in full?  By following just two simple rules, your transaction should meet the full-deferral rollover test of Section 1031.  They are:

#1--You must buy a property of equal or greater value to the property sold in order to completely defer the applicable capital gains tax.  If you purchase a property of lesser value, you will be taxed on the difference; and

#2--You must use all of the cash proceeds from the sale of the relinquished property towards the purchase of your replacement property in order to completely defer capital gains tax.  If you do not use all of your proceeds on the purchase, you will be taxed on the difference. 

For more information on these and other basic rules on Section 1031 exchanges, go to our website at: www.bayview1031.com and then proceed to the section titled "Understanding 1031's".

HOW DO I IDENTIFY MY REPLACEMENT PROPERTY?

One of our prospective clients recently asked that question. As most of my bloggers are aware, the taxpayer has 45 days from the sale of the relinquished property to identify possible replacement properties. So then how is "identification" accomplished?

The Internal Revenue Service Regulations require that the replacement property be identified in writing and delivered to a party who is (1) not considered "disqualified" and (2) directly related to the transaction by midnight on the 45th day following the sale of the relinquished property. I know what you're thinking--Who is a "Disqualified Person"?

The answer is a "disqualified person" is--- any person who is or has been the taxpayer's agent by acting as his employee, attorney, real estate agent, broker, accountant, or investment banker within two years prior to the closing on the sale of the relinquished property. FYI--blood relations are also "disqualified".

So who do you send the identification to? We recommend the taxpayer send it to us, the Qualified Intermediary--we even prepare an identification form and send that form to our taxpayer clients at the beginning of the exchange process--the taxpayer only has to fill it in and send it back to us before the expiration of the 45 days--we continue try to keep it simple.

PEOPLE ARE NOT SAVING !!

An interesting statistic appeared in the Business Section of our local newspaper.  It said: "...People are saving at the lowest level since the Great Depression, and that could be a problem for the millions of baby boomers getting ready to retire." 

The Commerce Department has reported that the nation's personal savings rate for the entire year of 2006 turned out to be at a NEGATIVE 1 PERCENT.  Let me repeat that:  A NEGATIVE 1 PERCENT, which is the worst savings rate in almost 75 years.  What does this mean?  "The negative rate means people are spending all of the money they have left after paying taxes--and then some."   The only way they can do that is by dipping into their existing savings accounts or worse--borrowing additional funds in order to finance their current spending habits. 

At Bayview Financial Exchange Services, we have a 401K program for our employees.  Most large companies have similar programs.  I stress to each of our employees, to start saving for the future.  Our company even matches a portion of those savings and yet only a small amount of the working public takes advantage of these wonderful savings plans.  FYI--I DO participate in our company's 401K plan and so should everyone else that has that same type of opportunity.

HOW LONG IS ENOUGH?

I get asked that question all the time.  How long did I have to hold my investment property before I can resell (exchange) it? 

Unfortunately, there is no hard and fast rule as to the length of time that a relinquished property (property that you are now selling/exchanging) has to be held by the taxpayer in order for the transaction to qualify for a Section 1031 exchange.   The case law says "a reasonable time".  In determining what constitutes a "reasonable time", the courts look at the "intent" of the taxpayer at the time of the original purchase and look at a "facts and circumstances" analysis to determine whether such investment "intent" is met.   

Most advanced tax advisers recommend that taxpayers hold the replacement property for at least one year after acquisition, and the relinquished property for at least two years prior to sale, but these time periods constitute no guarantees.  I would generally feel safe if the property was held for investment purposes for 2 years--after all--capital gains taxes are presently at a holding period of 1 year and 1 day.

SATISFIED WITH YOUR JOB?

I recently read an article by Mark Cox that stated that four out of five Americans have not found their "Dream Job".   "Eighty-four percent of U.S. workers reported they are not currently in their dream jobs," said Richard Castellini, Vice President, Consumer Marketing at CareerBuilder.com. "What defines a dream job is surprisingly reminiscent of childhood wishes for many workers. Workers said they want to enjoy their work experience, apply their talents and feel like they're making an impact. Having fun at work was the most important attribute of a dream job for 39 percent of workers, which heavily outweighed the 12 percent who said salary was most important."

Salary was one of the least important factors in determining a dream job. Money ranked third (12 percent) compared to having fun at work (39 percent) which topped the list, followed by making a difference in society (17 percent). Rounding out the bottom three attributes were traveling and seeing the world (5 percent) and being creative within a position (5 percent).

Across all professions, police and firefighters reported the highest incident of feeling they have their dream jobs (35 percent). They are followed closely by teachers (32 percent), real estate professionals (28 percent) and engineers (25 percent). Those in travel and nurses also ranked near the top at 22 percent and 18 percent respectively. Those professions with the least amount of workers feeling they have their dream jobs include accommodations/food services (9 percent), manufacturing (9 percent) and retail (10 percent)."