CAN I EXCHANGE A FOREIGN PROPERTY FOR A PROPERTY IN THE U.S.?

The Internal Revenue Service delineated in the 1989 Tax Reform Act the answer to that question.   They said that the "like kind" rules of Section 1031 which are applicable to U.S. taxpayers exchanging investment and trade or business property are restricted to the like kind requirement of "domestic property for domestic property" and "foreign property for foreign property."   OK--in plain English please!!!  If you are a U.S. citizen, you can exchange U.S. property that was like kind and was an investment property or used in a trade or business for U.S. property that will be used as an investment or used in a trade or business.  The same goes for a Foreign property for a Foreign property.  You CANNOT exchange a Foreign property for a U.S. property or vice versa.   Should you want to trade a foreign for a foreign, there are a number of issues to look at:  What are the Foreign country's Ownership rules?  Are there any Cultural or Language Issues?  Are there any Foreign Currency Issues?  What are the Foreign Country's Tax Reporting requirements?--Remember we may be dealing with two (2) different Foreign countries.  What is the stability of each of these Foreign Countries?   How is title held in each of these countries?   Can this transaction be handled within the necessary time limits as set out in Section 1031?   Obviously there are a lot of issues to be addressed and answered.    We do a lot of 1031 exchanges--there are not many foreign for foreign property exchanges because of the above issues.

PARADE MAGAZINE ASKS: DO YOU HAVE A BETTER IDEA?

I read an inspiring article over the weekend--it appeared in Parade Magazine.  The theory of the article was that together, we can solve many of the world's problems. I think we have all heard something like that before.   But, read on:  "Back in the days of typewriters, the mother of Monkees guitarist Mike Nesmith got tired of retyping to correct mistakes.  So Betty Nesmith cooked up the first batch of Liquid Paper in a blender and poured it into a nail-polish container.  She eventually sold the business to Gillette for $48 Million.  To come up with great ideas, you just need to pay attention to things that annoy you.  And you have to be willing to challenge the status quo.  Creativity isn't some magical process.  It's often possible to generate great ideas by taking an existing approach and simply flipping it around."  As was suggested in the article, instead of asking "why" ask "why not?"    The article points to many other examples of "why not?" And that all of us can come up with good ideas that improve our world everyday.  What about the airline pilot who got tired of lugging heavy luggage--his idea rolling luggage.  What about the post office?--they came up with the idea of having a "forever stamp" which never expires even when the price of first class stamps go up.  You too can come up with a better idea.    Let me hear  from you.

HOW DO I DESCRIBE MY REPLACEMENT PROPERTY?

The simple answer to that question is a long word--unambiguously.  For example:  If we are talking about real property, you could describe it by:  (i)  it's legal description; (ii) a distinguishable name; (iii) or its street address.   I am reminded by an outline I received at one of our national conventions, that if "the taxpayer is only acquiring a partial interest" in a property, to make sure that only the percentage interest it identified, not the entire property (ex. a 15% undivided interest in lot 5, block 3 of Happy Acres, Florida).   

If there is new construction, it is always a good idea to attach the plans and a detailed description of what the property presently looks like and what it should look like when acquired.  How should personal property  be described?  An unambiguous description of personal property is a specific description of that property.  If you are purchasing a car, don't say a green Cadillac.  Be more specific--give its year, color, model, make and its VIN (Vehicle Identification Number) if you can find it.( ex. a Green 2006 Cadillac Seville having VIN  12345xy).

THE WALL STREET JOURNAL SAYS: YOUR PERSONAL HOME IS NOT A GOOD INVESTMENT

According to the Wall Street Journal (WSJ), your personal residence is not a very good investment, especially if you are going to use the equity from it as a "...vital part of retirement planning."   "...It may be late for a lot of homeowners to read this, but here it goes anyway:  It's risky and bad planning to have too much of our net worth in your principal residence.  No prudent stock-market player would put 60% or 70% of a portfolio in just one stock, but millions will hold that much or more of their total net worth in just one house."   So what should a prudent  investor do?  "Think Differently--It's a house, not a retirement fund.  Stop thinking of your house as an investment, and recognize it for what it really is:  an expensive installment plan purchase that promises you a hefty rebate down the road. 

The best way to make a true profit on a home is to pay as little for it as you can."   Secondly, you should try to pay off your mortgage(loan) as quickly as possible.  "A typical home today will end up costing its buyer $1 million over the next 30 years."  By adding an additional $100 a month to a 6.25% ,  $300,000 loan the taxpayer will save almost 4 years worth of payments.   That's a whopping $57,000 of interest.   Sometimes having a duplex and living on one side is not a bad idea.  Let your tenant pay your payments or better yet, use the tenant's payment to continually help pay extra and with the result of paying off the loan early.  The WSJ says that remodeling very rarely adds to the additional value of a home--at least not enough to make up for the full costs of the renovations.  Finally, don't move so often.  The average homeowner buys and sells their home every 7 years and as a result have not been able to pay off much of the principal because most of the initial payments on a loan are almost all interest and very little principal paydown.  The longer you live in the property, the more principal  and less interest  will be paid each year.

HOW DO I IDENTIFY A PROPERTY IN A TAX DEFERRED EXCHANGE?

The Internal Revenue Code says that the Replacement property is identified ONLY if it is designated as a replacement property in a written document, which must be signed by the taxpayer.   The identification document must be hand delivered, or mailed,or telecopied or otherwise sent before the end of the identification period to either of the following:  (a) The person who is obligated to transfer the replacement property to the taxpayer (regardless of whether that person is a disqualified person); or (b) To any other person involved in the exchange other than the taxpayer or a disqualified person.  O.K.  so you ask who are other persons involved in an exchange?  They could include (i) a qualified intermediary (ex. Bayview Financial Exchange Services); (ii) any of the parties to the exchange; (iii) a title company;  and (iv) an escrow company.   

The form most taxpayers fill out, for IRS purposes,  to show they did an exchange, is Form 8824.  There is a proposal to change that form and have it require the taxpayer to name the party that received the identification.   This should help IRS make sure that the identification process was done correctly.  You read it first-- right here on Blog 1031.com.   For more information on the identification process or for that matter 1031 transactions, go to our reference section on our website:  www.bayview1031.com.

NOW IS THE TIME TO BUY REAL ESTATE

I was in Naples, Florida over the weekend.  They have over a 2 year supply of condo's for sale and some "gurus" tout "get out--get out if you can".    There is another side to this scenario as expressed in the latest edition of Strategic Advantage(SA).  SA says:  "Over the past 50 years there has never been a time when you could not make money in the real estate industry.  Those who profess "downturns," "slowdowns," and/or "difficult times" are gloom and doomers who lack vision, insight and a capacity to change.  Anyone who laments when times are challenging may be right statistically, but dramatically wrong strategically.  The myth of real estate cycles is that:  when good deals seem to be few and far between; when leases and sales seem to take longer to close; when financing and entitlements appear to be delayed indefinitely; and when pressure on fees, rents and NOIs become a daily annoyance/concern...you can still make money...and lots of it.   The real estate industry for decades has had a herd mentality...see what the perceived and regarded market leader does and attempt to replicate.  The real estate industry landscape, however, is littered with thousands of firms that executed a "follower strategy" to perfection...and lost.   Success within the real estate industry is defined by those who do different things, not do things differently."   Finally, they stress:  "Real estate is a cyclical business."    Let me shorten the theme of their outlook article:  "Buy today--so that you can profit tomorrow".

10 TIPS FOR REAL ESTATE INVESTORS --PLUS 1

CEL & Associates recently presented some advice tips for real estate investors.  I thought  most of them were right on point.  Here are some of those tips:

1. Remember real estate is a marathon not a sprint.
2. Remember to balance life (work, play, family and hobbies, etc).
3. Remember it is ok to say, "No."
4. Remember there are always two sides to every story and deal.
5. Remember to build relationships for a lifetime.
6. Remember there are always opportunities.
7. Remember it is what is inside the four walls that matters most.
8. Remember without a vision there is no direction.
9. Remember your core values should never change.
10. Remember a setback is merely an opportunity to recapture.

And I'll add one of my favorites: 

• Remember problems are opportunities in disguise.

CAN A CONTRACT FOR DEED BE EXCHANGED FOR REAL PROPERTY?

A Contract for Deed, is also known as a Land Contract, Real Estate Contract and/or an Agreement for Deed.  What is it?  Good question.  A Contract for Deed allows a seller to sell a piece of real estate to a buyer but not transfer title until the buyer has fully paid for the property.  The seller usually receives payments from the buyer and upon full payment of the debt owed from the buyer, then transfers title over to the buyer.    Some transactions are handled this way because it enables the Seller, if the buyer defaults on the payments owed the seller,  to resell the property a lot faster than if the seller gave a deed and took back a mortgage or deed of trust from the buyer.   The reason for this, is the seller would have to file a foreclosure action if a Deed was given to the buyer.   Under a Contract for Deed, the seller, if there was a default in payments by the buyer, would only have to file a breach of contract action, which is a lot quicker and simpler.   For that reason, some sellers prefer to sell under a Contract for Deed scenario. 

Now that you understand a Contract for Deed and why some sellers prefer to sell in that manner, can a buyer who purchases under Contract for Deed sell the Contract for Deed and do an exchange for another existing piece of real estate?   The answer is yes they can, because every state in the union has determined that the purchase by Contract for Deed is in fact the purchase of the economic bundle of rights of ownership on that particular piece of real estate.  That means that a taxpayer who has purchased under a Contract for Deed,even though  they may still even owe money to their seller, can still sell their rights under that Contract for Deed and do an exchange for another piece of real estate.   FYI---there are only a few states that still allow Contracts for Deeds, so you will be hearing less and less about it in the future years.

REAL ESTATE MOGULS?

Want to become a Real Estate Mogul?   Read the article from the New York Times entitled:  "Plans to Make Quick Profits on Modest Homes Falter".    I quote:  "It was a simple pitch:  Investors would put little to no money down and take out construction loans that a developer would use to build modest homes in a fast-growing stretch of Southwest Florida.  When finished, the homes would be flipped for tidy profits of $30,000 to $40,000 apiece. 

Too simple, perhaps. Nearly two years since the developer started marketing the investment plan nationwide, work on the homes has come to a halt, leaving 482 investors with half-built houses and thousands of dollars in construction liens....It was strictly a passive investment.  You didn't pick out the model of the house.  You didn't pick out the exact location.  Everybody signed papers without reading what they were signing said Paul Matera,  a retired contractor."  The article concludes that these "investors", who were aided by cheap mortgages, help drove the "...housing boom over the edge...Everybody thought that they were going to be a real estate mogul."   And the result?-- Many large builders, lenders and "investors" are in or are going to be in BIG trouble.  John Lonski, chief economist at Moody's Investor Services said:  "You will have a correction, and the correction will make regional homeowners unhappy as property prices fall."  According to the article, the worst is yet to come.