THE WALL STREET JOURNAL SAYS HOME SALES CONTINUE TO DROP

I don't like to be the purveyor of bad tidings, but facts are facts and although numerous "forecasters" play with numbers and deliver different results, it still doesn't look great for the housing industry.  The Wall Street Journal confirmed that "D.R. Horton, Inc., the nation's largest home builder by number of units, said its second-quarter orders fell 37%, an indication that the crucial spring home-selling season is proving to be weaker than many builders had hoped..."Market conditions for new-home sales continue to be challenging in most of our markets as inventory levels of both new and existing homes remain high," Chairman Donald Horton said.  "Our cancellation rate is essentially unchanged from the prior quarter, but it remains above our historical range as we continue to see an increase in the use of sales incentives in many of our markets."   Even UBS analyst, Margaret Whelan, predicts cancellations to remain high throughout the rest of 2007, "as the benefit from the price reductions is offset by the negative impact of the tighter credit standards.  In turn, this will generate further margin pressure and delay the timing for a recovery." 

Sounds like we are in for a continued "slowdown" in the new home market, at least for the next 7 or 8 months.  I will write more on this subject, when I return from the Federation of Exchange Accommodators convention--our guest speaker is the renowned Dr. Peter Linneman, economist  from Wharton Business School--I can't wait to hear his take on the economy.

CAN I DO AN EXCHANGE ON PROPERTY THAT I USUALLY SELL TO CUSTOMERS?

I get asked that question a lot.  Unfortunately, Internal Revenue Code Section 1031 specifically excludes that property that is used  a stock in your trade or business.   Lou Weller  describes stock in your trade or business as:  "...property that would properly be included in inventory or property held for sale to customers in the ordinary course of the taxpayer's trade or business."   In fact, real estate that is usually sold to customers in the taxpayer's normal trade or business is generally called "dealer property", and is taxed not at capital gains rates but as ordinary income.   

The next issue is can a "dealer" also be an investor?  The answer is yes--but the "dealer" has a big burden to prove to IRS that the property they are trying to do a tax deferred exchange (Section 1031 exchange) on is in fact a piece of property they held for productive use in a trade or business or for investment purposes and not primarily for sale to its customers.---It's all a question of the particular facts and situation for that "dealer" taxpayer.  IRS will look at a number of factors, including:  How long was the property held for; were there any improvements to the property and their nature; how many sales the taxpayer had on similar property and their frequency; and the per centage of income derived from real property sales by that taxpayer.  Not an easy situation for the "dealer"--but as I try to point out, they have the right to be investors also, not just "dealers".

MIDDLE CLASS GETS AUDITED BY IRS MORE OFTEN

The New York Times reported that middle class Americans are much more likely to be audited by the I.R.S. than in previous years.   "Those caught cheating can expect to pay about $4,100 more on average in income taxes.  Since 2000, authorities at the Internal Revenue Service have nearly tripled audits of tax returns filed by people making $25,000 to $100,000 as part of a broad change in audit strategy.  Audits of these middle-class taxpayers rose to nearly 436,000 last year, up from about 147,000 returns in 2000."   That means the chance of being audited, if you are in the middle class rose from 1 in 377, to nearly 1 in 140.  But note, those that are earning more than $100,00 are being audited at the rate of 1 in every 59 returns.  Make more than a million, your odds of audit increased to 1 in 16.  The question was asked of IRS, why the additional auditing?  Their answer:  "Without more audits... people may behave as if no one is watching."   Deputy I.R.S. Commissioner Kevin Brown noted that the "...strategy of pursuing more audits, even if each one receives less time and attention, has proved a success.  Tax revenue from enforcement actions, he said rose from $33.8 billion in 2000 to $48.7 billion in 2006. 

Critics have said the increased revenue from enforcement actions shows only how widespread tax evasion has become and how easy it is to find tax cheating.  The I.R.S.'s most recent estimate is that $290 billion in taxes due were not reported and paid."

CAN I EXCHANGE A LIFE ESTATE?

That  question was recently asked to one our Business Development Consultants.  First, what is a Life Estate?.   A Life Estate is an interest in real estate, giving the owner of the life estate, the right to use  and have possession of the property during a particular person's lifetime.   When that person dies, the right to use and possess the real estate reverts to a person(s) who owns the remainder interest.  So, let's go to the original question, can a taxpayer who owns a life estate interest in a piece of real estate, exchange the life estate interest for a full ownership in another piece of real estate?   

The answer is not so simple and probably is one of the more complicated questions we have addressed on this blog, because it is not a black and white answer, it's more grey.   If the taxpayer can prove that the life estate still has at least 30 or more years of existence (generally proven with a report from an actuary), then the life estate will qualify as "like kind" for any other type of real  estate, including the full ownership of that replacement property.   Let me discuss the additional issue.   What about the person(s) who own the remainder interest, that interest which gets the use, possession and other ownership rights to the property, upon the death of the party who had the life estate?  Can they do a 1031 exchange of their remainder interest, even if it is still subject to someone else's life estate?   The answer is yes they can.  I realize this is a technical question, but every once in a while, this blog should not just cover basic 1031 questions, but I believe, should address some of the more difficult issues.  What do you think?   I am open to any and all suggestions.   For a good understanding of Section 1031 and how to proceed  with a Section 1031 tax deferred exchange, go to our website (www.bayview1031.com) and hit the "What is a 1031 Exchange" button.

WHAT IS A REVERSE EXCHANGE AND HOW DOES IT WORK?

A reverse exchange is where the taxpayer purchases the replacement property first and then sells the relinquished property.   Typically, in a reverse (sometimes called "parking") exchange, the EAT (Exchange Accommodation Titleholder) will take title ("parks") the replacement property and holds title until the taxpayer is able to sell its relinquished property.   When the taxpayer closes on the sale of the relinquished property, the taxpayer then exchanges with the EAT who then transfers title to the taxpayer.   This is a very complicated process and a lot more expensive than the normal forward 1031 exchange.  The reason most taxpayers transact a reverse exchange is the property they want to own (the replacement property) is available at the present time, or maybe they don't want a competitor to own the property, or they want to have improvements completed on the property, prior to their taking possession.   Under Rev. Proc. 2000-37 a reverse exchange can be completed legally as long as both sides of the transaction are completed within 180 days.   There is also a procedure called "non-safe harbor reverse exchanges"--but that is a topic for another day.

ASSOCIATED PRESS SAYS: LENDERS SCRAMBLE TO HELP

Foreclosures are INCREASING.  As a matter of fact, they are the highest level in our history.  Did you know that a number of Mortgage companies would rather modify the terms of the loan than have to foreclose.  In a recent Associated Press article, it was pointed out that "...Lenders have long modified loans for homeowners facing jobloss, illness, divorce or death in the family.  But with many borrowers across the country struggling to keep up with mortgage payments, mortgage companies increasingly are prodding anyone who's having trouble making payments for any reason to give them a call...advocates say that half the people in foreclosure never talk to their banker before losing their house, and many could rework their loans if they only got help."  So who loses in this newest high level foreclosure market?  Both Lender and Borrower.  The article went on to say: "  Homeowners are the obvious losers, but all the financial service companies involved lose too.  The lender loses the steady steam of payments it counted on.  If it sold the loan as part of a securitization, a package of mortgage-backed securities, that investor loses.  Loan servicers, who are usually paid a fraction of the interest on a loan, lose too.  With home values falling in some parts of the country, none of the finance companies want to be stuck owning a house that has depreciated, or worse, a house surrounded by other homes in foreclosure."  If you or a friend are in trouble, there is a helping hand--call The Home Ownership Preservation Foundation--toll free, 24 hours a day at 888-995-4673.  Finally,  there are a lot of "sharks" out there--be mindful of anyone who offers you a quick fix or rushes you into signing something or charges for services.

YOU'VE SIGNED THE CONTRACT TO SELL--IS IT TOO LATE TO DO AN EXCHANGE?

NOPE.   This was another question asked, and of course answered, in one of our webinars.  A tax deferred exchange can occur, as long as the taxpayer has not transferred title to the property or transferred what we in the QI industry refer to as "the burdens and benefits" of the relinquished property.  If the closing has already occurred, it is tooooooooooo late, yes I said:  "it is tooooooooooo late" to take advantage of Section 1031 for a  tax deferred exchange.   What if you haven't cashed the check or your attorney has it in his trust account?  Again, it's tooooooooooo late, because you or your agent have control over the funds.

FORBES MAGAZINE TALKS ABOUT EVERYONE'S TAXE

Congratulations to us all !!!  We  are now past April 30th.  That is a significant date according to an article appearing in Forbes Magazine, because it means that Americans "...have earned enough money to pay this year's tax obligations at the federal, state and local levels.  Americans will work longer to pay for government (120 days) than they will for food, clothing and housing combined (105 days).  Since 1986 taxes have cost more than these basic necessities.  In fact, Americans will work longer to afford federal taxes alone (79 days) than they will to afford housing."  The article is using information provided  from the Tax Foundation.  Alas, it was pointed out that there is one category of spending that has even grown faster taxes.  Can you guess what area has increased even more than taxes?  The answer is health care, which according to the article has "...jumped from 29 days in 1982 to 52 this year, a 23-day increase in 25 years."  Doing the math, additional costs for health care have increased almost one extra work day for each year since 1982."

PLEASE EXPLAIN A "MULTI--ASSET" EXCHANGE.

This was a question that was asked by one of our webinars participants.  A multi-asset exchange involves both personal and real property.  For example:  a taxpayer could be selling a motel.  In that motel are 40 beds, 20 telephones, 60 lamps, etc.--- and in addition there is the building and land associated with motel.   The taxpayer could exchange the motel's building and land (the real estate), for any other type of real estate, as one part of the exchange.  But the taxpayer would have to exchange the personal property ( beds, telephones, etc) for "like kind" or "like class" property- meaning they would have to exchange them for similar items (other beds, telephones) or other property that qualifies as "like kind" or "like class". 

As I have explained in previous articles, when it comes to a personal property exchange, the items exchanged are a lot more specific, while on a real property exchange, the taxpayer can exchange any type of real estate for any other type of real estate.   

Careful tax planning are the keywords when it comes to a multi-asset exchange.  Please remember to employ a good tax practitioner and of course a good Qualified Intermediary.  For more information on this subject ,  go to our website at :  www.bayview1031.com.  Additionally, you might want to attend our next free webinar, which is being held on May 31, at 2 p.m.  Eastern Standard time.

WHEN YOU'RE TRAVELING--WHETHER IT BE FOR BUSINESS OR PLEASURE--ARE YOUR CREDIT CARDS SAFE, WHILE YOU'RE IN YOUR HOTEL ROOM?

I received a newsletter from a friend of mine, asking that particular question.  The article said:  "Most would answer "very safe" because the card is right there with you, either tucked securely in a wallet or locked in the safe. But beware...it might not be as protected as you think. There is a new scam lurking about hotels, and it's not coming from hotel employees - it's from people outside the hotel altogether. Here's how it works:

The phone in your room rings and the individual on the other end identifies themselves as someone from the front desk. They say there is a problem with your credit card and the number needs to be verified. You cooperatively pass along the information, and don't think about it again until the monthly statement arrives with a slew of charges that are not yours.

Suddenly you realize while on vacation or caught up in an important business trip, you were scammed!

So how do these individuals get to your room if they do not know your name? They simply call the hotel and randomly ask for room numbers until they can get through to a person in the room, or they ask for a hotel guest with a common last name like "Smith" until the connection is made. One way or another, they get through and scam hotel guests.

If a call is ever made to your hotel room requesting credit card information, taking just one precautionary step will confirm whether or not the call is a legitimate one. Simply ask for the hotel employee's name and tell them you will come down to the front desk and provide the credit card information. Asking for the name may cause the scammer to panic and hang up - but even if a name is given, take the time to go to the front desk and confirm the call. According to the American Hotel and Lodging Association, hotels never ask for credit card information over the phone. So, chances are good that receiving a call like this is a scam, and taking the time to walk down to the front desk will confirm whether there really is a problem with your card."