MEASURING PERFORMANCE

A friend of mine at JCTrident sent me the following article, titled: "WHEN PERFORMANCE GET MEASURED, PERFORMANCE IMPROVES."  "This old adage remains true year after year. The question is will you do the measuring that can get you the improved performance that you desire this year?

We see time and time again in the sports world how records are broken. They constantly measure past performance in order to set new levels of expectation. During the year, if you want to achieve improved performance, set up a system to measure all your activities that will insure success for yourself and your organization. It is much like a dashboard on your car. 

The dashboard measures the activity of the car to insure that it is performing at its expected levels. So if you want to perform at the levels that will achieve success, set up a dashboard that will measure how you are doing.

The first step in setting up your dashboard is to determine what is important to measure. What sort of activities should you be measuring? The answer is every significant activity that will help you achieve your goal. As an example, if you are in sales and you make cold calls to generate prospects, then you would want to track the number of phone calls made, the number of times contact was made and the number of appointments generated.

Once you have determined the activities to measure, set up your dashboard using a simple form to track your progress. You can use an electronic spreadsheet or simply make tic marks manually.

Don't get hung up on what type of method to use, just use a method that works for you. Keep it simple and easy. Remember, the purpose of maintaining the dashboard is to improve performance. So you'll need to set benchmarks to measure your actual activity. If you need to make four sales appointments a day, then measure it every day and keep track daily, weekly, monthly, quarterly and annually. On a regular basis, review your results to determine if you are performing at the level necessary to achieve your goal."

FYI---At Bayview 1031 we keep track daily of our sales, number of fundings and $'s held.  Our company truly believes in performance tracking.  So as they concluded in the article:  "... if you want to be your best, begin today by keeping track of those activities that will get you there. "

CAN I SELL MORE THAN ONE PROPERTY IN A SECTION 1031 EXCHANGE?

Yes you can.  I have numerous taxpayers who sell a number of relinquished properties with the express purpose of purchasing a much larger replacement property.   The key here is to make sure that all of the properties being sold are closed and funded before you have to close on the much more expensive replacement property.  Bayview1031 probably does 3 or 4 deals like this a week. 

We always recommend that the taxpayer have each sale of a relinquished property as a separate 1031 exchange--this way the taxpayer can identify 3 properties for each exchange, having 1 of the properties identified being the larger desired replacement property.  Why do we suggest the taxpayer do each property as a separate 1031 transaction?    I know your first thought was so that we could get more fees.   NOPE!!   The reason we suggest separate transactions for the taxpayer, even though they are purchasing 1 replacement property, is if that 1 replacement property fails to close, the taxpayer will still have the option of transacting a 1031 exchange on the other properties they identified.   Instead of 3 properties to possibly purchase as a replacement property, they will have 7 other properties to choose from.  This option gives the taxpayer a much better chance of being able to conclude the tax deferred exchange.

WALL STREET JOURNAL SAYS CONDO SALES SLUMP--MANY SWITCH TO RENTALS

When giving my seminars and keynote speeches around the United States, I include in the presentations the subject of  how many investors have converted their apartment complexes into condominiums, with the result of hopefully obtaining a higher return on their investment.   

The tax issue involved  is whether these investors can still claim the sale of the condo conversion units as an investment, rather than as inventory, and thereby still conclude a Section 1031 tax deferred exchange.  Generally, IRS examines the investors "intent" when deciding whether the investor is still an "investor" rather than  a  "dealer" .

Recently, I wrote an entire article on this critical issue because it is a very hot topic.  Many observers are finding the following to be a very interesting:  as a result of the declining real estate market, many developers are taking their condominium projects and trying to turn them into rental apartments.   

The Wall Street Journal recently reported:  "That is the strategy developers and lenders are aiming to use on billions of dollars of troubled condo complexes....And while a few reversions have succeeded, the obstacles to make the switch from condo to rental are high.   Among the hurdles:  lenders reluctant to lengthen loan terms because rental properties produce income more slowly than condos; irate condo owners who don't want to live with renters; crushing tax assessments based on old condo sales prices; and a rental market that is weak in some of the worst-hit condo markets, such as Florida and Arizona."   

I believe that  2008 is going to be a very interesting year and those investors that are solid and creative are still going to be successful.

SECTION 1031 AND THE "EQUAL OR GREATER" RULE

In the normal Section 1031 tax deferred exchange, the taxpayer sells its "relinquished property", the funds are delivered to the Qualified Intermediary (QI) (remember to use Bayview Financial Exchange Services (BFES) as the QI), and then the taxpayer closes on its purchase of the "replacement property" with the QI sending the funds it is holding to the closing agent on the purchase. 

But the question that keeps coming up is:   what price of property does the taxpayer have to purchase and do they have to use all of the funds?  You bloggers have heard me talk about the "Napkin Rule" on many occasions.  A part of that rule says that in order for the taxpayer not to have to pay taxes on the profits made from the sale of the relinquished property, they must use all of the proceeds received to purchase the replacement property. 

Additionally, the taxpayer must purchase a replacement property of equal or greater value than the property they relinquished.  If for some reason, the taxpayer purchases a property of lesser value or uses some of the proceeds for another purpose having nothing to do with the replacement property, the taxpayer would then be taxed on those funds or the difference between the sales price of the relinquished property and the purchase price of the replacement property. 

That's a lot of words.  Let me give you an example: 

• Taxpayer sells its relinquished property for $1.2 million and because there is no remaining financing on that property, is paid $1.2 million in cash proceeds which is delivered immediately to the QI.  The taxpayer decides to purchase a replacement property for $900,000.  The taxpayer will be taxed on $300,000 and the remaining portion of the transaction will qualify for a 1031 exchange.  What if the taxpayer purchased a replacement property for $1.3 million.  That's more than the sale price ($1.2 million) but instead decides to use $400,000 for personal purposes and obtains financing for the rest.  The taxpayer in that situation would be taxed on the $400,000 it kept for personal purposes and the rest of the transaction would qualify for a Section 1031 exchange. 

For more information on the "Napkin Rule" go to resource section of our website at www.bayview1031.com.

FORECLOSURES ON THE UPSWING

A friend of mine sent me the following information from Realty Trac, who released its 3rd Quarter report on Foreclosures in the United States.    The report states that the leading cities for foreclosures are:

"1.    Stockton, CA (1 per 31 households)
  2.    Detroit, MI (1 per 33 households)   
  3.    Riverside/San Bernardino, CA (1 per 43 households)
  4.    Fort Lauderdale, FL (1 per 48 households)
  5.    Las Vegas, NV (1 per 48 households)
  6.    Sacramento, CA (1 per 48 households)
  7.    Cleveland, OH (1 per 57 households)
  8.    Miami, FL (1 per 60 households)
  9.    Bakersfield, CA (1 per 64 households)
  10.    Oakland, CA (1 per 71 households)

Looking more closely, we can see pattern.   California, Nevada, and Florida are well represented and that makes sense.  Between 2002 and 2006, these areas were popular with speculators, many of whom used 2- and 3-year adjustable rate mortgages that did not require income verification, nor did they require downpayments in excess of 5 percent.   These loans are now adjusting and in 2007, mortgages for investors are more stringent.  They typically require a 10-20% equity position and verifiable income. 

With no mortgage options, no buyer bailouts, and no means to pay the bills, many speculators are choosing to walk away from their investments.  Hence, the high foreclosure rates in California, Nevada, and Florida.

Rounding out the top 10 are Detroit and Cleveland. 
Foreclosures in these cities make sense, too.  Both have been decimated by job losses in the auto and manufacturing industries and without jobs, homeowners can't pay the bills.

In other words, foreclosures are often not the result of a "bad mortgage", but instead a "bad investment" or a "bad economy"."

Securing Funds in a 1031 Exchange

WebCPA printed the following article on December 1, 2007.   The subject was  security of funds in a Section 1031 exchange.  Since they quoted me, I thought it might be of interest to you bloggers.

"Stephen Wayner, first vice president with the qualified intermediary (QI) Bayview 1031, notes that for many years, 1031 exchanges have been a popular vehicle for real estate investors seeking to minimize taxes. In recent years, however, “the actions of several disreputable firms have given the industry a black eye,” says Wayner, adding that it’s important for accounting professionals to understand that 1031 exchanges, with proper due diligence, remain effective investment tools. Among his tips:

The ultimate protection for 1031 exchange proceeds is to use a QI that is “bonded and insured.” In assessing the bonding or insurance limits of a QI, there are two important considerations: the amount of the bond or insurance and whether the coverage limits are “aggregate” or “per occurrence.” Aggregate bonding or insurance refers to the total amount of coverage for which the insured (the QI) is covered by the policy. The best coverage is a large “per occurrence” policy, which provides bonding up to the amount identified for each client in the midst of a 1031 exchange. He also recommends that instead of co-mingling exchange funds, some QIs “segregate” client funds in separate bank accounts. Security of funds in segregated accounts is an illusion. Regardless of FDIC protection, segregated accounts do not receive any protection from QI failure, dishonesty or bankruptcy.

FDIC Insurance, capped at $100,000, is also publicized as a source of protection.

Though FDIC recently raised insurance limits, the new cap applies only to certain types of accounts such as traditional accounts, Roth IRAs and self-directed Keoghs, but not 1031s. Also, the $100,000 insurance coverage provided is “per depositor,” and most QIs will title accounts in their own name.

CAN I SELL AN INVESTMENT PROPERTY AND ACQUIRE A REPLACEMENT PROPERTY WHICH WILL BE OCCUPIED BY MY CHILD?

I get asked this question a lot..  If the taxpayer allows their child (or other relative) to live in the replacement property rent free, the transaction will not qualify under Section 1031.  If that same child (or other relative) is allowed to rent the property at below market rent, IRS will assert that you have given them a gift of the difference in what you should have charged them (market rent) and the rent you received--Again IRS will probably assert that this too won't qualify under Section 1031.   

The best route is to have the child (or relative) enter into a lease with the taxpayer at market rent.   Remember, under a different Code Section(Section 2053b), a parent can give a gift of up to $11,000 a year to each child, without having to pay a gift tax.  Logically, the gift should be made in one lump sum and should not be tied to when rental payments are due