Real Estate Investors Can Defer Taxes with a 1031 Exchange

Beverly Hills real estate

Paying taxes on capital gains for property transactions has always been a hindrance to those involved in real estate investment. Why should investors pay taxes on profit from real estate transactions if they’re putting the profit right back into some other real estate transaction?

The answer: They shouldn’t.

That’s exactly why the IRS created 1031 exchanges: to allow for tax deferment on profit that is reinvested immediately. Notice it’s a deferment, not a credit or a reduction. It does have to be paid eventually, just not at the time of sale and not until the money is taken out of the property, at which point it is taxable. Eager to learn more, I found some info on 1031 exchanges at 1031.org.

What Is a 1031 Exchange?

Simply put, a 1031 exchange is a method of deferring the tax on capital gains until some point in the future, according to 1031.org. They’re called Section 1031 exchanges because Section 1031 of the Internal Revenue Code states that “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment.”

Section 1031 was created to encourage reinvestment of sale proceeds of property into similar property. Obviously this stimulates business and growth. As long as the investor continues to put profit back into more property, taxes are not owed.

This all makes pretty good sense. Let’s say I invest in a house in Beverly Hills that costs me $100,000 (I WISH!). I put $50,000 into the house and put it on the market. It sells for $250,000. My $100,000 profit, or capital gain, is then put into another property that I buy to fix up and sell. This continues, and all of my capital gains are deferred with a 1031 exchange UNTIL I sell my last property and enjoy my profit. At that point, I pay all taxes owed.

Frequently Asked Questions About 1031 Exchanges

What is the benefit of a 1031 exchange versus just selling property?

A Section 1031 exchange is one of the few ways investors can defer taxes due on the sale of property (assuming it qualifies for a 1031 exchange). Deferring taxes allows investors access to the money that would otherwise be paid in taxes, allowing them to invest in another property.

What are the general guidelines to follow in order to defer all the taxable gain?

The IRS is very clear on this. The value, equity in and debt on the new property must be equal to or greater than the value of the property being sold for an exchange to be valid. This is even more important – ALL of the profit from the property sale MUST be used to buy the new property. If even a tiny percentage of the profit is used for something else, the 1031 exchange is not valid.

If there is already a contract to sell the property, is it too late to start a tax-deferred exchange?
No, as long as there has not been a transfer of title or a closing on the sale of the property, a tax-deferred exchange can still be arranged. Once the closing occurs, it is too late.

Can the replacement property eventually become the investor’s primary residence or vacation home?
Yes, but Section 1031 has holding requirements (minimum length of time the new property must be owned) that must be met prior to changing the primary use of the property. According to 1031.org, the IRS has no specific regulations on holding periods (though a minimum of a year is recommended), and “if the owner later on wants to take advantage of the home owner’s exemption (up to $250,000 or $500,000 for a couple), there is now a five year holding period requirement.”

Finally, remember that if you’re a real estate investor or considering becoming one, now is still a great time to do so. Mortgage rates are still very low and property values, though trending up, are also still very low in many parts of the country. As always, please let me know if you have any questions.Happy investing!

If you’re looking to buy, sell, or lease residential or commercial real estate in Los Angeles, please contact me direct at jkryukova@gmail.com or 310.402.8181.

Great West Hollywood Starter Condo for Sale!

705 WESTMOUNT DR #206, WEST HOLLYWOOD ,CA   90069

Asking price $425,000

Stats:

2 Bedrooms

2 Bathrooms

HOA dues: $285.59

Walking distance to Shopping, Restaurants,  Neighborhood favorites like Urth Cafe, The Belmont, Fig & Olive, Cycle House, 24 Hour Fitness, The Abbey, Pavilions Market, etc.

Marketing Description:

Designer District Pied a Terre in the Heart of West Hollywood. This Two Bedroom Unit Features Orthogonal Spaces with Rough Hewn Wood Flooring in the Main Living Area. Chef’s Kitchen with Stainless Steel Appliances and Butcher-Block Counter Tops. Intimate Bathrooms with Slate Spa Style Showers and Architectural Vanity Areas. Spacious Master with Generous European Style Built-In Wardrobes. This Turnkey Property awaits your most Discerning Buyer.

Please contact me for more information or for other great deals in the area!  (310)402-8181 or jkryukova@gmail.com

Westmount 2 Westmount 3 Westmount

Year-over year US home prices up sharply in November

U.S.  home prices in November extended their steady recovery from the housing bust,  rising 7.4 percent compared with a year ago. It was the biggest year-over-year  increase in 6½ years.

CoreLogic,  a private data provider, said Tuesday that prices also rose 0.3 percent in  November from October. The month-to-month figures are not seasonally adjusted.  CoreLogic compiles its indexes by tracking sales of the same homes over time,  using data on sales in all 50 states.

The  gains in home prices have been widespread across most of the country. And  CoreLogic forecasts that prices will increase 6 percent this year.

Prices  in November were higher than in November 2011 in all but six states. And only 13  of 100 large cities that CoreLogic studies reported year-over-year price  declines. That was down from 20 cities in October.

The  sharpest increases were in Arizona, Nevada and Idaho. North Dakota and  California rounded out the top five.

Steady  price increases are helping fuel the housing recovery. They’re encouraging some  people to sell homes and enticing would-be buyers to purchase homes before they  get more expensive. Rising prices also reduce the number of homeowners who owe  more on their mortgages than their homes are worth.

“All  signals currently point to a progressive stabilization of the housing market and  the positive trend in home price appreciation to continue into 2013,” said Anand  Nallathambi, CEO of CoreLogic.

Despite  the gains, home prices nationwide are still nearly 27 percent lower than in  April 2006, when prices peaked during the housing bubble.

Some  of the biggest gains have been in states that were hurt the worst. Prices in one  of them, Arizona, have jumped nearly 21 percent in the past year, the most of  any state. But prices in that state are still nearly 40 percent below  their peak.

And  prices in Nevada have risen 14.2 percent in the past year but remain 53 percent  below peak levels.

The  states where prices continue to fall include Delaware, where they are 4.9  percent below a year ago, and Illinois, down 2.2 percent. Connecticut, New  Jersey, Rhode Island and Pennsylvania are also reporting declines.

Prices  rose 24 percent in Phoenix in the past 12 months, the most of any large metro  area. Riverside-San Bernardino, Calif. was next with a 9.7 percent rise. It was  followed by Los Angeles, where prices rose 8.4 percent.

Source: Sfgate.com

Top Reasons to Opt for Seller Financing!

Seller Financing

Top Reasons to Opt for Seller Financing

Seller Financing has benefits for both the buyer and the seller

A recent experience of mine reminded me of the importance of seller financing. The son of a longtime friend of mine recently caught me at a Friday night high-school game and informed me he and his wife had turned down an older home in the neighborhood they always wanted, for a new home in a subdivision.

They also declined the possibility of no-cost seller financing from the owner of the older home because the builder offered a slightly lower rate on the new home.

“We just felt like we wouldn’t have to do anything on the home for years,” Patrick said. “We couldn’t afford any expensive surprises.”

While I disagreed with him on both topics, I kept my opinions to myself because he had already made his decision and was looking forward to moving into his new home. Here’s why I would have chosen differently.

First and foremost, you can always repair or remodel a home, but you can never single-handedly fix a neighborhood. If you know the schools, churches and streets that are important to you, it’s usually best to buy where you have done your primary research. And, new homeowners often underestimate upkeep.

But just as important are the credit and cash needed to get a loan today. Lenders are being more cautious and are demanding more skin in the game.

Recently, Fair Isaac Co., the developer of FICO scores, revealed that 78.5 percent of all consumers have scores that fall between 300 and 749. The FICO score ranges from 300 to 850. So only about one in five American have a FICO score of 750 or higher.

Ellie Mae Inc., a provider of mortgage origination software to lenders, reports that borrowers approved for mortgages in September had an average FICO score of 750. What message does that send to prospective home buyers?

Besides high credit scores, borrowers are coming in with higher down payments to satisfy lender requirements. According to Ellie Mae, home buyers who used a Fannie or Freddie loan had, on average, a 21 percent down payment. Homeowners who refinanced had average equity in their homes of 30 percent.

Doug Duncan, Fannie Mae’s chief economist, recently said he thought that loan standards will eventually ease as banks reduce some extra risk-based fees that they have added to benchmark quotes since the mortgage meltdown.

But is there a viable plan B? What if you didn’t have to go to a lender for a home loan?

Seller financing is an underestimated benefit not only because of today’s increased lender scrutiny, but also because the buyer dodges most all the fees associated with the loan. For example, in Patrick’s case, he decided on a 3.5 percent loan from a lender rather than a 4 percent loan from the homeowner.

Let’s say the total costs of a $200,000 loan come to 2 percent of the loan amount, or $4,000. The monthly difference between a 3.5 percent loan and 4 percent loan is approximately $57 a month. Not only would Patrick have to borrow more or come out of pocket with the extra funds (in addition to the down payment needed on the house), but he would also need more than seven years to make up the monthly difference.

While many owners make “cash-out, conventional” financing a requirement when selling a home, others are more than willing to negotiate price and terms. Homes are selling quickly in many neighborhoods, but others continue to sit. It’s those owners who can be “all ears” if it means closing a deal and moving on with their lives.

And, some sellers, particularly seniors with no high-rate place to park their cash, are not opposed to accepting a healthy down payment and “carrying the paper” on their real estate as long as they are guaranteed 4 percent interest on their money. In most cases, it’s difficult to get that rate in non-risk accounts.

Buyers and sellers can build in safety features to make carrying the paper palatable for both sides. If you are a buyer, there’s no harm in asking. You could save time, anxiety and a lot of cash — an inexpensive surprise.

If you’re looking to buy, lease, or lease – please contact me at 310.402.8181 or jkryukova@gmail.com

Click here to visit my website

Source: Inman news

Hot Deal of the Week: Large lot, Pool, and tons of Charm in the heart of West Hollywood!

1246 N. Genesee Ave.  West Hollywood, CA 90046

Asking Price – $583,300

2bed/1bath with guesthouse including 1 bath

Lot size – 5,998 Sq. Ft

Zoning – WDR2

House needs some TLC and there is plenty of space to expand.  The lot itself is a dream, lush landscaping, full size beautiful pool, with potential to create a private, beautiful oasis in the heart of West Hollywood. Walk to Whole Foods Market, Sunset Strip, and easy access to Hollywood, Downtown, the Valley, and the Westside.  There is a ton of potential to fix this property, while maintaining its charm or possibly tearing it down to built apartments.   If building is too much, then consider a light remodel and moving right in or renting the property for income. Consistently renting for $4,000 – $3,800 for month in it’s current condition.  This property is a foreclosure.

This slideshow requires JavaScript.

Please contact me for showings and more information.

www.juliekproperties.com 

Listing courtesy of  Ed H. Park DRE 00929035

Large lot with tons of potential to expand and improve!

The Importance of Staging to Get Top Dollar

The answer to the real estate question “to stage or not to stage” a house for sale is a resounding: do it!

Higher prices is one reason. On average, a staged house commands a 17 percent higher final sale than a non-staged house. Faster sales is another. According to a Real Estate Staging Association report from 2010, homes that were not staged stayed on the market an average of 181 days (before owners gave in and had their homes professionally staged) as compared to 35 days for staged homes.

The why is pretty straightforward. Most homes are less than perfect, and staging can direct attention away from flaws in a room or throughout the house. In fact, even the best looking house can use a little help. For example, staging helps buyers focus on particular elements in the house—directing the eye to value such as a fireplace, custom woodwork, etc.

Although often confused, decorating and staging are very different. Decorating is personal; staging is business. In decorating, the goal is to make a house reflect the owners’ personality while staging takes personality out of the house but keeps it warm and inviting. Buyers need to be able to imagine themselves living in your house. Think about walking into a fine hotel: it’s not personal but you want to go in and stay a while. That’s staging.

Staging does cost money — anywhere from $300 to $5,000. But according to the 2011 HomeGain Home Improvement Survey, home staging produced an average of 299 percent return on investment, with sellers spending an average of $550 and seeing a $2,194 sale price increase.

Home staging is one of many low cost home improvements that can make a substantial difference in getting top dollar for your home.

 

If you’re interested in listing your property and need a valuation or staging suggestions, please contact us any time.

New addendum could help appraisers give credit for green features

The three-page Appraisal Institute form should guarantee at the minimum that an
appraiser will take notice of a home’s energy improvements and seek to come up
with a value adjustment for local market conditions.

Here’s some good news for homeowners who’ve installed energy-saving features
but haven’t been sure appraisers will credit them with higher valuations: Thanks
to a new industry-issued appraisal addendum, the odds have improved that such
upgrades get the fairer market value they’re due.

The Appraisal Institute, the country’s largest and most influential association in
its field, published the long-awaited addendum late last month. It’s designed to
be attached to any standard appraisal report covering a property with
significant green features. Owners, sellers, buyers, refinancers and realty
agents don’t have to wait for an appraiser to use it. They can download it at no
cost and ask that it be made part of the appraisal submitted to the lender.

 

The new addendum won’t guarantee you that the appraiser will raise your
property value by the tens of thousands of dollars you spent on your solar panel
array, high-efficiency windows or geothermal system. But it should guarantee at
the minimum that he or she will take notice of the energy improvements and seek
to come up with a value adjustment for your local market conditions.

The three-page form is a response to growing concerns that although the Obama
administration and many state governments and utilities are pushing homeowners
to invest in energy-conserving components, standard appraisal forms — including
those used by financing giants Fannie Mae and Freddie Mac — are not set up to give adequate

recognition to those often costly improvements.

The inevitable result: Owners are frustrated at what they consider lowball
valuations. Refinancers can’t get the loan amounts they seek because the
appraisal report doesn’t factor in the monthly utility savings they’re getting
from their solar panels. Appraisers, for their part, say local real estate
listing documents often don’t spell out in detail all the energy-efficiency
improvements or they get the facts wrong.

For example, appraisers complain that some realty listings claim that the
house is an “Energy Star Home” when in fact there’s nothing more than a few
Energy Star appliances installed in the kitchen. The Energy Star Home
designation is a much higher standard: It requires qualifying under a
comprehensive set of criteria for the lighting, windows, water heating and
high-efficiency appliances, among others.

The institute’s addendum runs the gamut of improvements and ratings, and goes
well beyond energy efficiency. Though it has basic sections covering insulation,
windows, lighting, heating, air conditioning and solar, it also covers
sustainability features such as the presence of water-saving or reclamation
systems, landscaping that lowers either water or energy use, and even the
presence — or lack — of public transportation nearby that might help lower fuel
usage.

Of special significance to owners who have had their houses audited or rated
for green features and energy efficiency, the addendum asks for detailed
information on the rating or auditing entity, the dates of the rating, average
utility costs in the area and estimated monthly savings based on the rating
itself.

Any certifications such as LEED (Leadership in Energy and Environmental
Design) must be attached to the report along with information on any changes
made by the owners to the property since the certification. If the house has
solar installations, the addendum asks for such details as the age of the
panels, the energy production in kilowatt hours for each array, and other
information relating to the energy savings attributable to the solar
features.

Appraisers using the new addendum should now be better equipped to identify
accurate, recent “comparable” sales in the area — a key part of coming up with a
valuation, according to Joseph C. Magdziarz, 2011 president of the institute. In
other words, if you have a highly efficient, audited house with extensive
energy-saving features as demonstrated by the addendum, an appraiser should look
for prices of houses that sold recently with and without energy-efficiency
features for indications of your home’s true market value.

Appraisers who have training in green valuations can also use one or more
techniques that essentially capitalize the documented monthly savings on utility
bills into a specific value adjustment appropriate for the local market. Sandra
K. Adomatis, an appraiser in Punta Gorda, Fla., who teaches green appraisal
courses and is a nationally recognized expert, said the higher the utility
charges in a jurisdiction, generally the higher the value gain from solar panels
and other energy-saving installations. For instance, in a relatively
high-utility-cost state such as California, said Adomatis, the value increment
from the same improvements might be double that in a relatively low-cost state
such as Florida.

The addendum is available at the Appraisal
Institute site, at http://www.appraisalinstitute.org

 

Source: Latimes.com 10/9/11

By Kenneth R. Harney