IRS Grants Relief for Taxpayers Who Lost Funds

in Exchange Company Bankruptcies

Revenue Procedure 2010-14 issued March 5, 2010 creates a safe harbor for Taxpayers who were unable to complete their exchange due to the bankruptcy of their exchange company.

While this Revenue Procedure is complicated, in simple terms, the gain will not be taxable in the year of sale if the Taxpayer reports the gain in accordance with the newly created safe harbor.  When the Taxpayer does receive payments out of the bankruptcy estate or other settlement, the gain will be incrementally taxable as and when received, pursuant to a ratio of the profit over the contract sale price.

The safe harbor sets forth strict criteria for eligible transactions.  Taxpayers who have experienced losses due to an exchange company bankruptcy should consult with their tax advisor.

For more information feel free to call the staff at IPX1031. (888) 310-1031 or (503) 223-3911.

 Know your 10 second commercial:  Mine is “we screen for credit, criminal, eviction, employment, and landlord verification.  The screening fee is $40.00 per adult over the age of 18.  All parties that will be on the agreement apply.”

 After you have given your commercial you can explore the caller’s reaction.  “Do you have credit, criminal, eviction, employment, or landlord issues you would like to make us aware of prior to renting?  Will any of these screening areas be a problem for you?”  Have a conversation.  Be aware that tenants will tell a story.  The screening facts matter. 

 Don’t try to define your criteria or establish if a caller can pass it.  Offer to provide it in writing and invite all callers to apply.  Treat all parties the same.  “We provide screening criteria and lead based paint disclosure and photos prior to booking an appointment to show.  Do you have email?”

 “Have you driven by the property yet?”  Explore if they are familiar with the area.

 Next you can move on to your property rules.  Questions such as the following are helpful.

 “Do you have pets of any sort? – reiterate your pet policy.  Ours is “we do not accept any aggressive breeds.  Pet visit at your home may be required prior to approval of a pet.”

 “What date are you interested in moving?” – reiterate your move in policy.  Ours is “we do not hold homes more than seven days once an applicant is approved.  Upon approval you will have 48 hours to pay an execution deposit and sign an execution agreement.  These are certified funds.”

 “Do you have any “musts” for a property that we should know about before showing you the house?”

 “This house has __________________ heat.”  “The tenant pays for all utilities except ___________________.”

 “This house is (small) or (duplex) or has a (garage) that is used primarily for storage.”

 “We are showing the property at ___________________________.  Would you like to be present at that appointment?  What is a good cell # for you? _______________________”

 We require a confirmation phone call prior to our dispatching to the appointment.  Please call to confirm when you are on your way to the home or cancel at ________________.  We don’t go to the house without a confirmation call.

If you would like help buying or selling a home in Oregon and Washington please give me a call!

Kathryn King 503-997-9035, kathryn@kjkproperties.com

• Selling in a depreciating area to purchase in an appreciating area. Consider selling in a glutted market in order to leverage the equity into an apartment complex at a discount in a market affected by lack of available financing to increase cash flow and hedge against further loss of value
• Estate planning. Exchanging several homes into larger apartment complexes so that the apartments later can be sold by the estate and the value split equitably amongst the heirs, or so that the asset may later be transferred into a trust for estate planning purposes.
• Increased cash flow. Single family residential can be more expensive on a price per square foot basis, exchanging for apartments or NNN commercial can reduce maintenance expenses and increase cash on cash return.
• Termination of active management duties.  Apartments and NNN commercial complexes are easily outsourced to management companies so that the owner may travel, etc.
• Moving equity into a property that can be refinanced.  Many owners of bare land have not considered the income stream that can be created by exchanging into an income producing apartment which would provide income in retirement.
• Moving equity into property or properties that are considered more liquid – an example would be exchanging two apartment buildings for single family residences in urban neighborhoods close to the city center.
• A hedge against inflation – In uncertain economic time’s one thing that is certain is that rents tend to rise.  You can safely plan for moderate to aggressive rent increases that improve your financial performance.
• Leveraging relationships – Contracting with a professional management team will give you direct access to the immediate attention of their vendor relationships saving you costly time and repair dollars during ownership.

Case study: Mr. Jackson is considering converting several single family residences into one large apartment.  He has been an active landlord for thirty years and feels safest in real estate because it is a commodity he understands.  He has had several health issues and maintaining several rentals has become a strain.  He has reasonable income from the homes but no longer wants active real estate responsibilities.  Mr. Jackson takes the homes and sells them totaling one amount of relinquished debt and one grand total of sales price.  Within the timeline of his exchange, he identifies an apartment complex in an area of town close to the tech sector with healthy wages.  His cash on cash return increases because of increased rent per square foot and a lower cost per unit acquired in the apartment.   This value is net of the cost of active management.  Mr. Jackson elected to employ a new management firm and deliver to them management standards so he could travel without worry.  The new management is active in the field and aggressively markets, providing Mr. Jackson with a lower vacancy rate than he himself could obtain.  His asset is protected by their effective maintenance relationships and practices.  Monthly reports and income checks are now the extent of his participation.

Margaret could choose to pay additional to the principal of the loans to pay them off at a 15 year amortization during the time she is earning a steady income.  At the time of her retirement, Mrs. Choo places the properties for sale with a broker specializing in land sales contracts or mortgage and trust carried by an owner. 

Seven buyers are found with attractive terms to Margaret.  The down payments total $220,000, which she is able to invest with her financial advisor in the stock and mutual fund market, and the payments from the land sales contracts have in turn created a stream of income to her of a total amount of $10,000 per month. 

Mrs. Choo graduates her sales clauses in each contract so that she is paid off in graduated steps, according to the wishes of her tax advisor; likely in step with the reduction of her other taxable income or to offset anticipated future losses.  The money from each satisfied contract is invested with her financial advisor.  The additional money is invested to create an additional stream of interest income and increased principal investment in the account.

You are a gainfully employed first time home buyer more interested in investment property than a home.  You would like to live in one side of a duplex and rent out the other side.

How should you go about it?  Obtain FHA owner-occupied financing, with 3% down, or by using a non owner-occupant, but related, co-borrower.  This scenario allows a gift down payment from a relative.

What are the pros and cons of this scenario?  Living by your tenant is not always easy.  Could be the best way to cash flow in the short term.  Live in for 2-5 years, save additional down payment, rent out owner unit and buy another investment property.