1031 Exchange Expert: Qualified Intermediary, 1031 Exchanges, Accommodator, California and the U.S., etc., etc,

An Attorney's Point of View: The VALUE of a GOOD Buyer's and Seller's Agent - Why You Need One!

Thu, 03 Jul 2008 13:34:07 -0500

[REVISION 7/4/08 (original post 7/3/08): The purpose of this post is to educate the public regarding the value a GOOD agent will bring to the transaction, why their fees are justified and how to find a GOOD agent]

Over the past few days there has been a HEATED ongoing debate regarding whether agents and in particular, listing agents are worth their commission (here's a link to the Member's Only version of this post with links to the debate). Since I don't have a horse in this race i.e., I am not a realtor nor am I someone promoting an investment business model that shuns the use of listing agents, I'm going to address the value that GOOD Buyer's and Seller's Agent's bring to the transaction and how to select them.

Agents and other Real Estate Professionals: if you have comments that are helpful to the consumer please post them here. If you have a comment that more appropriately belongs in the Member's Only forum, please use your discretion and post it here.

Definition of a GOOD Agent

A good agent will hold their clients' best interests above their own. They honor and respect the fiduciary relationship they owe to their clients. They are committed to providing professional guidance throughout the transaction. Honesty and integrity are integral character traits of the GOOD agent. They are fanatical about returning phone calls in a reasonable time frame (at least 24 hours). They have chosen real estate as a profession not a hobby or a short cut to making a quick buck.

At the same time, a GOOD agent is NOT a slave to the whims and emotions of an unreasonable client.

The Value a GOOD Listing Agent Brings to the Transaction

A GOOD listing agent will dramatically decrease the amount of time your property is on the market through realistic/effective pricing, a thorough marketing plan, established connections with reputable agents, appraisers, home inspectors, title, escrow and other service providers.

Here are some guidelines to finding the agent that will bring the most value to your transaction. Please do not pick an agent simply because they have spent money for billboard, bus bench or other advertising. Look for an agent who is respected by their peers and other professionals in the industry.

Remember that an agent uses their own resources (read money, gas and time) to market and sell your property before they are paid a dime.

1. Experience - An agent experienced in your local market will provide exceptional insight into the value of your property at a specific time in a specific locale. Be wary of the agent that instantly agrees with your assessment of the value of your property (most likely they are telling you what you want to hear and not giving you accurate pricing information about your property, which will dramatically affect how fast your property sells). A GOOD listing agent will suggest a selling price based on a variety of factors in your market and they should be able to support the price they suggest. Realistic pricing is the key to properties selling in this challenging market.

If you're selling investment property, the agent should also have experience with 1031 exchanges.

2. Marketing Savvy - Ask how they plan to market your property. They should have detailed plan that may include staging, advertising, open houses, agent-to-agent networking and Internet presence.

3. Professional Negotiation Skills - A GOOD listing agent will know how to negotiate effectively and professionally. Stay away from those who have a reputation for bullying and strong arm tactics, those who have a reputation for losing their temper and those who do not return phone calls. Those tactics are typically employed by those who have not developed effective and professional negotiation skills.

4. Word of Mouth Reputation - What is this agent's reputation among other agents (this is critical) and among their former clients. The agent should be able to provide you with references from other agents (outside of their brokerage) and former clients. A good reputation among other agents usually indicates that they are professional and facilitate the transaction rather than stalling it through ineptitude or inexperience.

5. A GOOD listing agent will coordinate and schedule showings, arrange for inspections and other professional services that your property may need prior to selling (some of these are included in their commission and some are not, have a candid conversation about what out-of-pocket expenses you will need to budget) they will receive the offers and present them to you with their recommendations regarding a counter-offer and other strategic aspects. A lot will depend on the urgency of your sale. You should candidly discuss your urgency or lack of urgency with your agent because this will impact the negotiation strategy.

The Value of a GOOD Buyer's Agent

A GOOD Buyer's agent will save you substantial time by sorting through available inventory and selecting properties that meet your criteria. They will have relationships with credible and ethical lenders that may assist the loan process. The will guide you through the negotiation of the transaction representing your best interests.

In selecting a Buyer's Agent look for:

1. Experience in the local market. A good understanding of historical property prices and the current trends will prevent you from spending more than you have budgeted. They will also be able to give you historical data regarding appreciation, school districts and neighborhood desirability relative to your needs. Remember that no one can predict the future.

The agent should spend at least an hour interviewing you to discover both the tangible and intangible factors that will affect your buying decision. At the end of the session, they should be able to reflect back to you the requirements you have and also any other intangibles that may affect you.

***If the properties the agent is showing you do not in any way reflect what you are looking for and you have been specific about why those properties aren't appropriate, consider looking for another agent. The agent should be responsive to your needs.***

2. Responsive - The agent should be responsive to your questions and phone calls. Remember, however, that you are not their only client. Try to make a list of questions you have rather than calling every time you think of something new. It will make it easier for the agent to assist you and reduce the number of phone calls. Help them, help you.

The above list is not exhaustive but it should give you a GOOD start to finding a GOOD agent for your needs.

GOOD agents (whether Buyer's or Seller's agents) are worth their weight in gold. They are passionate about serving their clients and passionate about their industry. There are many, many agents who do not qualify as GOOD agents. The only way to reduce the number of BAD agents is to not use them for your transactions.

As a consumer, it is up to you to find the best agent for you. Do your due diligence. Check references. Don't assume they are GOOD references because they gave you references. Google their name with the word "complaint," "bad," and "unethical."

It is possible to have a bad experience with a generally GOOD agent. It's just the nature of business but there are ways to increase your chances of a good experience.

This is my personal opinion only and it is a general opinion. Please feel free to add to this conversation.

[REVISION 7/4/08: I use both Buyer's and Seller's agents despite the fact that I'm an attorney and could easily negotiate my own contract. It is indispensible to have a third party's perspective and guidance, not to mention the amount of time they save me.]

1031 Exchange - 2008 Farm Bill Affects Water Rights As Like Kind Property

Wed, 02 Jul 2008 18:59:47 -0500

ARE WATER RIGHTS LIKE-KIND PROPERTY?

On May 22, 2008, Congress enacted the Food, Conservation and Energy Act of 2008 which is often referred to as the Farm Bill. Among other things, the Act amends IRC Section 1031(a)(2)(B) to exclude mutual ditch, reservoir or irrigation company stock from the definition of "stock." As a result, mutual ditch, reservoir or irrigation company stock should now be eligible in §1031 exchanges. In order to qualify for this treatment, the new law requires that ditch stock must be treated as an interest in real property under the law of the state in which the corporation is located.

So, what does this all mean? A little background information will help you understand it. For the most part, this very positive change will largely affect farmers and ranchers. However, it will also have an affect on areas (like California, New Mexico, Nevada, Colorado) where water is scarce and the state that recognizes water rights as REAL PROPERTY.

Internal Revenue Code (IRC) Section 1031 provides, in part, that no gain or loss is recognized on the exchange of property for other property of a "like-kind." In other words, to qualify for income tax deferral under §1031, the property relinquished in the exchange must be sufficiently like the property received in the exchange.

Fortunately, most property rights characterized as real property under state law are considered like-kind to other interests that are also considered real property under local law. Thus an easement or mineral right in most cases will be considered like-kind to a fee simple interest in real property and vice versa. If easements and mineral rights are considered like-kind to a fee simple interest in real property, then what about water rights?

In recent years, developers have been willing to purchase water rights at a significant premium and some economists expect the premium to increase in the future. Does a sale of water rights qualify for income tax deferral under §1031?

In most states, perpetual water rights are recognized as an interest in real property that would qualify as "like-kind" to a fee interest real property. See, e.g. Revenue Ruling 55-749, 1955-2 CB 295; IRS Letter Ruling 200404044. On the other hand, water rights that are limited in amount or duration may not be considered sufficiently like a fee interest in real property. In Weichens v. United States, 228 F. Supp. 1080 (Arizona - 2002), for example, the court held that the water rights in question were so limited in priority, quantity, and duration as to not be like-kind to a fee simple interest in real property.

DOES DITCH STOCK QUALIFY FOR §1031 DEFERRAL?

Like-kind issues also arise where water rights are owned indirectly. In some states, water is allocated among land owners by means of ditches. Ditches may be individually owned or may be "mutual" incorporated ditches. Water in incorporated ditches is allocated by shares issued by the company. The ditch shares represent proportional amounts of water rights held by the ditch company.

In most cases, stock certificates are issued by ditch companies. So, can ditch stock be exchanged for real property in a §1031 exchange? Section 1031(a)(2)(B) provides that "stocks, bonds or notes" may not be exchanged in a §1031 exchange. Thus, an exchanger cannot sell stock in a corporation that owns real property even if the underlying real property would qualify as like kind property. Under this reasoning, it would seem that a sale of ditch stock should not qualify for deferral under §1031.

THIS INFORMATION IS PROVIDED FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY. IT IS NOT TAX OR LEGAL ADVICE. INDIVIDUALS ARE STRONGLY ADVISED TO SEEK THE GUIDANCE OF THEIR INDIVIDUAL TAX AND LEGAL ADVISORS REGARDING THEIR SPECIFIC FACTS AND CIRCUMSTANCES.

Lisa A. Lambert, Esq. 559.433.5399 or LisaL@apiexchange.com

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www.apiexchange.com

July 2, 2008 FIRE UPDATE - Central California, Oliver Fire, Oakhurst and Yosemite

Wed, 02 Jul 2008 12:29:27 -0500

Good news for Central Valley and Sierra foothill residents related to the recent wildfire activity! The cooler weather and higher humidity levels have allowed fire crews to begin to make progress on the Oliver fire located southwest of Yosemite National Park. The Oliver fire is now 75% contained. Air pollution levels have dropped and are now registering in the Moderate range.

Although,the Central Valley has gained some relief, coastal areas like the Big Sur area are still deep in battle against raging fires. The Basin Fire complex is currently only 3% contained. The link will take you to the Monterey County Fire Website with information regarding evacuations, etc.

[I've removed a photo of the Big Sur fires taken by AP and attributed to them and the photographer out of copyright concerns] Yahoo! has a gallery of fire photos. Click here to see them.

Governor Schwarzenegger has called in the National Guard to assist fire crews in their fire suppression efforts. Read the Washington Post article (dateline Fresno) "National Guard Troops Set to Relieve Fire Crews."

Also see the article "Nebraska National Guard Troops to Help Fight Fires in California."

Below is additional detailed information regarding the Oliver Fire.

Oliver Fire Incident Information:

Last Updated: July 2, 2008, 8:45 am

Date/Time Started: June 21, 2008, 5:10 pm

Administrative Unit: CAL FIRE Madera-Mariposa-Merced Unit

County: Mariposa County Location: North of Ponderosa Basin

Acres Burned: 2,789

Containment: 75% contained

Structures Threatened: 200 residences, 225 outbuildings

Evacuations: The evacuation warning for Aurora Road (5S09), Standard Mill Road (5S03), and the 5,100 block to 6,100 block of Chowchilla Mountain Road (approximately 47 homes WILL BE LIFTED at 6:00 p.m. today.

Chowchilla Mountain Road east of Westfall Road will also be completely opened.

Cause: Lightning

Cooperating Agencies: CAL FIRE, United States Forest Service, CHP, OES, Mariposa County Fire, Mariposa County Sheriff, Mariposa County Human Services, American Red Cross, CDCR, and CCC.

Total Fire Personnel: 730 (426 CAL FIRE)

Engines: 66

Fire crews: 26

Helicopters 1

Dozers:10

Water tenders: 13

Costs to date: $10.2 million

Conditions: The fire spread has slowed, however the fire continues backing in steep inaccessible terrain. There are areas of unburned vegetation within the interior of the fire area that continue to ignite and burn. Mop-up of the large fuels is a slow and tedious process. As fire suppression activity diminishes, demobilization of some firefighters is occurring. Residents and visitors to the foothill and mountain area are reminded that fireworks are not allowed due to high fire danger. Residents are asked to take responsibility for living in the wildlands by creating and maintaining a minimum of 100 feet of Defensible Space around all structures.

CAL FIRE Incident Command Team #6 is assigned to this incident.

Download the latest fact sheet

Phone Numbers: 209-966-4784 (Oliver Fire Information)

June 27, 2008 UPDATE - California Wildfires - Oakhurst, Silver Complex Fires, Oliver Fire

Fri, 27 Jun 2008 15:24:38 -0500

Friday, June 27 - 8:30 am

Forwarded to me from the Yosemite Gateway Association of Realtors

THE FOLLOWING INFORMATION WAS OBTAINED FROM THE
SIERRA NATIONAL FOREST BASS LAKE RANGER DISTRICT & CAL FIRE

Three fires are located northwest of the town of Oakhurst, south of Fish Camp, just south of Ponderosa Basin, and in the Timber Loft area. Fire suppression efforts are concentrating on the Oliver Fire containment and the protection of the Ponderosa Basin structures. The Oliver Fire has been turned over to CAL FIRE. Additional fire resources have arrived and are on the fire lines.

One other fire is located in the Star Lakes area in the SNF and my effect smoke within Yosemite National Parks south entrance.
FIRES:

Oliver Fire - near the Ponderosa Basin, 2000 acres, 20% contained, structures threatened. NO CHANGE FROM YESTERDAY. Evacuations of 12 structures have taken place and evacuation warnings are out for 10 blocks of Chowchilla Mtn. Road. Residents may call 209-966-1133

Evacuations:

Evacuation Orders:
Aurora Road (5S09) and Standard Mill Road (5S03)

Evacuation Warning:
5100 block to 6100 block of Chowchilla Mountain Rd

Evacuation Centers:
Woodland Elementary School
3394 Woodland Dr

Road Closures:
Chowchilla Mountain Rd east of Westfall Road is open to residents only with proof of residency

Westfall Fire - 100% contained, no fire at present time.

Silverknob Fire - near Cedarbrook/Timberloft area (below Westfall Camp), 480 acres, 60% contained. NO CHANGE FROM YESTERDAY.

Star Fire - near Star Lakes (southeast of the south entrance to YNP, 260 acres, 0% contained.

***********************************************************

Red Cross has set up a station at Woodland School for evacuees. 3394 Woodland Drive. Woodland Drive and Hwy 49.

*********************************************************

Contact information:

SNF: 559-877-2218 (Madera)
CDF: 209-372-0480 (Mariposa)

Cal Fire: 209-966-4784 (Mariposa)
Residents in Mariposa may call: 209-966-1133 or

209-372-0480.

Also, tune to AM 1610 on your radio.

Re-Post - The Difference Between the Mortgage Forgiveness Debt Relief Act of 2007 and State Anti-Deficiency Laws

Thu, 26 Jun 2008 21:23:08 -0500

A week or so ago, I wrote a post detailing the Mortgage Forgiveness Debt Relief Act of 2007 (MFDRA) because I'd read a number of posts where the authors confused the MFDRA with their state's anti-deficiency laws. That post was lost when AR timed out on me when I went to publish the post.

If you want to get the information from the horse's mouth (the IRS) here's a link to the IRS publication regarding the MFDRA. I'm summarizing it below.

The main difference between MFDRA is who is providing the protection. MFDRA is federal law and applies to your federal income taxes. Anti-deficiency laws vary state by state and protect the borrower from the lender holding them liable for the deficiency (the difference between the amount owed and the actual sale price) in a short sale or foreclosure.

What is the MFDRA 2007

As a response to the mortgage and credit crisis, Congress passed this Act in late December of 2007 It generally, permits a taxpayer to exclude the forgiveness of cancellation of certain debt from counting as ordinary income on their federal taxes if the property at issue is the taxpayer's principal residence. Cancellation or forgiveness of debt usually occurs when the lender modifies the terms of a mortgage, accepts a short sale or forecloses on a property. MFDRA will apply to forgiveness and cancellation of debt occurring in 2007, 2008 or 2009.

Prior to December 2007 Mortgage Debt Relief Was Handled Differently

Prior to the enactment of the MFDRA, when a lender offered to modify the terms of the loan by either forgiving or canceling debt, the taxpayer would have to include the debt relief amount as ordinary income.

For example, if there was $300,000 owed on the taxpayer's principal residence and the property only sold for $250,000, prior to MFDRA, the taxpayer would have to show the debt relief of $50,000 as income on his/her taxes.

With the MFDRA, the taxpayer does not have to include that $50,000 debt relief as income.

Debts to Which the MFDRA Applies

Not all forgiven or canceled debt qualify for MFDRA treatment. It only applies to forgiven or canceled debt that was used to buy, build or substantially improve the taxpayer's taxpayer's principal residence.

What Happens With REFINANCED HOMES?

Debt used to refinance a taxpayer's home will qualify up to the extent that the principal balance of the old mortgage, immediately prior to refinancing would have qualified.

What About Debt Forgiveness on a second home, credit cards or car loans?

This property DOES NOT QUALIFY for MFDRA treatment. Only canceled debt used to buy, build or improve the taxpayer's principal residence or refinance debt incurred for those purposes qualifies for this exclusion.

Check With Your Tax Advisor Because If Part of the Forgiven Debt Doesn't Qualify for Exclusion from Income, It May Qualify Under A Different Provision

The forgiven debt may qualify under the "insolvency" exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. There are additional exclusions that may be explored with your tax advisor.

What are Anti-Deficiency Laws

Anti-deficiency laws differ by state and usually protect the borrower from being liable for the difference in the sale price of the principal residence and the amount owed on the principal residence. If a borrower is protected by anti-deficiency laws, it protects them from the lender holding the borrower liable for the deficiency. Many restrict this protection to purchase money loans only, so if the property is refinanced then the borrower may lose the protection of the anti-deficiency laws. I will cover this in more detail in a future post.

THIS INFORMATION IS PROVIDED FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY. IT IS NOT TAX OR LEGAL ADVICE. INDIVIDUALS ARE STRONGLY ENCOURAGED TO SEEK THE GUIDANCE OF THEIR OWN TAX AND LEGAL ADVISORS FOR ADVICE REGARDING THEIR SPECIFIC FACTS AND CIRCUMSTANCES.

Please remember me and Asset Preservation, Inc. for all of your 1031 exchanges and questions.

Lisa A. Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www.apiexchange.com

Silver Complex Firefighters Could Use Donations of Supplies - How You Can Help!

Thu, 26 Jun 2008 19:23:27 -0500

I recently received an email from the Yosemite Gateway Association of Realtors indicating that the firefighters who have been fighting the Silver Complex fires could use donations for incidental supplies to make them more comfortable while they are protecting our homes and forests. If you are interested in providing these types of donations, please see below.

Century 21 Ditton Realty is taking donations for the fire crews.

They have food and water but they need travel sized toiletries such as soap, razors, cleansing clothes, visine, vasoline, Kleenex, toothbrushes and toothpaste, deodorant, chapstick, etc.

They can drop it off at any of our offices and we will get it distributed to the fire crews.

For more information you can call:

Jessica Rubottom- Century 21 Ditton Realty, Coarsegold 559-760-5782 or email

j.rubottom@c21ditton.com

California Wildfires - Oakhurst and Silver Complex Fires UPDATE

Thu, 26 Jun 2008 19:14:16 -0500

Thursday, June 26 - 10:00 am

THE FOLLOWING INFORMATION WAS OBTAINED FROM THE SIERRA NATIONAL FOREST BASS LAKE RANGER DISTRICT & CAL FIRE

Three fires are located northwest of the town of Oakhurst, south of Fish Camp, just south of Ponderosa Basin, and in the Timber Loft area.

Fire suppression efforts are concentrating on the Oliver Fire containment and the protection of the Ponderosa Basin structures. The Oliver Fire has been turned over to CAL FIRE.

Additional fire resources have arrived and are on the fire lines. One other fire is located in the Star Lakes area in the SNF and may effect smoke within Yosemite National Parks south entrance.

FIRES:

Oliver Fire - near the Ponderosa Basin, 2,000 acres, 20% contained, structures threatened. Evacuations of 12 structures have taken place and evacuation warnings are out for 10 blocks of Chowchilla Mtn. Road. Residents may call 209-966-1133

Evacuation Orders:
Aurora Road (5S09) and Standard Mill Road (5S03)

Evacuation Warning:
5100 block to 6100 block of Chowchilla Mountain Rd

Evacuation Centers:
Woodland Elementary School
3394 Woodland Dr (Woodland Dr & Highway 49)

Road Closures:
Chowchilla Mountain Rd east of Westfall Road is open to residents only with roof of residency

Westfall Fire - southwest of Fish Camp community, 105 acres, 100% contained. (Miami Mtn.)

Chiquito Fire: 52 acres 60% contained

Silverknob Fire - near Cedarbrook/Timberloft area (below Westfall Camp), 480 acres, 60% contained.

Star Fire - near Star Lakes (southeast of the south entrance to YNP, 180 acres, 0% contained.

Gagg, Poison and 7 other fires are contained

**** Red Cross has set up a station at Woodland School for evacuees. A total of 11,073 support people are involved (firefighters, air support, etc.) 1 injury, no structures lost as of this morning, a cost of $203,000,000. ***

Contact information:

SNF: 559-877-2218 (Madera)

CDF: 209-372-0480 (Mariposa)

Cal Fire: 209-966-4784 (Mariposa)

Residents in Mariposa may call: 209-966-1133 or 209-372-0480.

Also, tune to AM 1610 on your radio.

1031 EXCHANGES MAY BENEFIT INVESTORS FACING FORECLOSURE

Thu, 26 Jun 2008 18:32:24 -0500

I know it sounds weird but it could help an investor in a very specific set of circumstances.

In the last post we examined the options available for taxpayers who had debt forgiven or canceled on their principal residence. But what about those who own investment property who are facing a short sale or foreclosure? Are there tax consequences when debt is forgiven or canceled on those types of properties? You bet!

Given the challenging conditions in the real estate market, some taxpayers may be faced with the prospect of foreclosure or a short sale arrangement with their lender. Taxpayers in this situation have a multitude of concerns ranging from a deteriorating credit rating to loss of their equity. Unfortunately, the taxpayer may have a significant tax liability that arises out of foreclosure or short sale.

LOSE PROPERTY IN FORECLOSURE BUT MAY OWE CAPITAL GAIN TAXES

A tax liability could occur if the indebtedness encumbering the property is greater than the taxpayer’s adjusted basis for income tax purposes. This happens because the transfer of the property to the lender or short sale buyer results in debt forgiveness. This usually happens in cases where the relinquished property is highly leveraged through cash out refinancing, has declined in value or has been significantly depreciated. The capital gain is recognized whether the property is conveyed through foreclosure, short sale or a deed in lieu of foreclosure. In these instances, taxpayers have a capital gain tax liability even though they will not receive cash with which to pay the tax liability.

WHAT CAN BE DONE TO MITIGATE THE TAX EXPOSURE?

Remarkably, all is not lost to a taxpayer who has some cash (which is really a long shot if they're in this situation already but this is a potential option) and would like to continue to invest in real estate. If the transaction is properly structured, the taxpayer could elect to complete a §1031 tax deferred exchange treating the mortgaged property as the relinquished property. In order to qualify, the transaction should be structured as either a short sale or a deed in lieu of foreclosure. If the property is foreclosed the transaction is not easily converted into an exchange because the transfer of the relinquished property occurs by operation of law. This leaves no room for an exchange agreement and the integration of a qualified intermediary into the transaction.

With a deed in lieu of foreclosure, it is critical that exchange documents be signed by the taxpayer prior to the property being deeded to the lender, as the deed to the lender commences the running of the 45 day identification period and the 180 day exchange period. During the exchange period, the taxpayer must acquire replacement property of equal or greater value to the relinquished property in order to defer 100% of their capital gain tax liability. The obvious hurdle to performing such an exchange is that the taxpayer must have enough cash available to make a down payment on the replacement property and be able to finance the remainder of the purchase price.

The above consequences highlight the need to involve legal and tax advisors in connection with all investment decisions. Failure to do so may result in a taxpayer incurring unintended tax liabilities that could have been deferred had the transaction been reviewed early on by the right professionals.

THIS INFORMATION IS PROVIDED FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY. IT IS NOT TAX OR LEGAL ADVICE. INDIVIDUALS ARE STRONGLY ENCOURAGED TO SEEK GUIDANCE FROM THEIR OWN TAX AND LEGAL ADVISORS REGARDING THE SPECIFIC FACTS AND CIRCUMSTANCES OF THEIR SITUATION.

Lisa A. Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www.apiexchange.com

The Difference Between the Mortgage Forgiveness Debt Relief Act of 2007 and State Anti-Deficiency Laws

Thu, 26 Jun 2008 16:42:09 -0500

If you want to get the information from the horse's mouth (the IRS) here's a link to the IRS publication regarding the MFDRA. I'm summarizing it below.

What is the MFDRA 2007

Prior to December 2007 Mortgage Debt Relief Was Handled Differently

With the MFDRA, the taxpayer does not have to include that $50,000 debt relief as income.

Debts to Which the MFDRA Applies

What Happens With REFINANCED HOMES?

Debt used to refinance a taxpayer's home will qualify up to the extent that the principal balance of the old mortgage, immediately prior to refinancing would have qualified.

What About Debt Forgiveness on a second home, credit cards or car loans?

Check With Your Tax Advisor Because If Part of the Forgiven Debt Doesn't Qualify for Exclusion from Income, It May Qualify Under A Different Provision

What are Anti-Deficiency Laws

Please remember me and Asset Preservation, Inc. for all of your 1031 exchanges and questions.

Lisa A. Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www.apiexchange.com

1031 Exchanges - Is An Assignable Contract Necessary?

Thu, 12 Jun 2008 13:45:17 -0500

YES!

This issue has come up twice this week. Once on an AR blog and once in the course of my business. So here you go. . .

When a client selects a Qualified Intermediary (QI, accommodator, facilitator) and decides to open an exchange account a number of contractual things need to happen before the QI is ready to accept the clients funds from the sale of the property.

1. The Seller (client/taxpayer) will sign an exchange agreement, which essentially prevents them from having the ability to pledge, borrow or otherwise receive the benefits of the sale proceeds during the exchange period except for the purchase of Replacement Property.

2. The Seller assigns the Purchase/Sale Contract to the QI, so that the QI can step into the shoes of the seller and accept the sale proceeds. This prevents the client from having actual or constructive receipt of the proceeds, which would disqualify the exchange.

3. The Seller will notify the Purchaser of the Assignment through a Notice of Assignment.

4. The QI will provide a Security of Funds Instrument. See my blog entry on API's Security.

STATE LAW AND ASSIGNABILITY

Every state has their own body of contract law. For example, in California, contracts are freely assignable unless there is a contractual provision specificly limiting or prohibiting assignability. In other states, contracts are presumed to be unassignable unless there is a specific provision permitting assignability. You must check with your state to be sure.

(Note to California Realtors: the C.A.R. Residential Contract does not limit assignability, however, the C.A.R. Commercial Contract requires an agreement of the parties for assignment.)

The following language may be used to accomplish three things (ALWAYS CHECK WITH YOUR BROKER OR COUNSEL PRIOR TO MODIFYING A CONTRACT)

1. Intent to effect a 1031 Exchange

2. Release the Buyer from any liabilties or costs resulting in the Exchange;

3. Notify the Buyer in writing of the Assignment

"Buyer is aware that Seller intends to perform an IRC Section 1031 tax deferred exchange. Seller requests Buyer's cooperation in such an exchange and agrees to hold Buyer harmless from any and all claims, costs, liabilities, or delays in time resulting from such an exchange. Buyer agrees to an assignment of this contract to Asset Preservation, Inc. by the Seller." Copyright 2008. Asset Preservation, Inc. All Rights Reserved

So, if you have a Seller, who is doing a 1031 exchange and you live in a state where contracts are not freely assignable you will have to (with assistance, at least the first time, from your Broker or Counsel) modify the contract to permit the contract to be assigned to the QI.

THIS INFORMATION IS PROVIDED FOR EDUCATION AND INFORMATIONAL PURPOSES ONLY. IT IS NOT TAX AND/OR LEGAL ADVICE. INDIVIDUALS ARE STRONGLY ENCOURAGED TO SEEK THE ADVICE OF THEIR OWN TAX AND LEGAL COUNSEL TO REVIEW THEIR INDIVIDUAL FACTS AND CIRCUMSTANCES.

Lisa A. Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www.apiexchange.com

1031 Exchanges -- An Exchange May Still Be Necessary, Even in a Declining Market

Wed, 11 Jun 2008 16:35:01 -0500

There May Still Be Capital Gain Even If they Are Selling for Less than What They Paid to Purchase It!!!

You ask, "How can that possibly be?"

Well, remember that when a taxpayer engages in a 1031 Tax Deferred Exchange (selling investment property and exchanging into a new investment property) they are DEFERRING the capital gain tax that would normally be recognized on the sale.

What does Deferral mean?

It means that the basis of the Replacement Property is reduced by the amount of Capital Gain that was deferred on the sale of the Relinquished Property resulting in a much lower (than the purchase price) basis.

If you need a refresher regarding calculating the Net Adjusted Basis for a property click here for my blog post on the topic.

If you need a refresher regarding calculating a rough estimate of Capital Gain on the sale of property click here for my blog post on the topic.

If you would like to see a Comparison Between a Sale and an Exchange Click Here.

EXAMPLE:

Say you sold an investment property (Property I) that you originally purchased (not as an exchange) for $200,000. You owned it for two years and then decided to sell it because it had appreciated substantially (it's now worth $400,000). You and your tax advisor decide that a 1031 exchange makes sense in this situation. So, you hire a Qualified Intermediary prior to closing escrow on Property I (so you don't have actual or constructive receipt of the proceeds). You comply with the 45 day Identification Period and you close escrow on the Property II ($420,000) within 180 days of closing escrow on Property I. Exchange Completed and you successfully deferred $200,000 in capital gain. ($400,000 (sale price) - $200,000* (basis) = $200,000)

Now it's two years later (2008) and you need to sell Property II, which is now only worth $320,000. You think that you don't have a capital gain issue because the property is worth $100,000 less than what you paid for it. What you have forgotten though, is that the basis in Property II is not $420,000 it is $220,000. The $200,000 capital gain on Property I that was deferred by 1031 exchanging into Property II reduces Property II's basis by $200,000, so the basis is calculated ($420,000 - $200,000 (deferred capital gain) = $220,000.

Therefore a rough estimate of the capital gain on the sale of Property II is ($320,000 (sale price) - $220,000 (basis*) = $100,000.

*This is simple basis (to simplify the example) not Net Adjusted Basis which gives a more accurate estimate of capital gain. See the above refresher links for discussions of Net Adjusted Basis and Calculating Capital Gain.

THIS EXAMPLE ILLUSTRATES WHY IT IS SO IMPORTANT FOR PEOPLE TO CONSULT THEIR TAX ADVISORS PRIOR TO SELLING REAL PROPERTY. YOU MAY MAKE A LOGICAL ASSUMPTION THAT CREATES A SIGNIFICANT TAXABLE EVENT THAT COULD BE PREVENTED WITH A SIMPLE CONSULTATION.

Lisa A. Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www.apiexchange.com

1031 Exchanges - Why Investors May Still Need to Exchange in A Declining Market.

Wed, 11 Jun 2008 14:33:46 -0500

There May Still Be Capital Gain Even If they Are Selling for Less than What They Paid to Purchase It!!!

You ask, "How can that possibly be?"

What does Deferral mean?

If you need a refresher regarding calculating the Net Adjusted Basis for a property click here for my blog post on the topic.

If you need a refresher regarding calculating a rough estimate of Capital Gain on the sale of property click here for my blog post on the topic.

If you would like to see a Comparison Between a Sale and an Exchange Click Here.

EXAMPLE:

Therefore a rough estimate of the capital gain on the sale of Property II is ($320,000 (sale price) - $220,000 (basis*) = $100,000.

Lisa A. Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www.apiexchange.com

Wondering Why Your Phone has Stopped Ringing?

Mon, 19 May 2008 22:05:00 -0500

It Might Not Be the Market. . .

Has your phone gone from this. . .

to this . . .

Are you blaming it on the market? Are you sure it's the market and NOT your telephone policy?

Don't miss Part 2 in the series.

Clients and Agents Biggest Pet Peeve . . .

Is the failure to receive a timely return phone call. Attorneys, CPAs and real estate agents run a tie with being the worst at returning phone calls. Have you ever been frustrated because another professional does not return your phone call? Are you ever likely to refer one of your clients to that professional after your poor experience? Do you consider yourself a professional?

IF YOUR PHONE HAS STOPPED RINGING

ASK YOURSELF THESE QUESTIONS?

1. Do I have a voicemail/email return call policy?

2. If you do, do you view it as a contract between your callers and you? Do you stick to your policy?

3. Do you ever get comments like these?

     "Wow, you must be really busy because it's really difficult to get a hold of you."

     "I didn't hear from you, so, I called another agent, attorney, cpa, lender, etc."

     "I really needed an answer to that question, I wish you had called me sooner."

     "Why is the Buyer's/Seller's agent calling me to find out what's going on with the sale?"

     "You said you'd call me back in 15 minutes and it's two days later."

4. Do you ever get frustrated because another agent won't return a call/acknowledge receipt of an offer/counter-offer, etc.?

Okay, if you answered "NO" to either 1 or 2 and answered "Yes" to 3, you may have discovered that you are losing credibility because you don't consider the telephone your sancrosanct life-line to the market. You may want to consider some of these return call policy ideas:

1. One agent I know states in his voicemail that he makes return phone calls between 12 -2 and 3-5 (another timeframe in which he can return the call) and to leave a detailed message. This tells the caller that he/she will not be getting a return call for a specific period of time and reduces the disappointment when the call is not returned immediately.

2. Another agent asks the caller to give them two hours to return the call and sticks to it (always calls back within 2 hours of the callers phone call).

My Personal Referral Policy

My referral reflects on me. Most likely if my client has a bad experience with a professional to whom I referred them, they will partly blame me.I interview all potential professional referrals because I want to know several things about this person as a professional before I entrust my clients to them.

1. Do they have exceptional experience and knowledge in their field?

2. What is the average time it takes them to return a voicemail/email?

3. Do they have a return voicemail/email policy?

4. Will they tell a client right away whether they are too busy to handle their case?

All of my referrals understand that I expect them to respond professionally, ethically and competently. I tell them up front that I will take them off of my list if they take too long to return phone calls promptly and courteously.

I will call the professional and alert them that I'm sending a referral and ask to be kept abreast of my clients's situation. I ask my client to tell me right away if this professional has behaved unprofessionally (not returning their phone calls in a timely manner), unethically or incompetently. In that case, I will explore with the referred professional what led to this opinion by the client (there are always clients who complain about everything, warranted or not). If I determine that the referred professional was indeed acting unprofessionally, unethically or incompetently, I will take them off of my referral list.

My Personal Phone Policy

1. All phone calls and email are answered within 24 hours. However, they are usually returned within two hours of the original phone call or email depending on whether I'm teaching a seminar or not.

2. My office telephone asks for a two hour window to return the call and gives an option to call National Headquarters (all personnel are fantastic) if they have an urgent 1031 exchange question or need to open an exchange.

3. I use my out of office reply on email all the time because I teach so many seminars and meet with clients outside of my office.

My company and I are fanatics about answering and returning phone calls and emails. Nobody likes speaking to a voice machine, so there is always an option to reach a live person right away.

Please leave any other ideas that you have to address this issue. I've seen a number of posts and wanted to leave my own thoughts because it is something about which I feel very strongly.

LET'S KEEP THOSE PHONES RINGING!!!

My next post will address different telephone policies when you answer the phone and when you return a phone call or email.

IF YOU THINK THE AR COMMUNITY WOULD BENEFIT FROM THIS POST, PLEASE NOMINATE IT AS A FEATURED POST BY CLICKING HERE.

Lisa A. Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www.apiexchange.com

Clicking on the Picture Below will take you to Asset Preservation,Inc.'s website.

How Is Your Telephone Answered? PART 2 (Telephone Series)

Mon, 19 May 2008 18:34:35 -0500

You Could Be Losing Clients. . .

Does the person answering your phone sound like this . . .

Or this. . .

Or this?

FRONT OFFICE PERSONNEL

Are they Performing?

If the person answering your office phone is unprofessional, discourteous, incompetent or apathetic, you could be losing business. A great way to find out what it sounds like to call your office, is to have friends call for you and give you feedback. Ask them to leave a message. How long does it take for you to receive the message? This is a critical link in connecting with your clients.

Is Training Needed?

Does your front office staff need critical training? The first impression a client will have of your office is their experience with the person answering the phones. Is that person overloaded with too many "extra projects" to give his/her full attention to the phones. How diligent are they in tracking down the person who was called?

In a challenging market, we cannot afford to have any "weak" links. Poorly trained or poorly motivated front office staff is a HUGE weak link in your efforts to connect with your clients.

Check out other reasons that may have caused your telephone to stop ringing.

If You Can't Control Front Office Personnel Make Your Cell Phone Your Primary Contact

If you have poorly trained or poorly motivated front office personnel and you do not have any control over their training (i.e., you have reported poor performance to your broker and they have not responded), make your cell phone your primary contact. You have control over how you answer the phone and how you return phones calls. It's not ideal because poeple like to speak to a live person but it's a better alternative to a rude, apathetic front office person taking the call.

IT'S ALL ABOUT YOU

Do you answer your cell phone as if it were your office phone? Or do you answer, "Yo! Stan here!"? Say nothing? Say hello?

1. You want your caller to know they have contacted the person they were trying to contact.

2. You want them to feel reassured by your calm, professional and competent demeanor.

3. Ask for their name and a return number in case you get cut off. THEN LISTEN!!!

4. If you don't know the answer to their question, tell them that it requires a bit of research and give them a time when you will call them back with the answer.

There's nothing worse than giving bad information because you were afraid of saying, "You know that's an interesting question that will require me to do a little research. Can I call you back at 3 PM with the results?" You have the opportunity to impress them twice. One, you were candid and said you'd need to do the research. Two, you took the time to look it up and call them back by a certain time.

I DO THIS ALL THE TIME because I frequently get weird facts and circumstances about 1031 exchanges that need a little research.

COMMUNICATION WITH OUR CLIENTS IS CRTICAL!!

Do everything you can to make it easy for your clients to reach you and then follow through! Give callers clear directions on your voicemail greeting regarding what information you need to call them back.

CLIENTS, PLEASE REMEMBER TO LEAVE YOUR NAME AND PHONE NUMBER (TWICE) [cell phones can cut out leaving only a partial return number] so that your agent can call you back.

So, that's my two cents. Let me know if you have any further observations.

Please call me or email me, if I can assist you or your clients with their 1013 Exchanges.

IF YOU THINK THE AR COMMUNITY WOULD BENEFIT FROM THIS POST, PLEASE NOMINATE IT AS A FEATURED POST BY CLICKING HERE.

Lisa A. Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www. apiexchange.com.

Has Your Phone Stopped Ringing?? Telephone Series (Part 1)

Mon, 19 May 2008 17:34:55 -0500

It Might Not Be the Market. . .

Has your phone gone from this. . .

to this . . .

Are you blaming it on the market? Are you sure it's the market and NOT your telephone policy?

Don't miss Part 2 in the series.

Clients and Agents Biggest Pet Peeve . . .

IF YOUR PHONE HAS STOPPED RINGING

My Personal Referral Policy

1. Do they have exceptional experience and knowledge in their field?

2. What is the average time it takes them to return a voicemail/email?

3. Do they have a return voicemail/email policy?

4. Will they tell a client right away whether they are too busy to handle their case?

My Personal Phone Policy

1. All phone calls and email are answered within 24 hours. However, they are usually returned within two hours of the original phone call or email depending on whether I'm teaching a seminar or not.

3. I use my out of office reply on email all the time because I teach so many seminars and meet with clients outside of my office.

My company and I are fanatics about answering and returning phone calls and emails. Nobody likes speaking to a voice machine, so there is always an option to reach a live person right away.

Please leave any other ideas that you have to address this issue. I've seen a number of posts and wanted to leave my own thoughts because it is something about which I feel very strongly.

LET'S KEEP THOSE PHONES RINGING!!!

My next post will address different telephone policies when you answer the phone and when you return a phone call or email.

IF YOU THINK THE AR COMMUNITY WOULD BENEFIT FROM THIS POST, PLEASE NOMINATE IT AS A FEATURED POST BY CLICKING HERE.

Lisa A. Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www.apiexchange.com

Clicking on the Picture Below will take you to Asset Preservation,Inc.'s website.

1031 Exchanges - Thinking About Investing In Real Estate With Other People? Read this First!

Fri, 16 May 2008 14:27:00 -0500

Partnerships V. Co-Ownership

Many investors consider asking other investors to join them in the purchase of an investment property. This arrangement can be very beneficial because it gives the parties the opportunity to invest in property they may not have been able to afford on their own and it spreads the risks and costs out.

They are a couple things to consider when contemplating a co-investing arrangement. Are you going to be a true partnership or are you going to be co-owners. This seems like a relatively minor distinction until you look at the big picture.

Partnerships

Remember, that partners are jointly and severally liable for the debts and obligations of the partnership. That means that you may be liable for the actions (like encumbering the property) of your partner even if you weren't consulted (for the attorneys reading this post, I am greatly simplifying the explanation for our target audience, investors, real estate agents and lenders). The laws regarding partnerships vary from state to state.

They are tax consequences as a partnership as well (usually beneficial). The profits and losses of the partnership "pass through" to the individual partners. Usually partners will file a K-1 partnership return where they would show the property as an asset and any profits and losses associated with it.

For 1031 purposes and other tax purposes, LLCs are treated similarly to Partnerships. There are added liability protections for the members of LLCs than are available for Partnerships

1031s and Partnerships

When a partnership sells investment property then the partnership is the taxpayer doing the exchange. The partnership will have to acquire the replacement property(ies) as the partnership (the partners are stuck buying together). Also, if the partnership is trying to attract more investors to their property they will not be able to sell a partnership interest to a potential investor who is using 1031 exchange proceeds because a partnership interest does not qualify as investments property under section 1031. Partnership interests are personal property. However, they could sell a tenant-in-common interest in the underlying property to a potential investor.

As you can see, owning property in partnerships can be complicated and messy. If you choose to do so, please, please, please get legal advice regarding the partnership agreement to avoid headaches down the road. Make sure you plan an exit strategy and make sure everyone is on the "same page" regarding any subsequent 1031 exchanges.

Alternative to Partnerships - Co-Ownership

Instead of investing as partners, it may be advisable to invest as co-owners to preserve each investor's right to do what he/she wants upon dissolution (cash out or 1031 exchange their interest). In that case each investor will have a Tenant-In-Common (TIC) interest in the property and upon disposition they will have the freedom to either cash out individually or engage in their individual 1031 excange.

Individual co-owners may also want to investigate creating their own LLC to hold title to the co-ownership interest.

If you choose co-ownership, you should still seek legal counsel prior to acquiring the property, to:

Draft a co-ownership/TIC agreement tailored to that properties specific attributes:

The co-ownership agreement roughly provides:

Clarification of no partnership and necessary provisions included to comport with IRC 1031;

Expense responsibilities (maintenance, prop tax);

Voluntary transfer and encumbrance provisions;

Involuntary transfer provisions (death, divorce, insolvency of a TIC);

Management responsibilities.

A memorandum of the agreement may need to be recorded.

Grant deed needs to be reviewed or prepared when they take title.

There are generally several communications required with the co-owner to clarify the inter-relationship of the owners and task responsibility as well as with each co-owners CPA and QI.

The cost for these types of agreements in the California Central Valley is about $3,000 per property to complete.

THIS INFORMATION IS PROVIDED FOR INFORMATIONAL AND EDUCATIONAL PURPOSES ONLY. IT IS NOT TAX AND/OR LEGAL ADVICE. INDIVIDUALS ARE STRONGLY ENCOURAGED TO SEEK GUIDANCE AND ADVICE FROM THEIR INDIVIDUAL TAX AND LEGAL ADVISORS.

Lisa A. Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www.apiexchange.com

1031 Exchanges - Can You Convert A Rental Into A Residence?

Fri, 16 May 2008 00:59:32 -0500

"MANY TAXPAYERS CAN TAKE ADVANTAGE
OF TWO TAX CODE SECTIONS"

After the Q & A, I thought I write a summary of the current state of rentals and residences and converting them. Here are some of the issues to review with the tax advisor when considering converting an investment property to a primary residence. It's very important to review these issues, especially, if the property was purchased as replacement property in a 1031 exchange. Click here for a real life question and answer regarding converting a rental to a residence.

Some taxpayers take advantage of exchanges and the tax deferral available under IRC §1031 and later convert their former rental house to a principal residence to qualify for the tax exclusion available under IRC §121.

HOW LONG TO RENT THE §1031 PROPERTY?

Section 1031 of the tax code does not provide a defined "holding period" for investment properties. The time period the property is held is only one factor the IRS may look at to determine the taxpayer's intent to hold for investment. The IRS can examine all the other facts and circumstances that may or may not support the intent to hold for investment.

Some legal and tax advisors recommend that a taxpayer hold a §1031 exchange property for a minimum of at least twelve months. The reason for this is that a holding period of 12 or more months results in the taxpayer reflecting the property as an investment property in two tax filing years. Another perspective is holding the §1031 exchange property for at least two years. In one Private Letter Ruling (PLR 8429039), the IRS stated that a minimum holding period of two years was sufficient. Many legal and tax advisors who believe two years is a conservative holding period, provided no other significant factors to contradict the investment intent.

IRC §121 - PRINCIPAL RESIDENCE EXCLUSION

Exclusion of up to $250,000 of the capital gain on a principal residence for a single taxpayer and $500,000 for a married couple filing jointly.

The taxpayer must own and use the home as a principal residence 2 of the 5 years prior to the sale.

§1031 AND §121: 5 YEAR HOLDING PERIOD

All principal residence sales occurring after October 22, 2004 are subject to a five year holding period if the principal residence was originally acquired through a tax deferred exchange. Investors who previously acquired their current residence through a §1031 exchange within the past three years will have to wait at least two more years before selling their residence to exclude the gain.

Under this provision, an Exchanger who performs an IRC §1031 tax deferred exchange into a rental house as replacement property and later converts the rental house into the Exchanger's principal residence, is not allowed to exclude gain under the principal residence exclusion rules of IRC §121 unless the sale occurs at least five years after the closing date of the replacement property acquisition.

COST RECOVERY/DEPRECIATION

Capital gain taxes must be paid on the cost recovery ("depreciation") taken after May 6, 1997 (at 25%), but may exclude additional gain on the principal residence, up to the maximum amounts allowed by §121.

This information is provided for educational purposes only. It should not be construed as tax and/or legal advice. Individuals should consult their personal tax and legal advisors regarding the specific circumstances of their individual exchanges.

Lisa A. Lambert, Esq (877) 646-1031 or email me at LisaL@apiexchange.com

Asset Preservation, Inc. (800) 282-1031 or info@apiexchange.com http://www.apiexchange.com/.

1031 Exhanges - REAL LIFE Q & A - RE: How Long Before I Can Move In?

Fri, 16 May 2008 00:48:25 -0500

REAL LIFE QUESTION AND ANSWERS

Today, I received a question from a reader of my blog. It is a very common question, so I thought I'd give you both the actual question and my answer. All identifying information has been removed. Click here for more formal information regarding converting a rental to a residence.

Dear Lisa:

After reading your column a question has come up no one seems to know the answer to.

We made a 1031 exchange from rental for rental . do you know how long we must rent it out for before we can move into it as a principle residence? So far it has been 14 months.

Much appreciate your opinion here.

My Response to the Question is Below:

Dear Client:

The answer below is general and cannot substitute for the guidance of your individual tax advisor. It does not constitute tax or legal advice. You are strongly encouraged to seek the advice of your own tax advisor prior to making a decision.

Here's My Answer:

The reason that no one can give you a specific time frame is because until recently, the IRS has not given any specific guidance regarding how time affects whether the property will qualify as investment property under section 1031. The main guidance has been that the taxpayer must substantiate that he/she intended to hold the property for "productive use in a trade or business or for investment." Time is only one of the factors in determining intent. Different tax advisors have interpreted the time factor in different ways depending on how aggressive their approach.

Many tax advisors are recommending a full 24 months of investment use prior to converting the property to personal use. This approach seems to be supported by the recent Revenue Procedure 2008-16 regarding vacation homes, which requires a full 24 months of investment use with very limited personal use (14 days per 12 month period or 10% of the time it was rented).

You have a couple factors supporting your investment intent: 1) your relinquished property was a rental; 2) your replacement property is a rental (although, you do not mention whether it is currently rented), the more rental history and rental income you report the better you will be able to substantiate your investment intent.

Your tax advisor should have been instructed to put the current rental property on a depreciation schedule (and take it off when you convert it to personal use), so there is a clear demarcation of converting its use.

Be aware that if you want to eventually sell this property as your primary residence and qualify for the section 121 exclusion ($250K for single or $500K for married filing jointly) you will need to live in it for two out of the last five years AND you will need to have OWNED it for a total of FIVE YEARS before qualifying for the exclusion.

I hope this answer was helpful in giving you some information about the subject. Please discuss this issue with your personal tax advisor because they will be able to review all aspects of your tax situation to make sure that all contingencies are covered.

Please feel free to send me any questions you may have regarding 1031 exchanges. If you have the question, most likely many others have the same question and would appreciate the information.

Lisa A. Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www.apiexchange.com

PHISHING SCAM ALERT RE: IRS ECONOMIC STIMULUS REBATE

Thu, 15 May 2008 10:50:09 -0500

Please Alert Your Clients to This Email/Phone Scam

Last night I posted a version of this to get the word out fast but there were very few AR'ers online. I received the email below yesterday purporting to be from the IRS regarding how to collectmy IRS Economic Stimulus Rebate. IT IS A SCAM. Note that the link listed does not even include www.irs.gov. I apologize for the poor resolution of the screen shot. (I'm still learning how to efficiently insert screen shots into my blog) Please feel free to leave me any tips.

I'm not re-posting this for the points but simply to get the information out to as many people as possible. It poses a real danger to vulnerable members of our communities.

Below is what the IRS has to say about this scam (I excerpted the relevant information from the IRS website but there were several variations on this scam that the IRS outlines on the website):

"IRS Warns of New E-Mail and Telephone Scams Using the IRS Name; Advance Payment Scams Starting

Updated April 21, 2008

Some people have received phone calls about the economic stimulus payments, in which the caller impersonates an IRS employee. The caller asks the taxpayer for their Social Security and bank account numbers, claiming that the IRS needs the information to complete the processing of the taxayer's payment. In reality, the IRS uses the information contained on the taxpayer's tax return to process stimulus payments, rather than contacting taxpayers by phone or e-mail.
An e-mail claiming to come from the IRS about the "2008 Economic Stimulus Refund" tells recipients to click on a link to fill out a form, apparently for direct deposit of the payment into their bank account. This appears to be an identity theft scheme to obtain recipients' personal and financial information so the scammers can clean out their victims' financial accounts. In reality, taxpayers do not have to fill out a separate form to get a stimulus payment or have it directly deposited; all they had to do was file a tax return and provide direct deposit information on the return."

I excerpted the relevant information from the IRS website but there were several variations on this scam that the IRS outlines on the website.

Our elderly and less tech savvy clients are particularly susceptible to these types of scams. This is an attempt to PHISH for identity theft purposes. I am going to be forwarding this email to all of my CPA, financial advisor and real estate agents and clients and referral sources, so that they can alert their clients.

Please feel free to email me for a copy of the email if you would like to forward it as an educational resource to your contacts and clients.

UPDATE 5.15.08 Afternoon: While I was cleaning out my junk mail, I found two other variations of this email. The scammers are out in force. Ironically, they both claimed that I was owed a measly $109.30.

PHONE/EMAIL SCAM RE: IRS Economic Stimulus

Thu, 15 May 2008 00:26:12 -0500

Please Alert Your Clients to This Scam

I received this email today purporting to be from the IRS regarding collecting my IRS Economic Stimulus Rebate. It is a scam. Note that the link listed does not even include www.irs.gov. I apologize for the poor resolution of the screen shot. (I'm still learning how to efficiently insert screen shots into my blog) Please feel free to leave me any tips.

Below is what the IRS has to say about this scam (I excerpted the relevant information from the IRS website but there were several variations on this scam that the IRS outlines on the website):

"IRS Warns of New E-Mail and Telephone Scams Using the IRS Name; Advance Payment Scams Starting

Updated April 21, 2008

Some people have received phone calls about the economic stimulus payments, in which the caller impersonates an IRS employee. The caller asks the taxpayer for their Social Security and bank account numbers, claiming that the IRS needs the information to complete the processing of the taxayer's payment. In reality, the IRS uses the information contained on the taxpayer's tax return to process stimulus payments, rather than contacting taxpayers by phone or e-mail.
An e-mail claiming to come from the IRS about the "2008 Economic Stimulus Refund" tells recipients to click on a link to fill out a form, apparently for direct deposit of the payment into their bank account. This appears to be an identity theft scheme to obtain recipients' personal and financial information so the scammers can clean out their victims' financial accounts. In reality, taxpayers do not have to fill out a separate form to get a stimulus payment or have it directly deposited; all they had to do was file a tax return and provide direct deposit information on the return."

I excerpted the relevant information from the IRS website but there were several variations on this scam that the IRS outlines on the website.

Please feel free to email me for a copy of the email if you would like to forward it as an educational resource to your contacts and clients.

UPDATE 5.15.08 Afternoon: Cleaning out my junk mail I found two other versions of this email. The scammers are out in force. Ironically, they were saying that I was owed a measly $109.30.

1031 Exchanges - Earthquake Preparedness

Sat, 10 May 2008 23:05:29 -0500

U.S. Geological Service Issues Report on California

They reported that there is a 99% chance that California will experience a 6.0+ earthquake in the next 30 years. Southern California's has a slightly higher chance for a large scale earthquake than northern California.

What that means is that every family needs to have a "plan." That plan should include contingencies for communicating their status (arrange for someone out of state to be your contact person). It's critical that each person have an emergency kit in their car that includes comfortable walking shoes, water, flashlight, batteries,thermal blanket, jacket, first aid kit and snacks that have a long shelf life (like Cliff bars).

You should also have a more elaborate kit at home that will sustain you and your family for at least seven days. There are many sites that have lists of supplies, etc.

Here's one that seems to be pretty thorough. http://www.quakekare.com/emergency-preparedness/earthquake-preparedness.html

FYI: Central California is looking like one of the safer places to be during a major earthquake. Consider investing in Central California and the Central Valley.

Fresno Association of Realtors Golf Tournament

Sat, 10 May 2008 22:54:27 -0500

Last Wednesday - Great Tournament

A full complement of golfers took to the links at Riverbend Golf Course to participate in the Annual FAR Golf Tournament. Many affiliates developed creative themes for the holes they sponsored. Asset Preservation, Inc. sponsored Hole Number 12, where we served Montana Amazon drinks and salami and cheese.

We wanted to offer something different from the usual fare of candy and other sweet goodies. The tournament proceeded smooth without any big gaps between the teams.

The Tournament was followed by a lively lunch and raffle. All in all, everyone had a great time.

1031 Exchanges - LLCs & Partnerships

Sat, 10 May 2008 22:41:42 -0500

It's Important Who Drafts the Operating Agreement and Partnership Agreement

Recently, I was called by a former client who was concerned because he was the managing member of an LLC that had done a multiple property exchange. One of the other members, an attorney, had drafted the LLC's Operating Agreement (the document the defines the repsonsibilities of the members and who has the authority to bind the LLC). The attorney member had purchased authorized the release of funds for the purchase of Property A (the managing member was not aware of this purchase until after it had been completed). Subsequently, the attorney member encumbered the property and added an additional owner to the title. The property is now in foreclosure.

The managing member called me to find out how this could have happened so that it could be prevented from happening again.

My suggestion to him was that he have an outside attorney review the Operating Agreement to make sure that it reflected the intent of all of the members. They had counted on the attorney member to draft a document that protected all of the members of the LLC but apparently he did not discuss that he had a conflict of interest.

Moral of the Story: Don't try to cut corners by eliminating the critical step of having the Operating Agreement reviewed by an uninterested third party, especially when one of the members drafted it, to make sure it reflects the intent of all of the members.

The above is also true when a partnership is involved because the Partnership Agreement and the Operating Agreement of an LLC outlines responsibilities and dictates who is authorized to act on behalf of the entity.

THIS INFORMATION IS PROVIDED FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY. THIS IS NOT TAX/LEGAL ADVICE. INDIVIDUALS ARE STRONGLY ENCOURAGED TO HAVE THEIR SITUATION REVIEWED BY THEIR OWN TAX/LEGAL COUNSEL.

1031 Exchange - Like Kind Property - REWIND

Tue, 06 May 2008 14:12:38 -0500

A Quick Review of the Most Commonly Misunderstood Aspect of 1031 Exchanges

Yesterday, we examined some more advanced aspects of 1031 exchanges that addressed like kind property issues. I thought it would be helpful to do a quick review on one of the most confusing areas of 1031s.

One of the most commonly misunderstood aspects of 1031 exchanges is the concept of Like Kind Property. People commonly think that if they sell a duplex only a duplex will be like kind in their exchange. That couldn't be farther from the truth.

The definition under the tax code of like kind property is "property held for productive use in a trade or business OR for investment." [emphasis mine] The key here is the investor's intent. Did the investor intend to hold the property for investment purposes (NOT RESALE)?

So under this definition, you could SELL single family residences

and BUY bare land

Or, you could sell bare land and buy commercial property. . .

It all has to do with how the investor treats the property prior to sale (Relinquished Property) and after purchase (Replacment Property). It must be held for investment.

This allows an investor to diversify his real estate portfolio for prudent investing. The 1031 exchange process allows the investor to defer the capital gain tax due on the sale of the appreciated property and use the deferred tax as additional equity in a new and possibly more valuable property.

Regardless of what you sell or buy, it is critical that you choose an experienced Qualified Intermediary that has an established track record for safe and secure exchanges. Asset Preservation,Inc. has performed over 130,000 secure exchanges since 1990. Our experience, customer service, security and knowledge are unsurpassed. Call us today!

THIS INFORMATION IS PROVIDED FOR EDUCAITONAL AND INFORMATIONAL PURPOSES ONLY. THIS IS NOT TAX/LEGAL ADVICE. INVESTORS ARE STRONGLY ADVISED TO SEEK THE GUIDANCE OF THEIR INDIVIDUAL TAX/LEGAL ADVISORS REGARDING THE SPECIFIC FACTS AND CIRCUMSTANCES OF THEIR TRANSACTION.

Lisa A. Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www.apiexchange.com

1031 Exchanges - Don't Miss These Posts On Development Rights

Mon, 05 May 2008 16:07:31 -0500

Exchanging Development Rights

I posted these during a low traffic period this morning. I've been checking on the stats and it looks like they were largely missed. Click here for Post 1 of 2 "Definition of Development Rights" and click here for Post 2 of 2 for the "IRS's Analysis of Transferable Development Rights."

If you are working with clients who own large tracts of land, these posts will be very helpful for you.

Lisa A. Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www.apiexchange.com