Tax-Deferred Exchanges…Just the Basics

Exchange of Property: The transaction must be structured as an exchange, rather than as a sale and purchase.   A qualified intermediary should be involved with the sale of the relinquished property and acquisition of the replacement property.  The investor must sign an exchange agreement, assignment of the purchase contract, as well as other documentation before the relinquished property sells, and the intermediary must hold the proceeds until they are used the buy the replacement property.  As long as the appropriate documentation is signed, the intermediary does not need to take title to the property.

Like-Kind Requirement: The like-kind requirement is fairly broad for real property exchanges.  Basically any real property held for investment qualifies as like-kind.  Vacant land can be exhanged for an office building; a single family rental home can be exchanged for an office building and so on.

Same Taxpayer Rule: The same taxpayer selling the relinquished property must purchase the replacement.

Deferring All Tax: The property the investor is purchasing must be equal or greater in value, equity and debt, but the debt can be replaced with cash.

Timing and Identification: The investor has 45 days from the closing of the relinquished property to identify the replacement property.  The investor can only acquire property which has been properly identified during the 45-day identification period.  If an investor wants to identify more than one replacement, there are several options:  The Three Property Rule: The investor may identify up to three properties without regard to their fair market value; The 200% Rule: The investor may identify any number of properties so long as the total fair market value of all of the listed properties does not exceed 200% of the value of the relinquished property.

Once escrow closes on the relinquished property, the investor has the lesser of 180 days from the date of closing or the date on which the investor’s tax return for the year the relinquished property was sold is due, to close the purchase transaction and complete the exchange.  For exchanges closing in the final quarter of the year, the taxpayer will need to get an extension to file his tax return to get the full 180 days.

I have completed a tax-deferred exchange for my own investment properties.  We sold a four-unit apartment house and purchased a condominium.  The condo needed deck repairs and the seller was going to credit us with $10,000 at close of escrow.  I contacted the intermediary and was told that that $10,000 could be construed as “boot,” which is not allowed in an exchange.  We arranged for a price reduction in that amount, so we were able to complete the exchange.  One of my clients was asked to carry a 2nd trust deed on the relinquished property and was told by his accountant that the note could be considered boot as well.  It is critical to keep in mind that the investor cannot receive any cash (boot) from the exchange.

Be sure to check with your tax advisor before entering into an exchange of investment property and I highly recommend that you use an intermediary.

Home Sales Are Rallying in the Palos Verdes Cities

For the last couple of months I have been searching for the very best homes to show out-of-state buyers.  Because their trip to California has been delayed, I have to keep adding homes to the list because so many of those that I have found have sold.  This is really good news for Palos Verdes area homeowners who have been waiting for the market to turn around before selling.   A home recently listed in Malaga Cove had nine offers and sold for $200,000 over the asking price!  Our inventory of homes for sale is approximately 40% of the inventory of homes on the market last year and demand is exceeding the supply.

It is still important to price your home as accurately as possible, to cooperate with agents wanting to show your home and to spruce up your property so those buyers will fall in love with it as soon as they walk in the front door.  Contact me for a free market evaluation of your home.

Home Seller Pitfalls to Avoid

Six years after the market peaked in 2006 and prices started to decline, many sellers are still in denial about the current market value of their homes.  It is difficult for most sellers to accept the reality of today’s home-sale market, whether they bought at or near the peak and will lose money selling today, or bought decades ago but are still stuck at 2006 prices.  One homeowner recently remarked that she was aware that home prices had dropped quite a bit over the last five years, but she felt that her home had not lost any value.

It is hard for homeowners to divorce themselves emotionally from a home they have enjoyed.  This is what sellers need to do so they can make rational decisions about a list price that will actually result in a sale.  This decision should be based on listings that have sold in your area that are considered comparable to your home.  Some sellers go to open houses to evaluate the competition.  If you are still emotionally wrapped up in your home, the exercise can be futile.  You return home feeling that the other homes are not as good as yours.

Put yourself in the buyer’s shoes.  Your house needs to be listed at a price that is enticing to buyers because it represents a good value.  In most areas, buyers are buying ibn a market knowing prices may continue to decline before the market fully recovers.

House Selling Tip: Be wary of real estate agents who tell you that your home will sell for a higher-than-supportable price just to get the listing.  Then they work on you over time until you reduce the price to market value.  Agents refer to this as buying a listing.

Its hard to resist the temptation of trying for a higher price than the comparables indicate.  However, you will not be happy if your home is on the market for months with no activity, and each time you drop the price it feels like too little, too late.  You can end up selling for less later if home prices in your area are still declining.

Listing your home based on what you want or or need to net from the sale will not motivate buyers to pay more.  Buyers pay market value.  They will not overpay in today’s market.

If your home needs a lot of work compared with the competition, you will either need to have work done before selling or discount your price accordingly.

For best results, be realistic about the current market value of your home and what preparation it needs in order to sell successfully in this market.

Understanding Short Sales

A short sale is a sale of a home that is worth less than the mortgage owed.   Because these properties are often listed at a price lower than their values, you may be able to get a good deal, if you have a tremendous amount of patience.   The problem is that the only motivated people in the transaction are the agents and the buyer.  If you decide to make an offer on a short sale, it will generally be submitted by your agent to the seller for acceptance, subject to the short sale lender’s approval.  This can take months, so I tell the buyers, “This will take a lot of time, so don’t call me up, whining about it.”  There really is nothing you can do to speed up their decision.

It is very important to structure the purchase contract such that it gives the buyer an out of the contract if an acceptance is not obtained within a certain time-frame.  Also, it is best to have the different time-frames for inspections, putting the deposit into escrow, obtaining the loan, and so on begin at lender approval of the deal rather than at seller’s acceptance.  We have a very good short sale addendum that is required for every short sale transaction.

It is very important to have a short-sale property inspected by a professional home inspector.  Many times the upside-down seller has not maintained the property.  Very rarely will the short-sale lender agree to pay for any repairs, so it is a good idea to get a contractor’s bid to repair the items so you will know if  the cost is unaffordable.

The short-sale lender will come after the buyer and the agent for money.  One of my buyers said, “Tell them to go pound sand!”  The lender stopped asking him, but then they came after me for some the commission.  If there is more than one lender, the sale is even more tedious.  Unless the lender in first position comes out with what is expected, they will try to cut down on proceeds going to the junior lien holders.

Someone purchasing a short-sale property should just be prepared and patient and don’t get mad (they don’t care!) and a good agent comes in handy, too.

 

Beware of Unsecured Property Taxes

A couple of years ago I marketed a home in Palos Verdes Estates for a sister and brother who had inherited the property from their mother a year earlier.  After the escrow closed, my clients phoned me to say they had received a bill for “unsecured property taxes” in the amount of $4400.  After some investigation (because I had never heard of unsecured property taxes), I discovered that when a person dies and the property is inherited, it is considered a transfer just as if the property were sold, and the property is reassessed as of the date of death of the decedent.  Because the property was sold a year after the death, my clients were charged with the difference between the property taxes owed before the death and the re-assessed value at death plus steep penalties for their being late.  Because the sales price was used as the basis for the value at death, that value was used for the unsecured property tax assessment.  My clients should have been excluded but an application for parent to child exclusion had not been submitted to the Tax Assessor.

This parent/child or grandparent/grandchild exclusion must be filed within three years after death/transfer, put prior to the date of transfer to a third party, or within six months after mailing of a Notice of Assessed Value Change, issued as a result of the transfer of property for which the claim is filed.  An application may be obtained by calling 213-893-1239.  This information was obtained from the Los Angeles Tax Assessor web site:  www.assessor.lacounty.gov.

 

Probate Sales in California

The probate process is a court-approved process that is designed to sort out the transfer of a person’s property at death.  I have been involved with several sales of properties in probate, as the listing agent or the selling agent or both.  Probate sales are different from regular sales in that once an offer has been accepted by the administrator or executor of the estate, the sale has to be approved by the court, unless full authority to administer the estate has been granted unter the Independent Administration of Estates Act (IAEA).  It has been my experience that IAEA probate properties are easier and faster to market, as some buyers and agents are intimidated by the court-approved sales process, often because they do not want to fall in love with a home, just to be out-bid in court and also because they have not really bought the property until it is approved by the court.

Some tips for selling probate properties:  There may be a lot of personal property that was left by the decedent and the problem of removing furniture, etc., can be burdensome.  The last listing I sold was filled with old computers, old furniture and old CDs and DVDs.  The heirs should carefully go through the property and set aside items that are precious, such as family photos and other memorabilia.  There are companies that can remove the other unwanted items.  A property in probate is listed just like any other with the asking price based on recent sales in the neighborhood.  Where court approval is required, the price may be more attractive because the process is more lengthy and complicated cialis vente internet.  Once an offer is accepted by the personal representative, the attorney for the estate will set a court date, which is probably at least a month out.  During this waiting time, notices about the court date are placed in the local newspapers to attract additional offerers.  There is a statutory formula for the first overbid.  It is an additional amount equal to 10% or more of the first $10,000 and 5% on the amount of the original bid in excess of $10,000.  If the court receives an acceptable overbid, the court will ask for additional overbids.  The judge will usually establish minimum increments as to the additional overbids.  All overbids will be taken into account based on the gross amount of the bid. .  If you are a prospective bidder on a probate listing, it might be advisable to set a limit on the amount you will pay, in case the price is bid up beyond the value of the property.  This is a simplification of the process, and only an attorney can give proper advice.