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Category Archive: ‘Real Estate Investing’

1031 Exchange

Image result for 1031 exchange

I appreciate the analytical, business-like aspect of the 1031 exchange, and try to do a couple every year just to keep my chops up.  I’d love to do more exchanges because sellers of investment properties have to re-invest to avoid capital-gain taxes.  But it’s rare that you can find new properties locally that are a good enough buy to make it worth the trade.

But for those who can – here is a good article on the basics of the 1031 tax-deferred exchange, plus three extra points worth noting:

LINK to 1031 exchange article

The excerpt:

While you will always want professional guidance when doing this kind of swap, there are three things to have in mind from the start:

  • Be aware of “passive liability.” In other words, if you have a $1 million mortgage, do a swap and acquire a property with a mortgage of $900,000, you have “gained” $100,000 in the eyes of the taxman. If you are buying and selling large investment properties, these gains can add up quickly.
  • To “exchange” a vacation or second home, that home must be an investment property. If you are planning to swap a vacation home, you need to make the case that it is an active investment. Usually that means being able to show paying tenants for at least a year. To ensure that you do not swap an investment property for a primary residence, a 2008 IRS ruling created a “safe harbor” for dwellings in a 1031 exchange. To meet the safe harbor rule, in each of two years immediately following the exchange, the home must be rented to another person for 14 days or more, and you may not use the home for more than 14 days (or 10 percent of the total number of days the home is rented in a 12-month period).
  • An exchanged vacation home cannot become a primary residence for purposes of taking advantage of the principle residence exclusion. Property acquired in a 1031 exchange is subject to a five-year-period of exclusion from the principal residence capital gains tax benefit.

Link to full article

Posted by on Jul 30, 2015 in Jim's Take on the Market, Real Estate Investing, Realtor Training | 0 comments

Seniors Renting

old guy renting

From Bloomberg:

http://www.bloomberg.com/news/articles/2015-07-21/boomers-competing-with-millennials-for-u-s-urban-rental-housing

Mike Abelson calls it his “man cave.”

After his wife passed away, the 65-year-old sold his house and began renting a 1,400-square foot apartment eight miles away in Bethesda, Maryland. The trial attorney now uses his downtime to enjoy warm summer evenings on his terrace.

“I pay a pretty steep rent, but it’s worth it,” Abelson said. “I don’t pay property taxes, I don’t pay for maintenance, plumbing or electrical. I don’t have to pay for the grass cutting. It’s just easier than being a homeowner.”

The number of renters who are 65 or older will reach 12.2 million by 2030, more than double the level in 2010, according to research by the Urban Institute in Washington. While the millennial generation born after 1980 has driven demand for apartments in recent years, baby boomers — those born from 1946 to 1964 — will be the next wave, pushing up rents and spurring construction of more multifamily housing.

Real estate developers such as Bozzuto Group, Abelson’s management company, and Alliance Residential Company are building projects where multiple generations can coexist. Should the supply of rental properties fail to keep up, however, younger people will be competing for housing with the burgeoning population of older Americans.

“It’s a combination of their sheer size and that they’re entering the age range where they increasingly downsize,” Jordan Rappaport, a senior economist at the Federal Reserve Bank of Kansas City, who has also studied the subject, said in a telephone interview. As a result, “it will put upward pressure on rents for all types” of multifamily homes, he said.

Read full article here:

http://www.bloomberg.com/news/articles/2015-07-21/boomers-competing-with-millennials-for-u-s-urban-rental-housing

Posted by on Jul 24, 2015 in Jim's Take on the Market, Real Estate Investing, The Future | 3 comments

Capital-Gains Tax on Real Estate

tax

Last night we heard a proposal to raise the capital-gains tax.  Can we cut to the chase and dive into reforming the tax code instead?

I don’t want to get into the politics of it, let’s leave that for other bloggers.  Everyone can agree that some sort of tax reform is wanted and needed – and hopefully somebody will pull it off someday.

Realtors hear about it all the time, especially from the long-time owners of rental properties.  The thought of paying a huge tax bill makes them immediately dismiss the idea of selling, because they know if their leave it to their heirs, the stepped-up basis will apply.

We shouldn’t have a tax code that influences real estate decisions. Tax reform should include a neutral stance on when you sell real estate – it should be taxed the same, whether you are dead or alive.

What about the MID, the mortgage-interest deduction?  Let’s get rid of that too, and create a pure marketplace where people buy homes to live in, and raise a family, and not because they get a tax break.

If you have any other reason to buy a house – investment, etc. – then great, but tax benefits shouldn’t be one of those motivators, because they won’t apply to all citizens.

‘Oh Jim, now you’re asking for it. The NAR is going to punch your ticket and throw you out of the club for that kind of crazy talk.’

Yeah?  The National Association of Realtors needs to play a bigger game.  The millions they spend on lobbying could help champion tax reform, instead of sounding like a broken record on the MID.

Here are two articles discussing the topic:

1.  This guys says that something has to give:

http://www.forbes.com/sites/anthonynitti/2015/01/20/why-republicans-should-embrace-a-28-tax-on-capital-gains/

2.  This guy points out how small the MID benefit really is:

http://www.latimes.com/business/hiltzik/la-fi-mh-capital-gains-20150119-column.html

Posted by on Jan 21, 2015 in Ideas/Solutions, Jim's Take on the Market, Real Estate Investing, This Is America | 8 comments

Vacation Rentals

short term rentals

The coastal markets are for the affluent, and the supply is shaping itself to the demand.  We are seeing wholesale changes in places like downtown Carlsbad, where the quaint older homes and businesses are being bulldozed for redevelopment, mostly for higher-end condos.

Another change is how Airbnb and VRBO.com has fueled a cottage industry of short-term rentals.  Properties that made no sense as monthly rentals are now catering to tourists and other short-termers to pick up more income.

There will be some turbulence along the way, but vacation rentals are here to stay.  There aren’t enough hotels to satisfy the demand (LINK), and if you don’t mind the additional hassles, the short-term rentals can be very lucrative.  Now a city councilman in Los Angeles thinks he needs to regulate it (H/T daytrip):

http://www.latimes.com/business/la-fi-regulating-short-term-home-rentals-20141202-story.html

An excerpt:

“Commercial ventures have purchased large numbers of rental units or even entire apartment buildings and converted them into de facto hotels, reducing and threatening the city’s stock of rental housing and affordable housing, and that is wrong,” Bonin said.

Posted by on Dec 3, 2014 in Jim's Take on the Market, Local Flavor, Real Estate Investing | 7 comments

Investors Going Further Out

Housing recovery pushes investors into more remote areas to find deals, with more looking to flip properties, C.A.R. survey finds

LOS ANGELES (Aug. 20) – Given the depletion of distressed homes on the market, investors are changing their strategy and are moving away from purchasing homes in more popular, urban areas in favor of more rural areas of the state where better deals can be found, according to a CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) investor survey.

In 2014, nearly half (45 percent) of investors said they purchased properties in such counties as Sacramento, San Joaquin, Fresno, Kern, Merced, and Tulare, up from 27 percent in 2013, C.A.R.’s “2014 Investor Survey” found.  Fifteen percent of investors purchased properties in Northern California in 2014, down from 27 percent in 2013, and 40 percent purchased properties in Southern California in 2014, down from 50 percent last year.

Additionally, with home prices on the rise, more investors are flipping properties instead of renting them.  In 2014, 28 percent of investors flipped the property, up from 20 percent last year. Fifty-eight percent of investors rented their properties in 2014, down from 73 percent in 2013.

More than eight out of 10 investors (83 percent) own other investment properties, with 7 percent owning more than 10 properties, 17 percent owning 6-10 properties, 47 percent owning 2-5 properties, and 12 percent owning one other property.

Among the reasons investors cited for buying now include profit potential (cited by 58 percent), good price (43 percent), location (26 percent), personal (21 percent), and low interest rates (14 percent).

The median sales price of an investment property in 2014 was $320,000, up 9.6 percent from $292,000 in 2013, reflecting increasing home prices and fewer available distressed properties over the past year.

Additional findings from C.A.R.’s “2014 Investor Survey” include:

• Reflecting the recovering housing market, the majority of investment properties purchased (70 percent) were equity sales, while 18 percent were short sales, and 12 percent were foreclosures. • More than two-thirds (67 percent) of investors paid cash • One-third of investors were foreign investors, with China, Mexico, Taiwan, and India being the top countries of origin. • While most investors made minor or no repairs to the properties, the percentage of those who did major remodeling nearly doubled from 9 percent in 2013 to 17 percent this year. • Investors spent more on remodeling costs in 2014, putting a median of $15,000 into the investment property, up 50 percent from $10,000 in 2013. • Investors own an average of 8.3 properties in 2014, up from 6.5 properties last year. • More than half of investors (55 percent) intend to keep the property less than six years.

California Investor Survey Slides (click links to open):

More investors are buying in remote areasMedian price of investment propertiesTwo-thirds of investors paid cashIntended use of property Top five reasons for buying

C.A.R.’s “2014 California Investor Survey” was conducted in May 2014 in an effort to learn more about the role of investors in the California housing market.  The survey was emailed to a random sample of REALTORS® throughout California who had worked with investors within the 12 months prior to May 2014.

For complete survey results, visit www.car.org/marketdata.

Leading the way…® in California real estate for more than 100 years, the CALIFORNIA ASSOCIATION OF REALTORS® (www.car.org) is one of the largest state trade organizations in the United States with 165,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.

Posted by on Aug 20, 2014 in Real Estate Investing | 2 comments

More Real Estate Crowdfunding

sharestates

Once crowdfunding for real estate catches on, we could see a whole new type of bubble – one that is less personal and investors can shrug off – From BI:

In the current environment of low interest rates, investors are scrambling for  yield, and many have turned to real estate.

Typically investors buy and flip homes, or they invest in real estate  investment trusts (REITs), which own different types of properties.

But Sharestates is offering both accredited investors and the public a real  estate crowdfunding platform that lets them dip as little as $100 into a  project. The idea is to bring real estate to the masses.

Read more:  http://www.businessinsider.com/sharestates-the-e-trade-of-real-estate-2014-8

This is the company they featured:

https://www.sharestates.com/

Posted by on Aug 9, 2014 in Real Estate Investing | 4 comments