1031 – Identifying Replacement Properties

We’ve completed many regular and reverse 1031 exchanges, and it is critical to follow the IRS rules when identifying the replacement properties.

For a successful 1031 exchange, it is important to understand and comply with the 1031 exchange identification rules.  These rules are not that complicated, but a failure to follow the rules may ruin your exchange.

Here are the top ten things to remember when identifying replacement property in an exchange:

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Rental Property & Returning the Deposit

Speaking of the joys of being a landlord, here is the C.A.R. summary of how to handle the security deposit:

California law allows a property owner/landlord/property manager (housing provider) to collect from a residential tenant a security deposit before the tenant takes possession. The amount of the security can be equal to two-months’ rent for an unfurnished dwelling, and three-months’ rent for a furnished unit.

At the end of the tenancy, the housing provider can use the security deposit (i) to recover the cost of repairing damage to the premises, exclusive or ordinary wear and tear, and (ii) for cleaning necessary to return the premises to the same level of cleanliness it was in at the beginning of the tenancy. The tenant is entitled to an itemized statement of the use of the security deposit within 21 days of vacating the premises. The best way to determine if the security deposit is being used for a proper purpose is to document the condition of the property at both the beginning and end of the tenancy.

Many standard form leases contain a provision similar to paragraph 10 in the C.A.R. Residential Lease or Month-to-Month Rental Agreement (C.A.R. Form LR) to address the condition of the premises.

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Big Money Moving In

NEW YORK, July 29 (Reuters) – Beset by COVID-19 and its fallout, local landlords are offloading their properties to cash-rich institutional investors, and America’s real-estate market may never be the same.

Before the pandemic, boyhood friends Michael Murano and Richard Tyson owned 96 rental units in their hometown of Rochester, New York. They offered accommodation to low-income tenants, many in the service industry, from rooming houses to single-family starter homes.

Today, they’re well on their way to liquidating the entire portfolio. Two-thirds of the units are already gone. The buyers? Large investors with all-cash offers.

“It broke my heart to sell 15 single-family homes to just one, out-of-state big corporate investor,” said Tyson, a 38-year-old U.S. Navy veteran.

“The last thing we need is to be exporting wealth out of this community, and limiting wealth creation here. But I knew we had to get the hell out of affordable housing – fast – because this was going to be a tidal wave coming at us.”

Many of America’s landlords have gone a year and a half without being paid by tenants, who’ve been protected by several state and local eviction moratoria as well as an umbrella federal ban enacted 11 months ago.

The owners have been waiting for $46 billion to help them survive without that income. The funds were approved by Congress months ago, but bureaucracy creaks; only $3 billion has reached them so far, according to U.S. Treasury Department data.

Now the eviction ban is about to end – on Saturday. Yet thousands of local landlords have already quit the business. And a growing number, like Tyson and Murano, are on their way out.

Taking their place: institutional investors, broadly defined in the industry as firms owning more than 1,000 units.

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Renting Out Your Home

A few ways to generate some extra dough with your home. Seen in the lat:

You can earn semi-passive income by renting out all or part of your personal residence.

Let’s say you list your house to rent while you take a two-week vacation. If you list on Airbnb or VRBO, you can charge a nightly rate plus a cleaning fee. Airbnb will deduct a commission to compensate itself for advertising your rental and collecting payment. If you rent out your house for $250 a night after Airbnb costs, that’s $3,500.  This is semi-passive income since there is a bit of work involved. You need to take photos of your home, list it on a website, respond to potential renters and arrange to have housekeepers do the cleaning. All told, that’s likely to take an hour or two per rental.

And you can rent to movie producers and event planners through Giggster, Peerspace and Splacer, among others. These sites encourage you to charge by the hour, which can enable you to earn four to five times what you’d get with Airbnb or VRBO. But there are unique risks with having movie productions and events at your home. Be sure to collect a deposit for potential damage and consult your insurance agent.

If you don’t want to rent out your house but are OK with letting people use your swimming pool, you can sign up with Swimply. The same cautions apply.

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Partial Ownership

Here’s a local sample of the new whiz-bang partial ownership craze.

The spec builder tried to sell this for three years before taking this $8.25M cash deal.  The same seller/Compass agent has the listing now, on behalf of the new owners:

ABOUT THIS HOME

This is multi-tasking, La Jolla style: Catch the perfect sunset as you splash in the ocean waves or sip a cool drink in the rooftop saltwater pool. The surf breaks just steps from this 3-bedroom, 4½ bath custom home.

Everything is designed to make the most of the Pacific views. Vanishing window walls transform indoor spaces into open-air living at its finest. The open plan living space has a gas fireplace and a sleek kitchen with a curved island and a space for formal dining.

Exotic materials and touchable textures are used throughout the home, including a back-lit Brazilian granite steam room.

The master suite has a luxurious ensuite with double sinks, soaking tub and walk-in shower. A vanishing window wall opens to a private balcony and stunning ocean views.

Enjoy the rooftop infinity pool area with its 8-person spa and adjoining lounge area with wet bar. Restock the bar from the home’s wine room. And when you’re ready to leave this Pacific paradise, there’s a hydraulic driveway and a turntable garage floor that ensures you always leave facing the ocean.

The home comes turnkey, fully furnished and professionally decorated.

https://www.pacaso.com/listings/6653-neptune-pl-la-jolla-ca

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Pacaso NIMBYs

The fight between the NIMBYs and AirBnb/VRBO/Pacaso homes is only beginning…..

Pattie Dullea stepped out one morning last month in Napa, Calif., to have a word with the young man who pulled up in an antique sports car to tour the home across the street.

“You might not want to buy there,” she said she told the man, who was there to consider investing in the home. “We don’t want our neighborhood to turn into a timeshare neighborhood. And we are going to do everything in our power to make that not happen.”

Such scenes are becoming more common in California wine-country towns where a real estate startup called Pacaso is snapping up million-dollar homes, then selling ownership shares to second-home searchers looking for weekend getaways.

The opposition to Pacaso in Napa is the latest attempt by homeowners to block real-estate companies from changing how homes in their neighborhoods are occupied or owned. Homeowners and local governments have for years fought the spread of short-term rentals made through platforms like Airbnb, and high demand during the pandemic for both vacation and primary residences has only intensified the conflicts.

Austin Allison, Pacaso chief executive and a Napa resident, said the local unpleasantness was misplaced outrage about the larger shortage of affordable housing in California. The company’s 14 homes in the region, which the company markets to up to eight partial owners each, are a drop in the bucket, he said. “This housing crisis is a big problem that’s way bigger than Pacaso,” he said.

Homeowners in the Napa Valley say their quiet residential cul-de-sacs are on the brink of becoming high-traffic party zones and no longer affordable to local families. Anti-Pacaso signs dot property lines. Groups opposing its presence have organized in several towns: In Napa, there is Communities Against Timeshares (Cats); in Sonoma, Sonomans Together Opposing Pacaso (Stop) is active; and in St. Helena, Neighborhoods Opposing Pacaso Encroachment (Nope).

The opponents can count early victories.

On Ms. Dullea’s street in Napa, Pacaso said this month it would no longer market shares in the house it bought there. The company cited community feedback in its decision to sell the house, which it will sell to a single owner. To calm concerns about reducing the stock of relatively affordable housing, the company also agreed to only buy homes priced above $2 million. And to help keep the peace, it has placed decibel limiters on stereo systems in its homes.

Napa Valley’s resistance could become a roadblock for Pacaso’s model, which relies on offering luxury-home stays inside traditional residential neighborhoods and away from typical vacation zones. The company so far has launched in 20 U.S. markets and has plans to expand to Europe.

Pacaso has accused some locals of trespassing and intimidation. One Pacaso executive filed a police report after someone responded to an online listing with the message, “I will burn down any home you buy in Napa,” according to a company spokesman. But the residents involved in protesting against Pacaso say that they don’t trespass or act aggressively.

“I think people need to just chill out and mind their own business,” said Will Maroun, a Pacaso customer in St. Helena who bought a one-eighth share in a house with backyard views of the vineyards. Mr. Maroun was hosting an outdoor dinner for four at 7 p.m. one evening when a neighbor called a noise complaint into the police, he said.

The police ordered him to turn off his music, but Mr. Maroun has continued to enjoy poolside tunes since. “They just haven’t called the cops.”

On Old Winery Court in Sonoma, residents of an eight-home cul-de-sac say Pacaso is the big problem. They are hoping to duplicate the victory won by Ms. Dullea and her neighbors in Napa. They are upset about the new house a former neighbor built, then sold to Pacaso this spring for $4 million. Now they worry their tightknit community will become overrun with part-timers coming and going to the house.

Every yard now has an anti-Pacaso sign, and some cars parked on the street have them, locals say. When a prospective buyer arrives to tour the property, residents alert each other and then step out of their houses, making their presence known, said Nancy Gardner and Carl Sherrill, retired homeowners opposing Pacaso.

“It’s nothing personal,” Mr. Sherrill said. “You might be the nicest people in the world. But we’re going to be angry. Because we’re angry at Pacaso.”

Link to WSJ Article

Everyone Is Doing It

While these purchases will only be a sliver of the five million homes sold every year, they could add up over decades and help to keep the supply of homes for sale somewhat limited.

New funding: Seattle startup Arrived Homes raised $10 million in equity and $27 million in debt financing to help scale its tech-infused real estate model that lets people invest in single-family rental homes for as little as $100. The company’s backers include the venture capital arms of Jeff Bezos (Bezos Expeditions) and Marc Benioff (Time Ventures); former Zillow Group CEO Spencer Rascoff; Uber CEO Dara Khosrowshahi, and other longtime tech execs.

The model: Arrived is a crowdfunding platform that allows anyone to purchase shares of rental properties and earn a passive income while the company handles everything from property acquisition to necessary improvements and management of daily operations.

The idea is to open up access to real estate investing beyond wealthy individuals and institutional investors, and use technology to help identify and manage rental properties. It’s a model used by companies such as Pacaso, another new startup which raised $75 million in March and splits ownership of vacation homes into different pieces as part of an LLC, much like Arrived.

Arrived is not legally permitted to share projected returns but does provide historical data and an investment calculator, as well as case studies. Investors can invest up to $20,000 per house and are paid quarterly. Rental tenants also receive shares in the property. If Arrived sells a home, the proceeds are distributed to investors.

The business: The company makes money in a few different ways, including a commission paid by the original seller when Arrived first buys a home; by sourcing the property and preparing it for investment; and through management fees for its portfolio of homes, such as a 1% management fee on the money people invest.

The traction: Arrived has secured more than 30 properties across Arkansas, North Carolina, and South Carolina; 12 of those are full funded or reserved, with about $3 million in property value funded over the past three months. The company declined to provide revenue metrics or number of users. Arrived is focused on residential homes in the middle of the market that can provide strong cashflow and dividends to users, but is also planning to launch in places such as Austin and Seattle that have strong appreciation potential.

Read full article here:

https://www.geekwire.com/2021/arrived-gets-37m-funding-let-anyone-invest-home-rental-homes-starting-100-share/

“Tenant From Hell”

The majestic home had it all — five bedrooms, four bathrooms, a three-car garage and a spacious basement in a beautiful neighborhood in Colorado Springs. If the single-family house sounds too good to be true, stepping inside the property shows prospective buyers a stunning reality: walls spray-painted with vulgarities, rooms destroyed with a hammer, carpet reeking of human and animal feces, and dead cats locked in a bathroom.

“How do you like the s— on the carpets,” read the spray paint in the dining room.

What was once Suzy Myers’s pride and joy was now every landlord’s nightmare, thanks to a departing tenant who didn’t pay rent, she told The Washington Post. A Tuesday listing on Redfin described the house as a “little slice of hell” that stemmed from, fittingly, “a tenant from hell.”

“This house is not for the faint of heart but for that special person who can see through the rough diamond to the polished gem inside,” real estate agent Mimi Foster wrote. She said in a video tour of the home, “Nothing could have prepared me for what I was about to encounter.”

Link to Full Article

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