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No Changes to 1031 (Yet)

There may be changes some day, but not now – and probably not any in the near future.

Important news from Washington, DC this week indicates a positive outlook for 1031 exchanges to survive in their current form.

The House of Representatives Ways and Means Committee advanced a reconciliation bill that did not include any changes to 1031, or several of the other tax reform proposals that had been floated earlier in the year which would have affected real estate investors.

Eviction Moratoriums

Will this cause people to sell their rentals just because the rules are complicated? Probably not, but they won’t have much patience for tenants who have been taking advantage of the system. From CAR:

The statewide eviction moratorium under the COVID-19 Tenant Relief Act (CTRA) is due to end today. However, the law will not simply return to its pre-pandemic form. Instead, a new law, the COVID-19 Rental Housing Recovery Act, will take its place. Here are the key differences in practices and procedures.

  • Exemptions for SFP and new construction to the just cause eviction rules return. Beginning October 1, the standard exemptions to the just cause eviction rules return, the most significant ones being for single family properties and new construction properties built within the last 15 years.
  • For rent due prior to October 1, 2021, the 15-day notice is still required (but not for rent due prior to March of 2020). To avoid confusion after October 1, if a tenant owed COVID rent from before October 1, 2021, it is highly recommended to use the appropriate forms to demand the rent now.
  • Special 3-day notice beginning October 1, 2021, through March 31, 2022, and the requirement of applying for Emergency Rental Assistance. Beginning October 1, a landlord may demand the full amount of rent using a special 3-day notice to pay rent or quit for rent that became due on or after October 1. However, the new notice requires the landlord to apply for emergency rental assistance. This special 3-day notice will be required for all rent due until March 31, 2022.
  • Tenancies commencing October 1, 2021, are not subject to the special 3-day notice. If the tenancy has commenced on or after October 1, 2021, then neither the special 3-day notice nor the requirement to apply for emergency rental assistance is required. Instead, on that date landlords can return to using the traditional 3-day notice to pay rent or quit.
  • On November 1, 2021, the landlord may collect unpaid COVID rent due from March 2020 through September 2021. Beginning November 1, 2021, the landlord may initiate a legal action to recover the unpaid COVID rent. This includes going to small claims court to recover any amount of COVID rental debt even if it is otherwise over the small claims court limits.

The above explanation is a simplified version of a surprisingly complicated procedure. C.A.R. intends to update its landlord/tenant forms where necessary. This will include:

  • The introduction of the special 3-day notice to pay rent or quit for rent demanded from October 1, 2021, through March 31, 2022
  • The reintroduction of the standard 3-day notice to pay rent or quit (for tenancies commencing after October 1, 2021)
  • The removal of the “Notice of Termination of Tenancy COVID Tenant Relief Act” (form NTT-CTRA)
  • The return, in its pre-pandemic form, of the “Notice to Terminate Tenancy” (form NTT)

Even though C.A.R. may make forms available for landlords to use, all persons are strongly urged to work with their own landlord/tenant attorney specialist before providing these notices, especially if their ultimate aim is to evict through a court procedure.

Tenant Screening

For those who might be thinking about my idea of renting your home for a year so you can defer the capital-gains tax when you exchange it for other(s), know that California is a tenant-friendly state.  Just the denying of a tenant has potential consequences!  We can refer you to a local property manager to assist you.

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

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