CAN MY ATTORNEY OR REAL ESTATE AGENT HOLD THE PROCEEDS IN ESCROW FROM THE SALE OF MY RELINQUISHED PROPERTY--- WHILE I AWAIT THE CLOSING ON THE REPLACEMENT PROPERTY?

Whew---that was a long question.  I will endeavor to answer the question in a much shorter manner.  Answer:  NOPE!!!!  The Internal Revenue Service, in its infinite wisdom, wrote a section into its Regulations, prohibiting any of the investor's agents from holding the proceeds from the sale of the relinquished property.   Who is defined as the investor's (taxpayer's) agent?  Investor's agents are defined as the taxpayer's broker, attorney, accountant, family member, friend and others who have a relationship with taxpayer.  That is why the taxpayer should deposit the proceeds with a reputable independent Qualified Intermediary, that is insured and bonded and has safeguards to protect the proceeds.  I truly love being that independent QI as you can probably discern from my blogs.

IS THE TAXPAYER RESTRICTED AS TO WHERE THEY CAN PURCHASE THEIR REPLACEMENT PROPERTY?

A CPA from Ohio just asked the above question and it is a good one to present in this blog.  A taxpayer can purchase the replacement property in any state in the Union.  Does Puerto Rico  qualify as a State?  No it doesn't--but there a few exceptions--so please ask your tax advisor if you think you are going to be dealing with Guam, Puerto Rico or the US Virgin Islands.  In the case of the CPA mentioned above, he has a client who is selling an apartment building in Ohio and wants to obtain a replacement property in Arkansas.  That is not a problem and that is allowed.  But the taxpayer cannot obtain a replacement property for Section 1031 purposes in Mexico, because obviously Mexico does not qualify as a State--New Mexico however will qualify.  One other little minor point, a U.S. taxpayer can exchange a foreign property for another foreign property, but not a foreign property for a U..S. property.  Check with your tax and/or legal advisor should you have any questions on these issues.

WHAT TYPES OF REAL PROPERTY QUALIFY FOR A SECTION 1031 EXCHANGE?

The simple answer to that question is:   all types of real estate qualify for exchange purposes.  But both the property being given up, the relinquished property, and the property being received, the replacement property, must have been an investment or used in a trade or business.  The properties must be "like kind".  For a more thorough discussion on "like kind" go to our blogs of August 7, 2008 and August 11, 2008.  Simply put, any type of real estate is "like kind" to any other type of real estate.  "WOW" was the response given to me by a Realtor who never realized that her client could exchange its farm land for an office building.  For example purposes, you can exchange any of the following for each other, as long as they qualify as held for investment or used in a trade or business:  raw land, hotels, single family homes, office buildings, shopping centers, factories, farmland, rock quarries, leases that have 30 or more years remaining (yes most states delineate 30+ year leases as ownership of real estate), commercial buildings, etc.  We will discuss personal property exchanges in the next blog--FYI--personal property exchanges are a lot more restrictive on qualification for Section 1031 purposes.

STAYING ON A BUDGET

          

     STAYING ON A BUDGET

    The following is an excerpt from a newsletter I received from Chris Weir at CountryWide Bank.  Since we are in a recession, many people are now paying more attention to their monthly budgets.  "... One of the best ways to rein in your budget is to get a handle on your spending habits. The tips below can help you figure out where your money is going every month, and whittle down unnecessary expenses.

Taking inventory. Many people can name their major expenses, but don't remember all the little expenses that drain their wallets. To help you get a true picture of your spending, try writing down everything you spend money on during the course of a month. That means writing down not only your major expenses, but also those quick trips to the gas station, grocery store, coffee shop, movie theater, fast food restaurants, and so on. Also, if you pay for insurance or your garbage bill on a quarterly basis, write down what the monthly expense equals. 

Hierarchy of needs. Once you have all your expenses listed, it's time to analyze them. The best place to start is by grouping your expenses using highlighters. For example, you may want to use one color to highlight "must haves" like your house, automobile, life insurance, utility payments and so on. Next, use a different color to highlight items that may be important occasionally, but aren't required--such as, new clothes for work. Finally, use a different color to highlight unnecessary expenses that are nice, but could easily be cut out, such as mochas from the local coffee house. Now, you can make some purposeful decisions about what you can cut--starting with the easy items and working your way up to the important but not necessary. Don't forget, it's not always "either-or." For instance, you don't have to cut out mochas altogether; instead, you can cut down to one per week as a special treat. 

Give yourself an allowance. Sticking to your budget is easier if you have no other option. If you have a real spending problem, you may want to give yourself an allowance to live on. For example, try taking out $50 or $70 in cash for each week and putting your credit cards and checkbook in a safe place. That way, when you spend money, you'll actually see it leave your wallet...which means you'll see the impact more dramatically. This forces you to make some tough decisions. After all, if you go to lunch on Wednesday, you may not be able to go to the movies on Friday night. It'll be tough at first. But soon, being frugal will be second nature. 

Stop window-shopping. Marketing is a powerful force. To help eliminate the urge to overspend, avoid filling your lunch hour or Saturday afternoons by walking around the mall. Instead, spend that time walking around a local park, reading a good book, or playing a board game with a good friend. When you do need to shop, make a plan to go to a specific store or two... and go with a list! Of course, the key to having a list is only shopping for the items on it--no more, no less."      

PLANNING IS ESSENTIAL IF YOU OWN AN INVESTMENT

The following is an excerpt from Christine Latilup’s newsletter.  I have been teaching these same important principles for years:

“Watching the Olympic Games in Beijing this summer reminded us of the dedication that our athletes possess to be competitors on the world stage and ultimately be medal winners.  Planning and years of preparation are essential to achieve the highest rewards. 

The same is true for investors, a dedicated plan is essential for the maximum reward.   When potential clients call to find out what the capital gains rate is, they usually think "oh, that's not so bad".    What they fail to understand is that there are three tax hurdles to overcome on the sale of a capital asset. 

The first hurdle is largely misunderstood and it can be very costly.  Upon the sale of a capital asset, real property or personal property, previously taken depreciation deducted since May 6, 1997 to the date of sale is  recaptured upon sale at the rate of 25%.  

Capital gains tax, the second hurdle, is assessed  at the rate of 15%.  It is calculated based on the original cost-plus improvements less cost of sale against the sale price.  This is usually the result of market appreciation and constitutes equity in the property.  While the rate is not insurmountable, it is anticipated to be in excess of 20% in the not too distant future as Congress looks for revenue raisers. 

The third hurdle depends on where you live and file your tax return, many states also tax capital gains at the state level and this can range from 3%-9%.   Unfortunately, too many taxpayers dutifully pay the tax each year without understanding that the tax can be deferred, interest free, if the sale is handled as a Section 1031 Exchange.  

Every taxpayer regardless of whether that taxpayer is an entity or individual, as long as the property is not personal use property, can utilize exchanges as a tax deferral strategy and never pay the tax!”

DO YOU OWN A LEMON?

Here is an excerpt from an article written by an attorney who specializes in dealing with lemon laws.  "It’s not unreasonable to expect your new car to run like a charm. But if your new ride has a serious defect and the dealer can’t fix it, you have rights under your state’s lemon law. Each state’s law is different, but to be considered a lemon, the defects have to occur within a certain timeframe (during the first two years of the vehicle’s delivery date, for example) and the car has to have been taken in for repair a specified number of times for the same problem. Typically, you then have to notify the manufacturer and give them a final chance to fix the problem. 

If you think you have a lemon, keep a log of your communications with the dealer, the dates your car is out of service, your repair records, and any written correspondence. Contact a lemon law attorney to guide you through the final steps that will legally establish your vehicle as a lemon and entitle you to a refund or a replacement vehicle."  For more information, contact Sergei Lemberg, Esq. at slemberg@lemberglaw.com or go to his lemon law blog at www.lemonjustice.com/blog

WHEN SHOULD I REFINANCE MY 1031 PROPERTY? A "NANOSECOND" AFTER CLOSING?

First and foremost, it is always advisable to err on the side of being conservative when dealing with IRS.   Having said that, you are taking a great risk if you refinance the 1031 relinquished  property you are about to exchange, just prior to closing the sale, because IRS has taken the position in numerous cases that taking those cash proceeds just prior to closing on the relinquished property sale constitutes receiving taxable boot. 

So what about refinancing the replacement property immediately after you close on its purchase?   There are some pundits that state you can refinance a "nanosecond" after closing on the replacement property.  I disagree with that position and would recommend waiting for at  least 3 or more months before refinancing the replacement property. Refinancing 3 or more months after closing/exchanging on the replacement property, makes it a lot harder for IRS to come back to the taxpayer and declare that they had planned the refinancing of the replacement property at the time of their purchase. 

For those bloggers that have been reading this blog for the past couple of years, you know I stress that 6 letter word "intent".  IRS will look or try to interpret the taxpayer's "intent".  In this case, refinancing later rather than sooner, after exchanging a piece of property, should be the mantra.

AARP REMINDS US OLDER FOLKS.

"You now have up to two years following a spouse's death to sell your jointly owned home and keep up to $500,000 in profits tax-free, thanks to a provision of the Mortgage Forgiveness Debt Relief Act signed into law last December.  The change should allow recently widowed homeowners more time to grieve and better plan their future, instead of rushing a home sale to avoid paying more taxes. 

Previously, a home had to be sold the same year as a spouse's death to qualify for the $500,000 exclusion; widowed homeowners who waited two years were only eligible for up to $250,000.  Any longer they wouldn't be eligible at all."   This is an important piece of information for someone who has lost their spouse.   You might want to keep a copy of this blog in a safe place,  just in case you or a family member loses their spouse, as this is a great tax break for widowed homeowners.

WHAT ARE THE MAJOR BENEFITS WHEN TRANSACTING A SECTION 1031 EXCHANGE?

That question was an issue specifically requested to be covered in my presentation given at the national convention for the National Society of Accountants, last month. 

Most of my bloggers are aware that Section 1031 provides that there will be no gain or loss recognized on the exchange of property held for investment purposes or used in the taxpayer's trade or business, the relinquished property, when exchanged for property that is "like kind" and will also be held as an investment or used in the taxpayer's trade or business,  the replacement property.   The result is that the federal government gives the taxpayer an "interest free" loan, because the  taxpayer has all of their cash to invest into the replacement property, having deferred the payment of any taxes due. 

The follow-up question is how does a  taxpayer use this valuable tool? 

The taxpayer can:
    1.    Exchange from depreciated property into a more expensive property, thereby obtaining additional depreciation;
    2.    Exchange from a piece of property that is not producing an adequate cash flow into a different property that will produce a better cash flow;
    3.    Exchange into a piece of property that the taxpayer believes will appreciate in value quicker;
    4.    Diversify into more than one property or different types of property;
    5.    Exchange old equipment for the newer version of the same equipment that is used the taxpayer's trade or business;
    6.    Exchange into property in a different part of the country, because the taxpayer wants to relocate to that part of the country;
    7.    Consolidate the taxpayer's existing investments into 1 or more larger investments;
    8.    Exchange property, such as raw acreage, that cannot be refinanced, into another property that can be financed;
    9.    Exchange from a management problem property into one that creates less headaches; and/or
              10.    Exchange into properties that will be more manageable for estate tax planning purposes.

HOW TO KEEP YOUR MONEY SAFE AT YOUR BANK

OK--here is this month's consumer oriented, non-1031 blog.  The information relates to keeping your money safe at your bank and comes from a newsletter I receive.   It's important because after last month's failure of California-based IndyMac Bank (I believe there will be at least another 100 banks that will fail in the next 12 months), many people have wondered how safe their accounts really are. While the Federal Deposit Insurance Corp. (FDIC) guarantees most bank deposits, here are some important details to remember. 

"What types of accounts are covered?   The FDIC protects checking and savings accounts, certificates of deposits (CDs), Christmas club accounts, and money-market savings accounts. However, Stocks, Bonds, and mutual fund shares...even those purchased through an FDIC bank...are not protected.

What are the limits of FDIC insurance?  Bank accounts that have less than $100,000 in them and certain retirement accounts (IRAs held in CDs and money market accounts) that have less than $250,000 are fully protected by the FDIC even if the bank fails. If you want to exceed these account limits, you can keep your deposits fully protected by:
1.    Dividing your money among several different bank companies. Note that dividing your money among several different branches of the same bank does not guarantee full protection.
2.    If you prefer to keep your money in the same bank company, you can still be fully protected if you divide your money among various "ownership categories". Ownership categories include a personal account in your name, a personal account in your spouse's name, a joint account co-owned by you and someone else, and a trust account that names someone other than you as a beneficiary.

What are some common ways customers end up with uncovered deposits?   If you purchase a CD through an investment broker, this CD will often be placed with a bank at which you already have an account. If the CD and your other accounts exceed the $100,000 limit, you may not be full protected. Before purchasing CD's through a broker, ask where they will be placed.   In addition, keep track of the interest your accounts earn so you don't exceed the limits this way.

What will happen if your bank fails? In most cases, depositors can fully access their funds by the next business day. Typically, failed banks are closed on Fridays, and funds are available by the following Monday. People can also usually use their ATM cards and write checks over that weekend as well. And for customers whose accounts exceeded the FDIC limit, all hope is not lost. Though this amount has varied, they can generally expect to recover 70 cents on the dollar of their uncovered funds after the bank's assets are sold.  The good news is that the vast majority of US banks are secure, but the above information will help you stay fully protected.  For more information, visit www.fdic.gov."