Team Reba Real Estate

Does distressed investment property qualify for 1031 exchange status?

Filed under: market activity, tax issues, real estate, King County, commercial real estate, investment property, deed-in-lieu, 1-4 unit, tenant, foreclosure, economic issues, legal issues, Washington, seller, buyer, short sale, Puget Sound, rental — Reba Haas @ 9:59 am

Over the past 10 years when the go-go markets of real estate were flying high and lots of people were jumping into the real property investment pool, not too many people worried about the consequences of losses. It was an easy game where everyone was making what they thought was easy money - who cared if the property didn’t cash-flow for a few years, you’d just hold onto it for 2-3 years and then flip it for a much higher appreciated value. Or, if you’d owned the property longer than since 2000 you could pull out equity and utilize it for more investment purchases, buying expensive personal toys like boats, flat-screen TV’s, and more. Well, in mid-2007 those days came to an end.

multifamily property 4-plex

What we’ve been seeing since then are a lot of investment properties (1-4 units, small multi-family, small and large commercial) coming on market that are in distressed condition, meaning, the owners are in default or they’ve lost so much money over time paying out to subsidize the monthly losses of negative cash-flow that the individual(s) is in their own financial distress having burned through their other assets to maintain this one. In many cases the properties are coming back on market at prices below what the seller purchased them for so usually there is a short sale involved. In these cases, if there is forgiven debt then there are typically tax consequences involved. Some folks who are familiar with what are called tax deferred exchanges may wonder if perhaps using one of these programs might help avert the tax consequence of an investment short sale.

Read this link from OREXCO 1031 Exchange to get the info on whether or not foreclosures, deed-in-lieu, and/or short sales qualify.

commercial building photo

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Last minute attempts in the House and Senate working to extend tax credit closing timeline

Filed under: title/escrow, market activity, tax issues, King County, Snohomish County, FHA/VA, single family, townhouse, real estate, condo, seller, economic issues, legal issues, buyer, Puget Sound, mortgage/loan, foreclosure, short sale, Washington — Reba Haas @ 9:19 am

The folks at Inman released the news that the House has approved an extension of the closing timeline for 1st time buyers and move-up buyers to get the tax credits offered for purchasing during the specified time limit. However, we’re still waiting for final news that the Senate has also approved it. Keep your eyes and ears peeled for it, but in the meantime all of the escrow offices I know are working full-tilt to get as many contracts closed today as they humanely can do.

Some of the frustrations that home buyers have experienced are that a large amount of the sales going on today involve either bank owned or short sale transactions - both of which aren’t always following the deadlines put to them in real estate contracts. With short sales taking, on average, around 6 months or more to close these types of transactions have really strangled the buyers who are trying to purchase them, if they were going for the tax credit.

At Team Reba we’ve seen the reality of the concerns that buyers have had with at least one listing having had a contract cancelled due to concerns that the buyer wouldn’t be able to close in time for the tax credit. Now it’s too bad that they did so since the extension is likely here. We also had another contract where we had to push hard on behalf of our buyer because the family was purchasing a bank owned home where the Trustee and the bank were slow to respond on every deadline and request for documentation, taking upwards of 3.5 months to close the deal. We just closed that transaction last week, much to the relief of our clients.

For the rest of you out there waiting to get your closing done today, you might cross your fingers, toes and legs and knock on wood - let’s hope the Senate gets moving on this bill.

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15-year Life for Leasehold Improvements

Filed under: tax issues, real estate — Michael Lindekugel @ 9:18 am

For more than 10 years, a temporary provision in the depreciation rules has allowed a 15 year recovery period for the cost of making improvements to leased property. This rule expired as of January 1, 2010, however. Thus, until Congress acts to renew and extend the provision, the cost recovery period is now 39 years, with the improvements being treated as part of the cost of the underlying real property.

The House and Senate have previously passed different versions of legislation (HR 4213), which includes a provision that would renew and extend the 15-year recovery period, retroactive to January 1, 2010, and through December 31, 2010. The Chairs of the tax-writing committees have agreed on a compromise version of HR 4213 that may be considered in both houses.

Source: The Washington Report, NAR

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Carried Interest Rules may change

Filed under: tax issues, real estate — Michael Lindekugel @ 9:15 am

Under current law, the carried interests (or profits interests) of general partners in real estate partnerships are taxed at capital gains rates (currently 15%) when the property is sold. In 2008 and 2009, the House passed legislation that changed the rule so that carried interests in real estate partnerships (and many other investment arrangements, as well), would be taxed as ordinary income. This provision has been very controversial. Until last week, the Senate had been unwilling to adopt this far-reaching legislation. Now, the chairs of the tax-writing committees have agreed that carried interest will be among the provisions used to “pay for” a very large package that will extend expired tax provisions and various spending programs, as well.

Under the compromise, a portion of the amount realized from a carried interest will be taxed as ordinary income and the remainder will be taxed as capital gains income. During 2010, 2011 and 2012, 50% of the income will be taxed at ordinary rates and 50% will be taxed at capital gains rates. Beginning in 2013, 75% of the carried interest income will be taxed as ordinary income and 25% taxed as capital gains. Assuming that the Bush tax cuts expire for upper income individuals, this would mean that, by 2013, the highest tax rate on carried interests would be 35%. Note that general partners who have invested their own capital in a real estate partnership will not be affected by this change.

The carried interest provision is part of H.R. 4213, a package that would renew and extend many expired tax provisions through December 31, 2010 and that would also extend spending programs including unemployment insurance benefits and various Medicare payment structures. The House had been scheduled to vote on the measure May 21, with the Senate following the week of May 24. The House did not conduct that vote, however, so the timing has slipped. It is not known if the legislation can clear both bodies before the Memorial Day break.

Source: The Washington Report, NAR.

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Operating Losses and capital gain from debt relief

Filed under: commercial real estate, tax issues, foreclosure, short sale, rental — Michael Lindekugel @ 4:44 pm

Question: A taxpayer has operating losses and is “under water” on a commercial property that will be going back to the lender resulting in debt relief and, consequently, capital gain. Can the taxpayer offset the gain with the operating losses to mitigate the tax liability?

Answer: No, ordinary losses do not offset capital gain. Capital gains and losses are first netted and the net result added to income in calculating federal income tax. The tax rate applied to the net capital gain is dependent on the amount of ordinary taxable income. For individuals, net capital losses offset ordinary income up to $3,000 per year and excess capital losses are carried forward. Ordinary losses, (usually net operating losses) do not offset net capital gain but may effect the tax rate applied to the net capital gain.

http://www.apiexchange-enewz.com/www/enewz/newsletter.php?id=135&dm=1

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3.8% Medicare Tax in 2013

Filed under: tax issues, property taxes, investment property, real estate, landlord, legal issues, economic issues, rental — Michael Lindekugel @ 11:57 am

Beginning in 2013, the national health care reform legislation that became law in March, 2010, imposes a new 3.8 percent tax on certain investment income. The new tax will apply to single filers with incomes over $200,000 and married taxpayers with incomes over $250,000. Under the law, the investment tax provisions in Chapter 2A of the Internal Revenue Code are placed under the heading “Unearned Income Medicare Contribution.” In general, this new Medicare tax will apply to investment income that is subject to income tax, which includes capital gains. Pursuant to IRC Section 1402 (C)(1)(A)(iii), the investment income to which this new tax applies includes “net gain” (to the extent taken into account in computing taxable income) attributed to the disposition of property that qualifies as a capital asset under Section 1221 (capital gains), as well as gains on other property that are considered part of ordinary income. Also of relevance for rental property owners, this new tax applies to a real estate investor’s rental income if they have income above the $200,000/$250,000 income thresholds.

The net effect of both capital gain tax increases is a new 23.8 percent tax rate for higher earners—the highest rate for long-term capital gains since 1997. The Joint Committee on Taxation estimates the new Medicare tax on investments will cost taxpayers over $30 billion annually. Additionally, the modified adjusted gross income threshold at which this Medicare tax will apply will not be indexed for inflation, which means an increasing number of taxpayers will be snared by this tax provision.

Overall, the economic impact of these tax increases will be felt by the very investors who help promote long-term economic growth. In 2007, taxpayers with incomes greater than $200,000 reported 47 percent of all interest income, 60 percent of all dividends and an amazing 84 percent of all capital gains.

The Coming Tax Increaes - Comparison

	Current	January 2013
Conventional Short-Term	35.0%	43.4%
Conventional Long-Term	15.0%	23.8%
AMT Short-Term	28.0%	31.8%
AMT Long-Term	15.0%	23.8%

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20% Capital Gains Tax in 2011

Filed under: tax issues — Michael Lindekugel @ 11:54 am

On January 1, 2011, the capital gain tax reduction that was signed into law by President Bush under the Tax Increase Prevention and Reconciliation Act will “sunset.” The tax rate will revert from the current 15 percent rate back to the former 20 percent capital gain tax rate that was in effect prior to 2003.

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Don’t forget to fill out your census data this month!

Filed under: property taxes, government, Fair Housing, tax issues, economic issues, real estate, rental — Reba Haas @ 10:14 am

You may have noticed that you received a piece of mail this month from the U.S. Department of Commerce. It has a big, can’t ignore it, sign on the front of the envelope that says “Your response is required by law”. If you’re concerned about privacy issues you can check out their website for more information. www.census.gov/2010census

For the housing industry it helps the government track how many people live in rental housing or owner-occupied housing. These statistics have been followed closely for several decades now because the housing industry impacts so much of our national economy - which has become even more evident as the USA sorts itself out through this recent financial crisis. Property taxes and excise taxes (paid when homes are sold/change hands) having gone down drastically over the past couple of years which has definitely impacted local economies from cities, to counties, and states who rely on those funds to fill the majority of their general funds, paying for all manner of services.

So, do your civic duty and fill out your census!

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Buying a foreclosure home in WA State? Be prepared that excise tax may become your responsibility if this Senate measure passes.

Filed under: Pierce County, King County, title/escrow, property taxes, Snohomish County, townhouse, Conventional loans, FHA/VA, single family, market activity, tax issues, buyer, seller, economic issues, legal issues, Puget Sound, foreclosure, real estate, condo, mortgage/loan, Washington — Reba Haas @ 10:54 am

WR Urges Call to Action on Proposed Tax Increase
Please send a message immediately to State House members to stop taxes on real estate. The Senate’s budget increases the B&O .25% on real estate professionals, as well as shifts the real estate excise tax onto the buyer of a foreclosed home. The Senate’s budget passed the Senate and is now being considered in the House.

The message above was sent out to real estate agents who are members of the local multiple listing service along with a link to the site where we could send a message to our representatives. For the general public, I realize that you may not care if real estate professionals are hit with a higher Business & Occupation (B&O) tax, but know that we have the highest rate of such a tax in this state.

The more important issue to the home buying public is the shift of moving the excise tax payment burden from the seller to a buyer of a foreclosed home. All this does is help lessen the costs of banks when selling their foreclosed inventory and it puts a higher cost burden on the buyers, who in many cases for first time buyers are just barely qualifying for the amounts that they’re purchasing in. If excise tax, which runs 1.78% here, is now put on them as a closing cost fee, then that buyer ends up paying the tax twice because they’ll have to pay it again later when they sell the home at whatever that new value will be at that time. Also, it will lessen the amount of home purchasing power that they’ll have, at least when it comes to buying bank owned homes because that will likely be part of the qualifying factors for the lender when they do their underwriting review. If a buyer is qualified at $200k for a traditional purchase but now 1.78% ($3,560 in this case) must be considered, then a buyer may not be able to buy a $199k home because the excise tax payment requirement puts them just out of reach if they originally only needed $7,000 for down payment via FHA (3.5%), PMI payment of roughly the same amount (possibly wrapped into financing) still increasing cost of loan and impacting qualifying factors, and reducing what they might have in their “reserve” accounts which are also factored in for qualifying because most banks want 3-6 months worth of funds available at closing.

If you are in support of not having the excise tax payment shift made to buyers, please contact your State representative immediately!

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An interesting video explaining One West Bank profit model on “short sales” of former IndyMac loans

Filed under: King County, market activity, tax issues, real estate, Pierce County, Snohomish County, Conventional loans, FHA/VA, single family, condo, mortgage/loan, seller, economic issues, legal issues, buyer, Puget Sound, foreclosure, short sale, interest rates, Washington — Reba Haas @ 10:12 am

This is an interesting video about former IndyMac loans that were purchased by One West Bank and how the short sale process enriches that company. I had a short sale that I negotiated for a client last summer that included a 1st lienholder as IndyMac (now One West Bank) and our understanding of how these transactions worked helped us close a great deal for our buyer - without the… seller taking on a promissory note. What frustrates me is to see the lenders who buy discounted notes and won’t negotiate in good faith on the “short”.

Watch Video

Keep in mind, that if the short sale was an investment property, there is not only the possibility of a promissory note to the seller, but there are tax implications for any forgiven debt. Currently, with the Mortgage Debt Relief Act of 2007, primary residences have had some reprieve from taxation on forgiven debt, but a lot of underwater loans belonged to people convinced of buying single family homes as investment properties who weren’t that financially stable to begin with but who had hoped to grow their assets but who are now losing nearly everything.

If you know someone who is in a position of needing to do a short sale in the King, South Snohomish or North Pierce County areas, please feel free to have them call us to learn some of the options available to them.

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Team Reba Real Estate

August 5, 2010

Does distressed investment property qualify for 1031 exchange status?

June 30, 2010

Last minute attempts in the House and Senate working to extend tax credit closing timeline

May 28, 2010

15-year Life for Leasehold Improvements

Carried Interest Rules may change

May 21, 2010

Operating Losses and capital gain from debt relief

April 14, 2010

3.8% Medicare Tax in 2013

20% Capital Gains Tax in 2011

March 18, 2010

Don’t forget to fill out your census data this month!

March 9, 2010

Buying a foreclosure home in WA State? Be prepared that excise tax may become your responsibility if this Senate measure passes.

February 12, 2010

An interesting video explaining One West Bank profit model on “short sales” of former IndyMac loans

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