Category Archives: Real Estate

Finding the Perfect Luxury Living Space Not on the Public Real Estate Listings

We were looking for a luxury loft, but all of the advertised spaces were not up to the descriptions in the ads. We then decided to take a chance on a Denver Realtor that can find properties anywhere. He has even done international property sales. A friend told us that he could find us the perfect place because he has connections in the real estate markets that other agents probably would not have. We told him that we wanted a large loft to use as a living space and a studio, but it had to be luxurious. Knowing the people in the industry like he does, he was able to find us a place that was not being publicly listed.

Learn More About Successful Investing Habits

The essence of success is achieving a long period of prosperity through your actions. In real estate investment properties, that kind of success can be fostered through committing some habits to your investment routine, using them to continually work towards new opportunities and new investments. By internalizing a few of the following techniques as habits, you can become more successful in your real estate transactions, giving you an edge on the competition (of which there is much in the real estate investment market).

As with most areas of business, getting your name out into the community is a great first step towards developing a network of people that will help you along your path to investment success. Let people know that you are looking for investment opportunities.

Give people you know business cards and ask them to keep their eyes and ears alert for possible properties.

Enlisting those you know and developing a strong network will give you an information pipeline that is unique to you, one that possibly could turn up opportunities others miss. Make it clear that you are available to talk about any opportunity and sometimes they will come to you rather than go out to the public.

Think actively about risk and profit. These may seem like obvious things to think about, but often times investors get caught up in the short-term ramifications of a property and neglect to think about the long term profitability of a property. Conversely, some investors think only about the potential profit of a property and neglect to consider the risk needed to attain that high level of profit.

Internally, you should engage in a balancing ask for risk and profit on every property you assess. Is it in a stable area? Are property values likely to increase? How likely is it that property values will decrease? These are risk-type questions that need to be asked both in the hopes that they are positive and to guard against the answers coming back negative. Never get too concerned with risk or profit singularly, instead consider them both as a sliding scale and consider those that offer a strong balance as the most optimal real estate properties for investment.

The most important piece of advice on how create successful habits is create a plan. With a concrete, pen-to-paper blueprint for the measures you are going to take to ensure success, you are less likely to neglect certain items and more likely to make that plan a part of your daily routine. Talk with a certain number of people in your network each week. Pledge to investigate a certain number of new investment properties each month.

Taking proactive steps is one of the best ways to create great opportunities for yourself in real estate investments and sometimes people simply need a checklist or reminder to keep at those tasks. By developing a plan and going over it as a checklist periodically, you will gradually wean yourself of that need and internalize the habits that will ultimately make you successful.

Once that level of commitment happens, developing opportunities will be less a matter of expending great amounts of energy to stick to a pattern and more an effortless cycle of proactive behavior that creates an advantage for you in what is an extremely competitive real estate investment atmosphere.

However, there is one additional word of warning. Never stop learning new steps to incorporate into your habits. It is one thing to internalize a plan and another to get set in a series of steps that you cannot break free from. Laying a strong foundation of positive habits that can later be added to is worlds apart from learning one set of steps and never deviating from that course of action. Balance your procedure with old and new ideas and you will possess a better chance for real estate investment success

Learn More About Five Real Estate Investment Tips

There are countless tips on real estate investing available and this is by no means intended as a comprehensive list. While every investment has its own intricacies and problems that need to be worked out, there are some very basic aspects that are common to most investment properties. Understanding those aspects and asking questions about them can help you determine whether a particular real estate investment opportunity is for you.

Anything Can Change
Building in the capacity for change in your investment is not only good real estate advice, but good life advice. Aspects of an investment can change at any given time and building in a little cushion in your profit projections for that change will most likely give you a better outlook on the possible outcome of your investment.

This is especially true for something like the tax climate of your investment as changes in tax laws happen regularly. If the tax situation surrounding your investment is the only thing you like about it, it is probably not a sound investment. Solid investments can withstand changes in the tax code, so never rely solely on the stability of tax codes, you will be sorely disappointed.

Do What You Know
It is tempting to get involved in real estate investment opportunities outside of your comfort zone. Maybe the terms look good or the area is nice, but your lack of expertise in the field will ultimately hurt you over the course of the investment. If you are well versed in multi-family homes, do your best to uncover the best investment opportunities in that field. If your bag is fixer-uppers, stick with that. Success is difficult to replicate so if you have a knack for something, exploit that knack.

Compare, Compare, Compare
As any real estate agent will tell you, valuations for a new home put on the market are a direct reflection of other sale prices of similar properties in that area. Your potential investment is the same way. If you are going to rely on rents to make back the money spent on the investment, compare the rents your prospective investment property takes in against similar properties in the area. Are they too high? If so, that may indicate future trouble filling the building at those prices, which then cuts into your profit forecast.

If you are getting involved in a fixer-upper, compare what you think the home will be like in the future to homes that have sold that look similar to that now. Doing so will help you estimate your eventual sale price and the amount of money you should invest to net a decent return.

Hammer Down True Expenses
Just as you want to examine what your incoming cash flow will be on any real estate investment opportunity, you want to investigate your outgoing cash flow as well. What are the key costs involved in running the property? What are the taxes on the property? How much does it cost you when part of your multi-family property is vacant? Sometimes properties can look great when you examine the rent payments coming in but then lose their luster when you look at the cost of running the facility. You need to investigate both sides of the story to get an accurate view of the financial future of your investment.

Know The Building
In real estate investing, surprises are usually costly. Not only should you do a full walk through of the prospective investment yourself, you should also look in to hiring an independent, professional inspector as well. Uncovering problems with the foundation, roof or furnace early can either save you from making a poor investment or give you ammunition to negotiate a lower price.

Not all real estate investments are the same and you will likely run in to a unique problem on every property you pursue. However, by sticking to the tips here, you can give yourself a great foundation from which to operate. Above all, pursue information on the property as vigorously as possible to eliminate the possibility of regretting your investment later.

Know More About A Short Term Investor

The world of real estate investing can certainly seem like a vast one full of many different types of projects and opportunities. That can certainly be true, but by asking yourself the key question of what kind of investor you want to be, you can cut through a lot of that material and focus on the activity that you will not only benefit most from, but will enjoy the most as well.

Asking yourself whether you are a short or long term real estate investor will go a long way towards determining the types of project you should spend your time pursuing and the kind of information you should be soaking up from as many sources as possible. For those that answer the question as short term, your primary purpose is to buy low and sell high, no matter how you get there. There are two main ways.

Put A Home Through Rehab
Perhaps the most common way to take a low-sale price home and convert it into a higher sale price home is through renovations on the property that add real value to the piece of real estate. You’ve no doubt heard of flipping homes or renovating homes and this is where those types of investors put their resources.

The draw for this type of investment just like any short-term investment is the prospect for a quick payoff. Indeed that can be the case but those pondering a pursuit of fixer-upper properties should keep in mind that it takes time and experience to get through a real estate transaction efficiently and first time real estate investors can be overwhelmed by the renovation experience.

The key goal here is to find properties that have the potential to sell for far more than their renovations might cost. That search is being done right now by hundreds of real estate investors in your area, so pinpointing the best opportunities can often be a difficult, competitive pursuit. It may be a good idea to partner up with a seasoned investor on a few transactions before setting out on your own to get the hang of renovations and the homes that are best suited for that kind of investment.

Find A Gem
Many real estate investors skip the renovation portion of the process all together and focus on properties that are undervalued on the market and could be resold almost immediately at a higher price. Obviously, these properties can be more difficult to find and the risk involved is usually higher because undervalued homes are usually undervalued for a reason.

One demographic that finds this type of investment particularly attractive is made up of committed real estate investors that also have a license to buy and sell real estate. One of the key barriers to reselling a home is the expense entailed in real estate commissions on both the purchase and sale of the property. For those that act as their own realtor, that cost goes away and the prospect of a profit increases greatly.

Short-term investments can certainly provide many benefits such as quick profits and the flexibility to quickly pursue other opportunities, but there will always be risks involved as well. If you want to get involved in renovating homes, make sure you do your homework and learn what to look for in a real estate candidate.

If hunting down undervalued homes is what you plan to do, think about pursuing a real estate license as well to cut down on the cost involved in the process. No matter what course you ultimately take, the key piece of advice is to become knowledgeable in the field before ever taking your first step. Real estate investors with the best foundation of understanding are more likely to build upon that and forge successful real estate investing careers.

Learn More About A Successful Investor

While much has been done to crush the misconception, many still believe that to be a successful real estate investor, you must either have a lot of money or find some one-in-a-million opportunity. That is plainly not true and while it may certainly turn out that making money through investing comes easier as wealth increases, all wealth has to start somewhere and the real estate investing arena is no different.

In The Beginning
The biggest piece of advice any real estate investor can have when just starting out is to invest carefully. There will be many opportunities as you get deeper into the real estate investing field, but not all of them will set you on a path towards prolonged success. The most successful real estate investors deliberated carefully before picking an initial project, sometimes a hard thing to do when you make your mind up to get involved in real estate investing.

What ends up being the case here is that you will find a way to get involved in an investment without laying out your entire nest egg, though it will take some time. A common way to achieve that low-cost inroad is to partner with another investor on a particular property to get your feet wet and share the risk with another party. You may not see the huge windfall you’ve envisioned, but if you choose the right opportunity you will see enough to continue your investing career.

Save, Reinvest, Rinse, Repeat
Investing is a cycle and as you graduate from your first real estate investing experience, the best thing to do would be to put your earnings away in savings and then take a portion back out to reinvest in a new project. The best investors make a strict habit of saving at least a portion of the proceeds of every investment to gradually build up a fall-back reserve should an investment go horribly wrong.

You will find that most real estate investors make a serious commitment to saving and many never have a reason to stop doing so. While you will most likely run into a life event or investment hiccup that causes you to stop investing for a period of time, you will most likely see a rebound from that and begin again. Remember to save and reinvest your proceeds to continually benefit from your investments.

It Will Get Rocky
Very few real estate investors make it through an entire career without having some hardship and difficulty along the way. For most situations, successful investors will tell you that riding out the storm and waiting out a rough patch is the best way to combat a low market or other investment malady.

Markets, just like so many things in life, are cyclical and if your investment looks dour for a time, you would be well served to wait it out as prosperity is likely to return. That may seem a little touchy feely, but look at the stock market for inspiration. Though there will always be dips in the market, there is eventually a peak to offset that loss. Maintaining a similar outlook of patience on your real estate investments will likewise typically pay off in the end.

Though it may seem like only the wealthy get wealthier, getting involved in real estate investing does not have to be as daunting as it appears. Just getting a foothold in the investment arena with a small deal at the onset of your career is likely to eventually grow into bigger and bigger investments. Make certain that you save and remain level-headed as you go through your investment career and you will be able to speak from a position of authority when people ask you just how you did it

Tips to Keep Your Cool on Undervalued Homes

The best possible scenario for a real estate investor is to find a home that is undervalued to be able to then turn around and sell it for a profit. Obviously, this can be a difficult prospect as real estate markets becoming increasingly clogged with willing investors, but what happens we you do find a possible target? How do you evaluate its viability? The real answer: keep your cool.

Finding a target may seem like the most difficult part of the investing process, but gathering a variety of potential real estate possibilities will help you develop a more discerning real estate investing eye. Turning up undervalued prospect is an exercise in targeting sellers that have a motivation to sell quickly.

That motivation could come from a recent divorce, a fresh relocation or some financial difficulties. These situations are often emotional and if you get too wrapped up in the story behind each sale, you might be more prone to simply say yes to every opportunity instead of evaluating each investment properly. Here are some tips:

Develop Guidelines
Before you ever go on a search for potential investment properties, write down the kind of profit margin you would require to get involved in a real estate deal. You will want to build in cushion for cost overruns and market fluctuations, of course, but many investors forget to compensate themselves properly for time.

By setting up your guidelines with time limits attached to them, you can avoid this problem. Getting involved in a property that will eat up six months of your time and return a profit of $5,000 is obviously not worth the trouble. However, not every situation will be as clear as that, so developing a plan on the term of your investment and the profit level you want to target will help you more efficiently go through potential properties, undervalued or not.

Don’t Be Over-Eager
Keep many irons in the fire but only pull one out when the time comes. One of the pitfalls of finding an undervalued house is the tendency to forget about needed repairs or other work to get a home back on the market. You might be so excited to find a target after a long search, the story behind a seller’s motivation might prompt you to say yes before going through the math on the investment.

If you have developed guidelines, now is the time to use them. Don’t wait until late in the transaction when a seller is putting pressure on you to move to sit back and think about the investment. You are more likely to make a rash decision or submit to a seller’s negotiating point that you would not have otherwise. Just because a home is undervalued doesn’t mean the seller is resigned to getting the short end of a deal.

Don’t Be Fooled By Volume
While volume might be a valued statistic in the retail industry, real estate investors should avoid counting investments instead of counting profits. Just because you’ve found a handful of undervalued homes does not mean that you need to get involved with each one no matter how small the profit.

In real estate investing, you do not make up your profits through volume. Instead, strong real estate investors will spend time on the properties that will net them the biggest return and focusing on that one strong prospect instead of 10 inferior ones will help you develop that investing skill.

While it is exciting to find an undervalued home that you might think has the potential to be a solid real estate investment, don’t get carried away by that excitement and forget to evaluate the deal properly. Do your math to make sure that the time you put into a property will be rewarded, no matter what the selling price might be. You will be a better real estate investor over the long term if you do.

How To Researching Your Investment Property

Getting involved with an investment of any kind is a significant business operation and one that should not be entered into lightly by any means. By going through an extensive set of information before ever signing your name on the dotted line, you can avoid some of the pitfalls that are awaiting investors on some projects. There will always be unforeseen circumstances encountered on any business deal and purchasing an investment property is no different.

Know Your (Potential) Tenants
If you are buying a multi-family home with current renters, make sure you get a full disclosure on all of the information surrounding those renters. Do some of the tenants have a history of late payments? Are you going to have to replace one of the renters in the near future?

Obviously, a piece of real estate full of eight-year tenants will be a bit more attractive than a property with a high level of turnover. By buying a rental property, you are buying into the management of that property and you should have a complete picture on the kind of time and effort commitment that is going to be necessary to maintain the real estate. If minimizing your day-to-day time expenditure on a property is important to you, perhaps you will put a premium on a history of stability with the property.

Know Your Property
Of course you will take numerous tours of the property before purchase, but make sure you either commit to memory or write down any of the small little items you notice that might need work or further investment. Obviously, the state of the appliances in the piece of real estate is something to be noticed as you will often be asked to update those appliances later and some kind of expectation has to be determined as to how likely it is that you’ll have to in the near future.

Any kind of infestation is a huge red flag as it can indicate further infrastructure problems with the property, so be sure to look for anything that might suggest a pest problem. Externally, investors sometimes neglect to think about features such as landscaping and drive way/roadway repairs that could become issues over the course of owning a multi-family property. It is easy to see problems that a coat of paint could solve but perhaps more difficult to see sprinkler-system troubles on a property inspected in December. Be sure to exhaustively inspect your potential investment just as you would exhaustively inspect a piece of real estate you hope to make your new home.

Know Your Implied Agreements
Often, investment properties come with strings attached to other companies that might have agreements on the property. Sometimes those agreements terminate during a change of ownership, but sometimes they don’t. That can include cable television services, landscaping, snow removal agreements and a whole slew of property-upkeep services that need to be done on any property. If you are not planning to take care of these types of things yourself, an outside company must be used and sometimes previous agreements will leave you without the ability to even negotiate rates. These are all costs associated with adding an investment property to your portfolio and should be understood before taking action on any piece of real estate.

There are loads of other aspects to owning a property that are best left for other articles, but never underestimate the time and effort commitment it requires to take on an investment property. By doing some thorough homework on the state of the property, the state of the tenants and the state of the external agreements surrounding the property, you can ensure that you have a full picture of the property and what your financial outlay will have to be. Doing your homework before any of those steps will remove some of the uncertainty and potential mistakes that can beset investment projects.

Tips to Personalize Your Entryway

It’s always tricky to prioritize decorating dollars, and I tend to funnel most of mine to interior improvements: furniture, fabric, tchotchkes. But lately I’ve been thinking that the outside of the house – and especially my front entry – deserves its share of the love. The entry may be the first impression of a home, and my entry is best described as mousy.

Fortunately, jazzing up a front entrance doesn’t have to cost a fortune. Try these eight strategies to create a showstopper entryway without blowing your budget.

1. Create a mini room. Here a bench with cheery outdoor pillows, a hanging paper lantern and a framed chalkboard combine to turn a plain entrance into a sitting space all its own – all without breaking the bank. Mix and match furniture to suit your home’s architecture and style.

2. Spell out a welcome. A stencil, a can of spray paint and presto! A plain concrete stoop turns into a hospitable howdy. If you can’t or don’t want to paint directly on the surface, try stenciling a plain cotton or sisal doormat instead.

 

3. Invest in showstopping hardware. Swap out bland doorknobs and knockers for instant pizzazz on the cheap. You can search flea markets and architectural salvage stores for one-of-a-kind vintage models, but even home centers carry eye-catching styles these days. Choose a knocker that offers a glimpse into your personality and interior style, whether it’s an equestrian motif for horse lovers or a nautical theme for a house on the coast.

4. Pile up plantings. Plants are one of the easiest and most affordable ways to give your entrance a polished look, and they can enhance any effect you’re going for. Mass tumbles of old-fashioned blooms in weathered tin or tole tubs for a cottage; stick with variegated greens and sleek containers in a modern setting. For a traditional house, create a symmetrical grouping of palms, ficus or roses in ceramic or terra-cotta planters.

5. Light the way. Why settle for a boring outdoor light fixture when you can hang a piece of eye candy? Outdoor chandeliers are delightfully unexpected. If you want to use it for illumination, look for a model that’s designed for outdoor use, but if you just want the decorative effect, you can mount an indoor fixture without wiring it.

6. Paint the door an unexpected color. It sounds obvious, and yet so many of us take the easy way out and go with brown, black or white. If the task of choosing a bolder hue throws you for a loop, try this trick: Snap a photo of your house, then take it to the paint store so you can see how different colors work with your exterior.

 

Choose a shade that contrasts strongly with the primary paint color: bright pink paired with pale gray siding, turquoise against rusty red brick, plum on khaki stucco. Lipstick red in a field of crisp white is a classic, but branch out and try other colors – perhaps kelly green or Chinese yellow.

7. Decorate the doorway surround. Set off your front door and give it greater presence by adding a decorative frame. If the architecture will accommodate such a treatment, line it with decorative tiles or a mosaic. If not, you can achieve a similar effect with paint.

 

8. Have fun with house numbers. Forget hardware-store numbers on the mailbox. Make yours pop: fun colors, funky fonts, creative placement. Just be sure that you don’t sacrifice clear visibility and readability for the sake of visual interest.

Some Housewarming Gifts For New Homebuyers

Yes, a plant is a considerate gift for a friend or family member who just moved into a new house. But you know what’s better? A whole lot of stuff. If you want to come up with a thoughtful, useful, and memorable gift for a new homebuyer, we’ve got some ideas.

1. Housecleaning services

Presumably, the house your loved ones are moving into is nice and clean when the moving truck arrives. But what is it going to look like after they’ve been emptying and breaking down boxes and walking in and out of every room multiple times? A certificate for housecleaning services a few days or a week out from their move-in will be a much-appreciated gift.

2. A home-cooked meal

In all the chaos of packing and moving and unpacking, it can be easy to forget to do “normal” daily things… like actually eat a meal. Show up with dinner and you’ll be a superstar. And don’t forget to bring serving pieces, disposable dishes and silverware, and a package of napkins since the kitchen boxes may not be unpacked yet.

3. Groceries

Or, show up with groceries and stock the fridge right after everything is moved in and the electricity is turned on. Getting to the market may be a priority for them, but with so many other conflicting priorities, it may have fallen to the bottom of a long list.

4. A meal kit delivery service

If your new homebuyer friends or family members are busy professionals and/or parents, they’ll undoubtedly appreciate being able to simplify dinner. Blue Apron, Plated, and Hello Fresh all offer their own version of “a freshly prepped meal-in-a-box,” as Forbes calls them, and many of them have introductory specials you can get in on.

5. Help with unpacking

There’s nothing like the gift of time when it feels like the moving-out and moving-in process is never-ending.

6. Find landscapers

Super organized people may have already taken care of finding a landscaper in their new neighborhood, but, for many others, this is one of those things that can fall through the cracks, and the next thing you know, the HOA is sending you notices about your overgrown lawn. You can be a great friend by helping to find a landscaping service in their new neighborhood and setting up an appointment for the lawn to be cut just before or after the move, as needed.

7. Offer babysitting services

Sometimes, just making sure the kids are taken care of and entertained is all someone needs to get through a stressful event like moving.

8. A move-in care package

Hit Target and put together an “essentials” bag full of things you know will come in handy the first few days/nights in the house. You can personalize to your friends’ and family’s tastes and include things like: a bottle of wine and disposable glasses, high-protein snacks like nuts and bars, toilet paper, Ibuprofin, and light bulbs and batteries.

9. A cleaning basket

A package of Swiffer floor cleaners. A box of Mr. Clean Magic Erasers. A new broom. Dish and laundry detergent. A toilet plunger. A couple of bottles of cleaning spray and a few rolls of paper towels. They’re all the cleaning items your loved ones may not have thought to buy or bring with them (or may not know which box they’re in, if they did).

10. Gift cards

Not sure if you should go this route because it might feel impersonal? A gift card to Target, Home Depot, the local supermarket, or a hot new restaurant in their new neighborhood will always be appreciated, especially when those unexpected costs of moving to a new place start to catch up with your friends.

Know More About A Valuable Alternative To A Home Sale

Congress is currently talking tax reform. Two very important real estate benefits are on the so-called “chopping block”, either to be completely eliminated or significantly curtailed.

It is doubtful that the home owner exclusion of up to $500,000 (or $250,000 if you file a single tax return) of profit will be impacted; there are too many homeowner voters who will forcefully object. But investors do not have the same strong lobbyist who can make the case for preserving the “like kind” exchange. So if you have an investment property, now might be the time to consider doing an exchange.

Residential homeowners have a number of tax benefits, the most important of which is the exclusion of up to $500,000 (or $250,000 if you file a single tax return) profit made on the sale of your principal residence. But real estate investors — large and small — still have to pay capital gains tax when they sell their investments. And since most investors depreciated their properties over a number of years, the capital gains tax can be quite large.

There is a way of deferring payment of this tax, and it is known as a Like-Kind Exchange under Section 1031 of the Internal Revenue Code. In my opinion, these exchange provisions are still an important tool for any real estate investor.

The exchange process is not a “tax free” device, although people refer to it as a “tax-free exchange.” It is also called a “Starker exchange” or a “deferred exchange.” It will not relieve you from the ultimate obligation to pay the capital gains tax. It will, however, allow you to defer paying that tax until you sell your last investment property — or you die.

The rules are complex, but here is a general overview of the process.

Section 1031 permits a delay (non-recognition) of gain only if the following conditions are met:

First, the property transferred (called by the IRS the “relinquished property”) and the exchange property (“replacement property”) must be “property held for productive use in trade, in business or for investment.” Neither property in this exchange can be your principal residence, unless you have abandoned it as your personal house.

Second, there must be an exchange; the IRS wants to ensure that a transaction called an exchange is not really a sale and a subsequent purchase.

Third, the replacement property must be of “like kind.” The courts have given a very broad definition to this concept. As a general rule, all real estate is considered “like kind” with all other real estate. Thus, a condominium unit can be swapped for an office building, a single family home for raw land, or a farm for commercial or industrial property.

Once you meet these tests, it is important that you determine the tax consequences. If you do a like-kind exchange, your profit will be deferred until you sell the replacement property. However, it must be noted that the cost basis of the new property in most cases will be the basis of the old property. Discuss this with your accountant to determine whether the savings by using the like-kind exchange will make up for the lower cost basis on your new property. And discuss also whether you might be better off selling the property, biting the bullet and paying the tax, but not have to be a landlord again.

The traditional, classic exchange (A and B swap properties) rarely works. Not everyone is able to find replacement property before they sell their own property. In a case involving a man named Mr. Starker, the court held that the exchange does not have to be simultaneous.

Congress did not like this open-ended interpretation, and in 1984, two major limitations were imposed on the Starker (non-simultaneous) exchange.

First, the replacement property must be identified before the 45th day after the day on which the original (relinquished) property is transferred.

Second, the replacement property must be purchased no later than 180 days after the taxpayer transfers his original property, or the due date (with any extension) of the taxpayer’s return of the tax imposed for the year in which the transfer is made. These are very important time limitations, which should be noted on your calendar when you first enter into a 1031 exchange.

In 1989, Congress added two additional technical restrictions. First, property in the United States cannot be exchanged for property outside the United States.

Second, if property received in a like-kind exchange between related persons is disposed of within two years after the date of the last transfer, the original exchange will not qualify for non-recognition of gain.

In May of 1991, the Internal Revenue Service adopted final regulations which clarified many of the issues.

This column cannot analyze all of these regulations. The following, however, will highlight some of the major issues:

1. Identification of the replacement property within 45 days. According to the IRS, the taxpayer may identify more than one property as replacement property. However, the maximum number of replacement properties that the taxpayer may identify is either three properties of any fair market value, or any larger number as long as their aggregate fair market value does not exceed 200% of the aggregate fair market value of all of the relinquished properties.

Furthermore, the replacement property or properties must be unambiguously described in a written document. According to the IRS, real property must be described by a legal description, street address or distinguishable name (e.g., The Camelot Apartment Building).”

2. Who is the neutral party? Conceptually, the relinquished property is sold, and the sales proceeds are held in escrow by a neutral party, until the replacement property is obtained. Generally, an intermediary or escrow agent is involved in the transaction. In order to make absolutely sure the taxpayer does not have control or access to these funds during this interim period, the IRS requires that this agent cannot be the taxpayer or a related party. The holder of the escrow account can be an attorney or a broker engaged primarily to facilitate the exchange.

3. Interest on the exchange proceeds. One of the underlying concepts of a successful 1031 exchange is the absolute requirement that not one penny of the sales proceeds be available to the seller of the relinquished property under any circumstances unless the transactions do not take place.

Generally, the sales proceeds are placed in escrow with a neutral third party. Since these proceeds may not be used for the purchase of the replacement property for up to 180 days, the amount of interest earned can be significant — or at least it used to be until banks starting paying pennies on our savings accounts.

Surprisingly, the Internal Revenue Service permitted the taxpayer to earn interest — referred to as “growth factor” — on these escrowed funds. Any such interest to the taxpayer has to be reported as earned income. Once the replacement property is obtained by the exchanger, the interest can either be used for the purchase of that property, or paid directly to the exchanger.

The rules are quite complex, and you must seek both legal and tax accounting advice before you enter into any like-kind exchange transaction.