Passive or Lazy 1031 Exchange

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Tis the season…. for commercial property owners to consider there next move for their real estate assets that they want to sell or exchange. Many hesitate currently because they say that in this market they need more time to sell and identify a property. Of course, the traditional 1031 exchange window can be too tight for some sellers.

When having lunch with Northern California based Rich Inglis an Enrolled Agent (EA) and Real Estate Tax Strategist with Mosaic Tax Strategies, he mentioned utilizing a passive or lazy 1031 exchange. Hmmmmm? What’s that?

He mentioned that he uses this strategy for many of his real estate savvy clients. So, I asked him for more specifics about the the passive 1031 exchange.

Q: What is a passive or lazy 1031 exchange?

 A: A “lazy 1031” exchange is a process where the investor does not use an intermediary to perform a 1031 exchange. Instead, the investor sells a property as a regular sale and, in most cases, realizes a capital gain. To offset the gain, the investor would purchase another property in the same year and used a cost segregation strategy to create a large loss to offset the gain on the sale of the original property.

Q: What are the benefits?

 A: The benefits are the investor is not subject to the 45 day identification period and the 180 days close restriction.

Q: What are the risks? 

A: Risks include, both the original investment property and replacement property must be purchased in the same calendar year. Depending on the gain, the cost segregation loss may not be enough to offset all of the gain.

Photo by The New York Public Library on Unsplash

Q: Why don't more people do them?   

A: I believe that more people don’t do them because, one, the 1031 exchange is sufficient for most investors, and two, most people don’t know about the strategy.

Q: Why don't more people know about them?

A: I believe that more people don’t know about them because most tax professionals do not engage in proactive tax planning and do not concentrate their education on real estate matters and thus information on advanced strategies don’t make it to the real estate investment community.

Q: Can this exchange be used for all types of properties?

A: The lazy 1031 exchange can be used on any property that is eligible for a 1031 exchange. Which is to say, any real property including residential and commercial.

 Q: What is the best way to do a passive 1031 exchange?

A: The best way to do a lazy 1031 exchange is to work with a tax professional that is very knowledgeable about the process and can run numbers before the transaction is attempted so that the investor understands the tax consequences.

 Q: Any additional thoughts?

 A: As with any tax planning engagement, there is no one size fits all strategy. A good tax planner will run multiple scenarios and chose those strategies which benefit the taxpayer the most.

This blog and information available at this website and in this article are for informational purposes only and not for the purpose of providing tax or legal advice. You should contact your attorney and/or accountant to obtain advice with respect to any particular issue, question or problem.

San Francisco Apartment Rents Resume Downward Decline (Copy)

San Francisco’s multifamily rents resumed their downward spiral in September and October, which wiped out the rent gains made in the previous six months of 2023.

Average rents, which in September fell 0.5% below their August level, dropped another 0.8% in October. That totals a year-over-year decline of 1.6%.

During this time of year, average rents often drop, but typically the seasonal drop arrives after rising during the spring and summer leasing season, when tenant demand soars and landlords can secure strong rent increases.

However, 2023 saw a moderate spring-summer leasing season in San Francisco. The lack of demand can be attributed to the ongoing resident population decrease, reduction of workers returning to offices and lackluster tourist activity. Toss in the challenging economy for renters, high interest rates and job layoffs which creates a perfect storm for apartment renters.

High-end apartment buildings account for a bulk of the rent decrease in the past two months. Average rent for four- and five-star-rated buildings slipped 2.2% year over year. The luxury segment continues to suffer high post-pandemic vacancy rates, with an average vacancy of 9.6% in San Francisco. The continuing lack of demand forces landlords to entice renters with favorable lease deals.

San Francisco doesn’t stand alone with subdued rent growth. Multifamily rents have flattened or fallen in many other national markets. Some markets, such as those in the Sun Belt, feel the effects of historically high levels of new construction, while other markets suffer more from the impact of the continued economic pressures. San Francisco doesn’t suffer from over-supply, and many expect that demand will pick up as the economy improves over the next year.

Uber Follows Other Tech Giants in Office Space Reduction, Another San Francisco Sublet

San Francisco commercial real estate took another hit as ride-sharing giant Uber looks to shed a sizeable part of its San Francisco office space. The company recently listed nearly a third of its new corporate hub in the city's Mission Bay neighborhood.

The move represents one of the latest among U.S. firms looking to reduce their space as executives shift priorities in an uncertain economy and the rise of hybrid work patterns stemming from the pandemic.

Photo by Lili Popper on Unsplash

Uber attempts to sublease all 286,548 square feet in one of four buildings it uses for its global headquarters, according to marketing materials shared with CoStar News. The task to sublease won’t be easy considering the declining number of office tenants willing to invest in and expand in the city, which has one of the highest office vacancy rates in the country, CoStar data shows.

San Francisco rents, which rank among the highest in the nation, now average about $62 per square foot, CoStar data shows.

 Many Silicon Valley tech giants continue to make deep cuts to their real estate portfolios by closing office locations, subleasing unwanted space, terminating prelease agreements, and halting future investments. Those decisions have increased the Bay Area's real estate market with millions of square feet of sublease space or have downsized offices as leases come due.

 San Francisco now touts one of the highest sublease availability rates in the country.

Nearly 12 million square feet of sublease space remains available in San Francisco alone — more than six percent of the city's entire inventory — well below New York, which has about 31 million square feet of sublease space, or about three percent of its entire office stock, according to CoStar data. The issue continues to worsen as the demand for office space in and around the city's downtown deteriorates, where vacancy has shot up to surpass 20%, the data shows. 

Slack Aims To Ditch High-Rise Space in Latest Blow to San Francisco Office Demand

Even though San Francisco Omicron numbers continue to decline, San Fransisco’s High-Rise leasing continues to take a hit.

Here’s a recent article from CoStar that offers more insight -

Slack Aims To Ditch High-Rise Space in Latest Blow to San Francisco Office Demand

Instant Messaging Platform To Offload Workspace in Pursuit of Flexible Work Options

By Katie Burke
CoStar News

February 3, 2022 | 5:07 P.M.

Just as San Francisco's sublease glut appears to be easing, one of the city's largest tech companies is putting hundreds of thousands of square feet of offices on the market in the latest nod to companies shifting toward long-term remote work.

Instant messaging platform Slack has listed all 208,460 square feet of its office space in the high-rise at 45 Fremont St. more than three years after signing what had been the city's third-largest office deal of 2019. CBRE has been enlisted to help market the space, which according to marketing materials is "available now."

Slack, acquired by fellow San Francisco tech company Salesforce last year, was one of the first companies to shift to remote work after the pandemic's outbreak in early 2020. It has repeatedly delayed its return to physical office space, and while it is tentatively set to bring workers back sometime this month, a majority of its global workforce will be "digital first."

A spokesperson for the company confirmed the sublease decision and told CoStar News that while Slack would retain its Foundry Square headquarters at nearby 500 Howard St., the company's shift to more flexible working models will be a permanent aspect of its real estate strategy moving forward.

Slack leases the full 247,238 square feet of office space at the Howard Street complex as part of a deal that won't expire until August 2028, according to CoStar data.

'Doomed Approach'

Emerging COVID-19 variants, delayed return-to-office plans and an employee-driven push for flexible schedules have all spiraled into a tangle of woes for the San Francisco office market, which prior to the pandemic boasted the nation's most expensive rents and a severe shortage of high-quality space. Over the past two years, however, a growing pool of locally based companies, including Airbnb, Salesforce, Uber, Dropbox, Cloudflare and Eventbrite, have downsized or abandoned physical office space altogether as they adopt hybrid or fully remote work structures.

Slack CEO Stewart Butterfield said last year that it was fruitless to require workers to return to in-person office space, and that the pandemic has created a new course for companies that will forever change how and where employees work.

“When I see headlines about CEOs trying to lure employees back to the office, I feel like it’s probably a doomed approach,” Butterfield said. “Work is no longer a place you go. It’s something you do.”

The mounting preference for remote work has dealt a series of blows to the nation's top-tier office markets, and the impact is seen delaying a full recovery for several of them. San Francisco has suffered the most severe office occupancy losses among the nation's largest cities since the start of the pandemic, according to a CoStar analysis. More than 10 million square feet of office space has been vacated, a figure on par with the amount of space tenants emptied in San Francisco during the dot-com bust of 2000.

On the sublease front, San Francisco has fared far worse than other major office markets across the country.

With more than 8 million square feet of office space sitting on the city's sublease market, San Francisco has seen a slight drop from its high of about 10 million square feet a year ago, but more than double the 3.7 million square feet from the end of 2019.

Marco Cugia, an associate director of CoStar market analytics, said some of the older sublease listings have been marketed for so long, the original lease term has expired and the space is now available directly from landlords. That is evidenced by a rise in total space availability in San Francisco, for both direct and sublet listings, to more than 28 million square feet.

"Heightened sublet availability is a negative sign for office demand as existing tenants are cutting out of leases early, but it also puts downward pressure on overall market rents because it's a discount compared to direct vacant space," Cugia said.

As a result, San Francisco has been overtaken by Silicon Valley as the country's most expensive office market. Annual asking rates in San Francisco have fallen about 5% over the past year to roughly $61 per square foot, according to CoStar data. In San Jose, which encompasses the tech-concentrated Silicon Valley area, asking rents average roughly $62 per square foot.

By comparison, rents among sublet availabilities in San Francisco average only $42 per square foot.

Using a Delaware Statutory Trust (DST) to Perform a 1031 Exchange

Photo from Wikipedia

Many investment property owners who wish to sell their assets often gripe about either 1- paying capital gains tax, 2- the lack of inventory to do a 1031 exchange.

Some savvy investment property owners take advantage of the 1031 exchange into a Delaware Statutory Trust (DST).  What is a DST?  A DST represents a legal entity used in real estate investing that allows for a number investors to pool money together and hold fractional interests in the holdings and assets of the trust.

A DST functions similar to a limited partnership, where a number of partners (or owners) pool investment money together for investment purposes in which a master partner will manage the assets that are owned by the trust. 

The DST has become a popular structure for pooled real estate investment after a 2004 IRS ruling that allowed ownership interests in the DST to qualify as a like-kind property for a 1031 exchange.

In general terms a sponsor will create the DST and name a trustee who will have sole authority to manage the business and assets of the trust. The trustee maintains fiduciary responsibility to the beneficial owners (i.e. fractional owners).

The trust will collect the investment money, arrange any financing necessary on behalf of the trust, and make and manage or hire property managers. The trust itself holds direct ownership of the assets with the individual owners owning an interest (or share) in the trust.

Like an LLC, income and distributions (and taxes) pass through to the individual owners. The typical trust life can vary but many fall in the five to ten year lifespan in which property is acquired, income collected and distributed to owners and when, upon disposition of assets, remaining capital returns to the investors.

An investor who owned an investment property may roll the proceeds from the sale of that property, into a new investment class such as industrial, hospitality, mixed-use, multi-family housing or office space through the purchase of a fractional investment.

Not only does the DST open up new sectors that may not have been available, but the structure allows investors to realize passive income, while not needing to worry about the day to day issues of real estate management. 

Although an individual investor can hire a property manager, as a DST investor, the management of the trust asset will likely be of an institutional caliber. This example also applies to the work and analysis done by professionals associated with the trust regarding investment and financing decisions.

While DST offers many advantages, some drawbacks exist.

Investors wishing to have any say in the investment management or investment decisions should look for another vehicle, as the DST ownership structure offers no control. The trustee or investment manager will be making all investment as well as any property management decisions.

DST investors should be prepared to invest for the life of the trust, which can be five to ten years. Anyone looking for a more liquid investment or flexibility to sell should be aware that premature sale of a share will likely get unfavorable pricing.

For more DST information - DST broker referrals feel free to contact me.

Commercial real estate market continues double-digit declines in sales activity

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The commercial real estate market has gone through five months of high double-digit declines in sales activity according to Real Capital Analytics.  According to their August 2020 report, the property sectors have been dragged down in this Covid-19 calamity, but some are faring worse than others. Distressed debt situations continue to are spike, but the sale of distressed assets has yet to climb in a significant way.

Apartments were the largest sector for transaction volume in August, accounting for 40% of all commercial real estate sales. Still, the $5.4b in apartments traded is a low figure compared to recent years, and was down 65% from a year earlier.

Hotels had the lowest level of deal volume across the main property types with only $300m in activity. Even the sale of development sites came in stronger. Hotel sales were already under pressure before Covid-19 hit, but with the shutdown in travel and tourism, the sector is further under strain and distressed hotel deals are rising.

With these declines in place some have been wondering about where are all of the distressed properties and foreclosures.

Levels of distress continue to climb, but distressed asset sales, not so much. It takes time for distress situations to be resolved and except for the hotel sector, sales of distressed assets have not climbed dramatically.

In the current downturn, sales of distressed assets have yet not moved much from the pre-recession trends. Distressed sales represented only 1.4% of total transaction activity in Q2’20, a level not much different from the trend set over the previous two years. As distressed sales began to rise as a share of total activity in 2009, however, the price information from these deals helped to set investors’ expectations on pricing overall.

Slight single-digit declines in property prices accelerated to a double-digit pace, with the RCA All-Property CPPI hitting a low-water mark in Q4’10.

 It remains unclear if in this current downturn will again take three full years from the start of the recession for commercial property prices to hit a low point. Distress continues move into the system faster this time which might accelerate the process of distressed sales. Until these distressed assets hit the market in the significant way, however, asset pricing will remain clouded.

1031 Exchange and Opportunity Zones Extensions due to Covid-19

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For those of you watching the clock tick away on your 1031 exchange or Opportunity Zone rollover, some good news arrived.

Late last week, the IRS issued Notice 2020-23, extending a variety of deadlines, including 1031 exchange deadlines. Although the Notice lacks clarity, because it is not written like the typical Disaster Relief Notices, this Notice extends any 45-day or 180-day deadline that occurs between April 1 and July 14, to July 15, 2020.

Please note that this extension remains different from the usual disaster extension that provides for an extra 120 days.

The examples below illustrate the current extension:

• Example 1: Exchange began April 1, 2020. 45th day is May 16, which would be extended to July 15, 2020. Taxpayer must still close on replacement property by Sept 28, which is the 180th day; because Sept 28 is after the last day of the disaster period (July 15).

• Example 2: Exchange began Dec 31, 2019, 45th day is Feb 14, 2020. ID period is not extended because it is before April 1. The 180th day is June 28, which would be extended to July 15, 202

• Opportunity Zones.  If an investor who sold a capital asset planned to roll over the gain into an Opportunity Fund and the 180-day deadline to do so falls between April 1 and July 15, 2020, he or she can make the investment as late as July 15.  

Most of these tax laws remain a moving target, so to be sure, 1031 exchangers should speak with their tax advisors to determine if they are eligible for an extension.

Coronavirus Recession Now Underway

In this time of uncertainty I like to turn to trusted resources for information. No better source of information then my alma mater UCLA. David Shulman one of the top economists at the UCLA Anderson school wrote this piece about the upcoming outlook for the real estate market. I’m re-posting this update so that people can be more educated about their real estate and financial decisions.

The Sum of All Fears¹Updated Forecast - Including Real Estate - from UCLA Anderson

By David Shulman, Senior Economist, UCLA Anderson Forecast and UCLA Ziman Center

As we noted in our quarterly March report, the forecast represented an “attempt to distill incomplete and rapidly evolving information into a framework about the future course of the economy.” We now have new information that has confirmed the coronavirus is spreading rapidly, the travel and recreation sectors of the economy are shutting down, oil prices continued to plunge in response to the Russian war on the American fracking industry, credit spreads have widened dramatically thereby tightening financial conditions, and stocks remain volatile with a downward bias.

“Because of social distancing and outright fear, commercial and residential real estate has been placed under stress by the coronavirus recession now underway.”

As a result we have changed our forecast. Simply put we believe that when the business cycle dating committee of the National Bureau of Economic Research meets they will note that the 2020 recession began this month. Significant increases in Federal spending to support individuals and industries damaged by the coronavirus and a new program of quantitative easing by the Fed will limit, but not avert, the decline in economic activity that we foresee. In summary our new forecast is as follows:

· Real GDP declines by 6.5% and 1.9% in 2Q and 3Q, respectively. Growth rebounds in the 4Q a 4% clip.

· Social distancing causes real consumption to fall by 7.8% in 2Q.

· Real Business Fixed Investment declines throughout the year.

· Two million jobs are lost between 1Q20 to 1Q21.

· The unemployment rate rises from 3.6% to 5.0%.

· The Fed responds with a zero interest rate policy and QE.

· Inflation remains muted.

In addition, we have the following forecast addendum on the real estate sectors:

Because of social distancing and outright fear, commercial and residential real estate has been placed under stress by the coronavirus recession now underway. Particularly hard hit will be hotels, retail (especially malls), senior housing and nursing homes. The office, industrial and apartment sectors will be negatively impacted by the two million job losses we foresee. Housing activity is being pressured by the weak economic environment and the unwillingness of consumers to visit new developments. Further, it is likely that realtors will call off open houses. If that is not enough, deal making will slow down because of the reduction in face-to-face contacts. In sum, it will not be a pretty picture over the next several months.

 ¹ With apologies to Tom Clancy.

Retail Vacancy Tax Added to Ballot by San Francisco Supervisors

The New Year promises to be an interesting one both at the national and local level. Locally, the close of 2019 saw the San Francisco Board of Supervisors unanimously approved the landlord vacancy tax during a special late year meeting.

If the voters approve the ballot measure this March, landlords with a storefront vacant for more than 182 days will face a fee that is calculated according to the length of their storefront and the amount of time it has been empty.

Besides the SF supervisors, many local residents have been upset at the number of vacant storefronts dotting their neighborhood streets. Even though San Francisco contains many vacancies, the City doesn’t rank in the top 10 for retail vacancy rates in the country. The Inland Empire just outside of Los Angeles has the highest vacancy rate in the nation at 7.1% according to a July report based on data compiled by CoStar, a commercial real estate information company. Sacramento (6%) maintains the fifth highest rate in the nation and Fresno ranks number 8 (5.6%).

Many outside experts attribute the increase in retail vacancies to factors such as an increase in online shopping not just unreasonable landlords. 

If the measure passes, San Francisco’s tax may be the first of its kind in the United States to pertain specifically to retail space. Across the bay, Oakland implemented a vacancy tax on residential landlords as voters overwhelmingly approved Measure W last November.

The Oakland ordinance allows the city to tax a property owner $6,000 per parcel or $3,000 per condo if units remain vacant for more than 50 days.

How New COPA Law Will Affect San Francisco Multi-Unit Property Sales

With San Francisco’s housing crisis spiraling out of control, the City of San Francisco recently enacted a new ordinance significantly impacting owners of multiunit buildings. More specifically, it will affect landlords of multiunit buildings with 3 or more residential units (including TIC units) who wish to sell their property. This new law called the Community Opportunity to Purchase Act “COPA” gives qualified non-profit organizations the right to purchase the units.

San Francisco Supervisor Sandra Lee Fewer proposed this new legislation in December 2018 as a means of stabilizing communities by combating tenant displacement and preserving affordable housing. Supervisor Fewer’s new legislation may be new to the Bay Area but not to other cities such as Washington DC, Boston, Chicago, and Seattle which have had similar ordinances for many years.

The impact of COPA will be significant. The specific guidelines give qualified nonprofit organization buyers 25 days to work with tenants and exercise their first right of first refusal offer and, if accepted by the seller, enter into a Purchase-Sale Agreement. Although sellers do not have to accept the non-profit offer, the non-profit would be granted a right of first refusal to match an existing offer.

If a non-profit succeeds in purchasing the building then deed restrictions would be placed on the building, restricting the building to affordable housing “for the life of the building.”

What will be the COPA impacts have on owners of multi-unit buildings here in San Francisco?

It may affect prices and values. Time will tell if certain buyers wish to enter the San Francisco market with these added restrictions. One issue for sellers looms in that they may not be able to work a 1031 exchange as efficiently.

The new COPA law will definitely slow down the selling process. Even if a non-profit decides not to purchase a building, the right of first refusal time will hamper any seller idea of a quick sale.

A final note - those building owners who willfully bypass the COPA option may find themselves in legal hot water. If an owner sells a multi-family residential building in violation of COPA, Qualified Nonprofits may bring legal action against the seller. Potential remedies include damages, attorneys' fees and, if the violation is knowing or willful, civil monetary penalties presumptively tied to the value of the property. These remedies are imposed only against the seller or a party that has willfully colluded with the seller to violate COPA.

Sellers seeking advice or having questions regarding COPA should engage a qualified San Francisco real estate attorney.

Vacant San Francisco Commercial Units To Pay Fees and Possible Fines

San Francisco hardly looks like a ghost town however many vacant commercial spaces can be seen from Vis Valley all the way the Marina. Call it the Amazon and high lease rate effect.

To cure this ill, San Francisco recently passed an ordinance authored by San Francisco Supervisor Sandra Lee Fewer, which “requires vacant or abandoned commercial storefront owners to pay annual registration fees [...], require annual inspections of registered vacant or abandoned storefronts, and update the penalty for violations of the requirement to register.”

Under the new legislation, a commercial storefront counts as “vacant or abandoned” if it’s been unoccupied for 30 days, with exceptions specified for units undergoing construction or repair work.

Fewer’s new rules specific that building owners pay a $711 fee to register a vacant storefront. The new rules state that the money to be paid upon registration rather than more than 200 days later, as the previous current law specified.

The law further specifies, “The owner of a registered vacant or abandoned commercial storefront department shall provide a report from a licensed professional confirming the storefront’s interior and exterior has been maintained” every year or face further fees.

The new ordinance also removes the exception that a storefront is technically vacant as long as it’s being offered for sale or lease.

If that wasn’t enough for commercial building ordinances, San Francisco Supervisor Peskin submitted a proposal that owners of commercial properties in Neighborhood Commercial Districts — areas where stores and services are clustered — that remain vacant for more than six months would face a fine of at least $250 per day.

It remains obvious to anyone who walks down a commercial district that storefronts represent the visible face of the long-term vacancy problem, Peskin aims to target residential properties as well. Landlords with three or more units that sit vacant for six months would also pay $250 per unit per day until the unit is leased.

The Board of Supervisors would need to approve Peskin’s plan to place it on the November ballot, where it would need to pass by a two-thirds vote to become law.

San Francisco sellers already licking their chops in anticipation of new IPO millionaires

Now that Lyft, the first of the ballyhooed Bay Area IPOs, has gone public the Bay Area is well on its way to creating a new slew of millionaires. Later this year when the likes of Uber, Pinterest, Slack and other make their way to the IPO stage San Francisco and the Bay Area will see even more millionaires in the making.

Once the employees have access to their funds they will definitely impact the San Francisco real estate market. The impact will not be immediate as lockup periods for selling the stock vary from company to company, but most don’t last for more than one year.

Of course the newly minted millionaires will affect the local real estate market. Over the past eight months home sales saw a sizable drop in homes sales. Specifically, sales volume in the nine-county Bay Area totaled 3,857 units, according to CoreLogic. This number represented the lowest number of sales that the region has seen in 11 years and nearly 28% below December 2018 levels.

The California Association of Realtors reported that the Bay Area median price rose 4.5% in January 2019 compared to January 2018. Median home prices in Marin, San Francisco, San Mateo and Santa Clara counties continued to remain above $1 million, while Marin County recorded a 12.8% annual price drop.

How will local San Francisco real estate sellers and buyers react? It certainly won’t be a welcome sight to buyers who were just recently starting to gain back some leverage.  Sellers may already be licking their chops, envisioning buyers overpaying for their dream house. Expect in the next six months for home sellers to solidly regain the upper hand.

Credit Score Mistakes To Avoid

With the holiday season in full swing, most people will be using their credit cards to purchase various big-ticket items. These purchases tie into your credit score. Credit scores can be the key to a successful real estate purchase. Favorable loan rates can be tied to high credit scores. Real estate buyers and investors might consider these credit card mistakes that can hurt credit scores.

Jack Olson from Better Credit Club suggests the following items to avoid making costly mistakes:

1. Closing Credit Cards

Your credit scores are built upon the strength of your open and active accounts. As long as your accounts are “open and active” and “paid as agreed” they will add value to your scores. When your account is no longer open and/or active you will lose the value from that account, therefore it’s best to keep your accounts open for as long as possible. Closing an account will cause your scores to fall quickly. In fact, Jack’s grandmother’s scores dropped from 800+ to one in the low 600s because she closed all of her credit cards. Don’t make this credit mistake.

2. High Utilization on Low Limit Cards

Credit card debt has a huge impact on credit scores but many people don’t realize how big of an impact an individual credit card balance has. The credit scoring system places emphasis on individual account balances vs overall account balances. As a result, if just one of your credit card balances exceeds 50% of the limit, your scores can drop 7-20 points. His typical offenders are the low limit cards because it doesn’t take much to exceed the 50% threshold.

Do you pay your cards off at the end of the month? You’re still not safe. Typically lenders report randomly perhaps in the middle of the month. Your balance on the 15th may be the balance that sticks on your credit for the next 30 days. To avoid this credit mistake, keep your credit card balances low.

3. Opening New Accounts

Did you know that opening up a new credit card is a credit mistake? Opening a new account of any type will typically bring your scores down. The credit scoring system sees a lot of risk in new accounts and therefore your scores can drop once the account shows up on your credit report. The average person opens up an account every 2-3 years, any more activity signals a high risk behavior.

4. Collections

Collection account can seemingly appear on your credit report at any type and they are terrible for your credit scores. The most common type of collection that Jack sees are medical related. If you have visited a doctor’s office or the hospital at any time over the past few years, a good chance exists that a medical collection will appear on your credit report. Jack recommends checking your credit report periodically to make sure that no collections appear.

5. Past Due Payment

Times get tough and money gets tight. You may not be 30 days late on your payment yet but the damage can still felt on your credit. If your creditor reports that your payment is past due, your scores will drop like a rock. The good news is that this credit mistake can be corrected by getting current on your payments.

6. Debt Consolidation Programs

Many people look to debt relief programs as a better alternative to a bankruptcy but many debt relief programs are just as harmful as a BK itself. Many of these debt relief programs advise you to stop making your payments to your creditors. During this time your accounts go from “paid as agreed” to 30, 60, 90 days late and finally to a charge off. If you stay in the program long enough, the debt relief company will use your money to settle the charged off accounts. Consequently your credit will be trashed with collections and charge offs.

Stricter Rent Control Laws This November?

Come this November politicians won’t be the only nervous ones. California landlords will also be ballot watching here in the Golden State. Specifically, property owners will be watching the results of Proposition 10.

So what does Prop 10 entail?

A yes vote for Prop 10 supports allowing local governments to adopt rent control, repealing the Costa-Hawkins Rental Housing Act.

That strengthening of rent control could have a major impact in many cities across the state. According to the Department of Consumer Affairs, at least 15 California cities currently have some sort of rent control including Berkeley, Campbell, East Palo Alto, Fremont, Hayward, Los Gatos, Oakland, San Francisco and San Jose.

Any investor or property owner who owns properties in these cities or anywhere else in California may be affected by the new law in terms of how much rent they can collect and how much they can increase it.

Property owners here in the Bay Area with cities that already have rent control may ask what the importance is. This new proposition would allow local governments to revamp their own rent control laws. For example, in San Francisco single-family homes, condos and homes built after June 13, 1979 currently fall outside of rent control laws. However if this new proposition passes those properties could be subject to rent control under the new law.

The Costa-Hawkins Rental Housing Act is a state statute that limits the use of rent control in California. Costa-Hawkins provides that:

·       Cities cannot enact rent control on housing first occupied after February 1, 1995, and housing units where the title is separate from connected units (such as free-standing houses, condominiums, and townhouses).

·       Housing exempted from a local rent control ordinance before February 1, 1995, must remain exempt.

·       Landlords have a right to increase rent prices to market rates when a tenant moves out (a policy known as vacancy decontrol).

Prior to the enactment of Costa-Hawkins, local governments were permitted to enact rent control, provided that landlords would receive just and reasonable returns on their rental properties.

If this law passes it will certainly affect the value of all rental properties some more than others. Rental property owners might consider their options sooner than later. Perhaps it would be wise to sell or do a 1031 exchange into a commercial property? (The new law affects residential property). Or maybe the proposition might not pass. Either way, it’s wise to keep up to date about options and updates in the ever-changing real estate market.

Commercial and Investment Properties – 1031 Exchange in the new landscape

For commercial and investment property owners here in the Bay Area much of the new tax bill brought uneasiness and uncertainty. As bad as things could have been for Bay Area real estate owners the results could have been worse.

Fortunately, the 1031 exchange remained in the tax code.

Now that investors and commercial real estate owners have reviewed the details of the tax legislation, interest in structuring real estate transactions as 1031 tax deferred exchanges brought new momentum.

Here are some points to consider when contemplating a 1031 tax deferred exchange (courtesy of Ron Ricard at IPX1031):

1.    1031 Exchanges are used to defer taxes only on real estate. 1031 Exchanges for personal property were eliminated in the Tax Cuts and Job Act of 2017.

2.    1031 Exchanges allow taxpayers to defer capital gain taxes and depreciation recapture taxes and the 3.8% Net Investment Income Tax.

3.    To completely defer payment of any capital gains taxes, taxpayers need to purchase Replacement property with a value equal to or greater than the property that is being sold. In some cases the taxpayer may purchase a property of lesser value and still defer a significant amount of tax.

4.    1031 Exchanges follow strict time limits. Once the Relinquished property is sold, taxpayers have a total of 180 calendar days to purchase Replacement property. Within the first 45 days of the 180 the taxpayer must identify the Replacement property that they intend to purchase.

5.    Exchanges between related parties are allowed, but specific rules must be followed. Buying from a related party requires advanced planning.

6.    Partnerships may participate in 1031 exchanges. However, if the partners do not wish to stay together for the exchange, there are several interesting structures that can be considered.

7.    Taxpayers must utilize the services of a “Qualified Intermediary” when participating in a 1031 tax deferred exchange. The Intermediary provides guidance, proper documentation and secures the taxpayer’s funds between the sale and purchase.

8.    1031 Qualified Intermediaries are not regulated by the Federal Government, nor most State Governments. 

I am not a tax expert. 

I can be reached by email at Keith (at) ResourceRock.com 

New 2018 Tax Law and How It Impacts the Bay Area Real Estate Market

As if there weren’t enough factors swirling around the Bay Area real estate market the new 2018 tax bill arrives.  Both real estate investors and regular homeowners have been nervous about how the new tax bill will affect them.

In addition, many potential home buyers remain nervous about how this tax bill will affect not only the local real estate market as a whole but what financial impact it would have on a new home purchase.

No doubt that most people will end up paying more taxes on their real estate but will the Bay Area real estate market collapse? Doubtful. The job market remains strong and Inventory continues to be in short supply. Will prices continue to escalate? Maybe, especially with single family homes being in short supply. Will the market level off? Probably, especially for condos. Many new construction condos will come on market in 2018 which will ease the inventory supply and bring stability to values.

To ease some of the questions and concerns involving real estate taxes for 2018 and beyond, I asked CPA extraordinaire David Kupferman to answer a few questions.

1- How will the new tax bill affect current homeowners here in the Bay Area?

AS LONG AS YOUR MORTGAGE IS BEFORE 12/15/17 THEN YOU’RE GRANDFATHERED IN WITH THE PRIOR $1-MILLION DEBT CAP FOR DEDUCTIBLE MORTGAGE INTEREST.  AFTER THAT YOU’RE STUCK WITH DEDUCTING LESS, INTEREST ON $750,000.  HOME EQUITY (NON-ACQUISITION) DEBT EARLIER WAS LIMITED TO $100,000 DEBT INTEREST DEDUCTIONS BUT NOW THEY’VE TOTALLY ZAPPED THAT, NO DEDUCTIONS ALLOWED.  SAY WHAT?  JUST KEEP PAYING OFF YOUR HOME EQUITY LOAN, KEEP THE BANK HAPPY BUT THE IRS WILL NOT LET YOU DEDUCT IT ANYMORE.

REGARDING REAL ESTATE TAXES, NOW THE MOST YOU CAN DEDUCT ON A HOME’S IS $10,000/YEAR.  THE STATE OF CALIFORNIA, AS PREDICTED, IS TRYING A TRICKY LEGAL END-RUN AROUND THIS NEW NASTY FEDERAL LIMITATION BUT THE TRUMP ADMINISTRATION WILL LIKELY TRY TO QUASH THAT AS PUNISHMENT FOR NOT GIVING TRUMP THE GREATEST ELECTORAL VICTORY IN THE WHOLE HISTORY OF THE UNITED STATES OF AMERICA.

NOTE:  THE ABOVE LIMITATIONS ARE FOR HOMEOWNERS!  IF YOU OWN RENTAL PROPERTIES (OR IF YOU’RE RENTING YOUR HOME PARTLY OUT VIA AIRBNB) THEN THE ABOVE LIMITATIONS DO NOT APPLY AT ALL, OR ONLY IN PART.

2- What does it mean for potential home buyers here in the Bay Area?

PLAN ON PAYING MORE IN TAXES BASICALLY.  YOU MIGHT NOT BE ABLE TO AFFORD AS MUCH OF A MORTGAGE OR MIGHT NEED A 25 INSTEAD OF 20 YEAR LOAN…. YOU MIGHT NOT QUALIFY FOR AS BIG A LOAN AS YOU COULD BEFORE. THIS IN THEORY COULD IMPAIR HOME VALUES HERE BUT, THEN AGAIN, THE LOCAL MARKET IS SO JUICED UP, THERE’S SO MUCH MONEY HERE, THAT HOME BUYERS IN MANY CASES WILL STILL AFFORD THE HOME EVEN THOUGH THEY MIGHT BE PAYING, FOR EXAMPLE, AN EXTRA $20-30,000 DUE TO TRUMP’S CHRISTMAS TAX ACT.

3- Is there a new tax strategy that buyers or investors here in the Bay Area that you would suggest?

THE STRATEGY FOR HOME BUYERS IS DIFFERENT THAN FOR RENTAL INVESTORS – RENTAL EXPENSES DIDN’T CHANGE MUCH – NO LIMITATIONS ON TAX AND MORTGAGE INTEREST DEDUCTIONS, IN FACT RENTAL DEPRECIATION IN CERTAIN CASES WAS SPED UP, TAX RATES WERE LOWERED.  BUT FOR INDIVIDUAL HOMEOWNERS (AKA CALIFORNIA VOTERS) THE NASTY NEW LIMITATIONS HIT HARD…. BUT AT LEAST ANY OLD MORTGAGE DEDUCTION IS LIKELY GRANDFATHERED IN.

ARGUABLY, LIVING IN SIN DOUBLES YOUR (TAX SAVINGS) PLEASURE:  A TAX APPROACH WHICH COUPLES MIGHT CONSIDER WOULD BE TO BE SINGLE (CANCEL THE WEDDING!!  CALL OFF THE ENGAGEMENT!!  CALL THE DIVORCE ATTORNEY!!) THEN BUY/OWN THE HOUSE TIC (EACH OWNING HALF…) –THEN COULD EACH ARGUABLY DEDUCT $750,000 OF MORTGAGE DEBT INTEREST AND $10,000 IN PROPERTY TAXES, ETC.

4- In the real estate world, is this tax bill something that we are all making too big a deal about and that we should just go on buying and selling as before?

NO, NOT REALLY.  PEOPLE HAVE TO BUDGET - THE IMPACT OF TRUMP’S CHRISTMAS TAX ACT ON YOUR BOTTOM LINE CASH FLOW MUST BE CONSIDERED.  THERE IS NO MAGIC WAND RULE OF THUMB WAY TO DETERMINE THIS – ONE MUST RUN THE CALCS – EVERYONE’S A BIT DIFFERENT.  FOR SOME FOLKS THERE’LL BE BIG IMPACT, FOR OTHERS NOT MUCH CHANGE (IE: THE LOSS OF CERTAIN DEDUCTIONS MIGHT BE OFFSET BY A LOWER TAX RATE, MAYBE…).  BAY AREA HOME PRICES ARE INFLATED, WE LIVE IN A SECLUDED BUBBLE THUS, IN A WAY, IF THE TAX ACT LETS OFF STEAM ON OUR LOCAL HYPER-INFLATED HOUSING MARKET THEN IT’S BETTER FOR FAMILIES AND YOUNG COUPLES LOOKING TO BUY.  SO, WHILE MANY OF US MIGHT BE BITTER ABOUT TRUMP’S ATTACK ON THE CALIFORNIA LET’S AT LEAST TRY TO SEE THE SUNNY SIDE OF THINGS…

5- Is there anything in the future sense of the bill that would be of concern (or joy) to current or future property owners?

GIVEN THAT THE TAX ACT WAS WRITTEN IN A SECRET MAD PRE-CHRISTMAS RUSH (WITH LITTLE PUBLIC & EXPERT INPUT)  WE EXPECT FOR THE NEXT YEAR OR SO AN ONGOING STREAM OF LITIGATION AND CORRECTIONS/EDITS TO THE ACT.  THUS I’D SUGGEST YOU HOLD OFF SPENDING BIG LEGAL FEES ON NEW CONTORTEDLY STRUCTURED ENTITIES TO AVAIL OF THE ACT’S MANY FLAWS AND LOOPHOLES.  SO, TAKE ‘ER EASY, LET THE DUST SETTLE IS MY SUGGESTION.  ALSO, THE CONGRESS (IN THEIR BENIGHTED DESIRE TO SPREAD MARITAL HARMONY THROUGHOUT THE LAND TO STOP PEOPLE FROM THE SIN OF DIVORCE) MADE FUTURE DIVORCES FAR MORE PAINFUL.  HUH?  FOR DIVORCE SETTLEMENTS 2019-ONWARDS, TAX DEDUCTIONS OF ALIMONY PAYMENTS ARE BANNED, THUS THAT ALIMONY MONEY WILL BE TAXED AT THE HIGHEST RATES (USUALLY THE EX HUSBAND’S) INSTEAD OF THE RECEIVING SPOUSE’S LOWER TAX RATE – THEREFORE (VIA THE HIGHER TAX RATE) THE GOVERNMENT TAKES FAR MORE IN TAXES, THE ALIMONY RECIPIENT GETS FAR LESS.

LASTLY, IF THE DEMOCRATS RETAKE THE SENATE AND CONGRESS IN 2018 THEN MUCH OF THE ACT’S “TRICKLE DOWN” ASPECTS (AND HOW  IT WAS PARTLY FUNDED ON THE BACKS OF CALIFORNIA HOMEOWNERS) MIGHT REVERT TO HOW IT WAS WAY BACK IN 2017-EARLIER…

BUT DON’T HOLD YOUR BREATH – WE’VE GOTTA DEAL WITH IT THE WAY IT IS NOW…

Note: Keith Rockmael is not a tax expert. I can be reached by email at keith@resourcerock.com