You’re Invited to Learn About the New Tax Laws That Are Affecting Commercial Real Estate
Please join us for an informative live presentation with Dan Adams, Senior Vice President & Commercial Lending Manager at Wells Fargo. Dan will be taking us through the changes, how they affect commercial real estate, and also conducting a Q&A to answer any questions you may have. Come prepared and ready to learn how you can maximize your business, personal, and investment strategy.
Date: March 29th, 2018
Location: KW Commercial Del Mar/Carmel Valley
Seats are limited to 30! Sign up today to secure your spot!
Registration is free and we encourage donations to Autism Tree Project Foundation (ATPF).
The Autism Tree Project Foundation helps spread community awareness for autism. Their goal is to give children on the autism spectrum a voice and additionally aims to build community compassion towards the parents and families of these special children. ATPF helps thousands of families with autism create a roadmap for their child with autism and navigate a very complex system of care required for children with Autism Spectrum Disorder.
All monies donated to ATPF go straight to helping real families in our community through one of their 20 critical programs. These programs are on-going and provided to families at no charge, making the Autism Tree Project Foundation very unique. They are a grassroots foundation and have only 1 full-time employee on staff. They do not charge any of their families for ATPF programs.
Earlier this month we asked you for your top questions on the new tax law. Dan was generous enough to answer some. Here’s the top 5:
1. There are new rules for Sub S corp and LLC’s. Do they apply to real estate in single asset entities?
Yes, the new pass-through rules apply to single asset (real estate) entities. This means that the 20% deduction of pass-through net income applies to the rental real estate owned by a business, an individual, or a living trust.
2. Are there any changes in expensing acquisition costs that were capitalized in the old tax rules?
No, those rules remain exactly the same.
3. Are there changes in the Alt Min Tax rules for passive investors?
Yes, there are significant changes to the Alternative Minimum Tax (AMT). Generally speaking, the AMT has basically been eliminated. It would be extremely rare for an active or passive investor to be subject to the AMT anymore. I have read some comments that the IRS now expects the AMT to impact fewer than 1,000 individual taxpayers going forward.
4. Any changes in 1031 or installment sale rules?
Yes, we can now only exchange real property (not tangible personal property like improvements). That creates a difficulty for buildings which had a cost segregation study done, in that the short-life assets would be taxed as boot (taxable gain) in the exchange. Ideally, the replacement property would need to have a cost segregation study done immediately so that the additional depreciation from that could be used to offset the taxable gain from the exchange boot.
5. How are the taxes on each property affected as far as tax write-offs? It seems if they only allow a certain amount of taxes to be written off, it is going to affect the property prices?
The $10,000 state and local tax limit applies to state income taxes and property taxes paid on your primary, secondary, or investment properties only. There is no limit on business properties or rental properties that are owned by a corporation/LLC. There is a chance that owning a home is less lucrative now because of the tax limitations. This could artificially increase demand to rent a home instead of own it.
Click here to check out our tax article about the Tax Cuts and Jobs Act
Interview with Globest
In a recent article with Globest, Dan discussed some of the recent changes.
Below are a few highlights of the article, to view the full interview, click here
- Dan believes the new tax laws are positive for the industry by creating certainty.
- The tax policies ability to spur GDP growth is an indicator of the increase in the demand for office, industrial, warehouse, and other commercial property.
- The new tax law made numerous changes that will favorably affect commercial real estate as an asset class, including indirect changes such as reductions in tax rates.
- The law provides for a 20% reduction of business income for most pass-through entities.
- 1031 Exchanges are now only available with real estate.
- The increase in estate-tax exclusion to $11 million per person should be viewed as favorable since those are the assets that most often appreciate and are inherited by heirs.
- The demand for single and multi-family properties will go up as the tax advantage of owning a home has been significantly reduced.
- US-Based Manufacturing will increase, which could drive demand in that sector.
- Although it’s been said California was hit harder than other states, much has been exaggerated. The $500,000 capital-gain exclusion for sale of principal residence still exists.
- The new tax law isn’t a “one size fits all” situation. Brokers should consult their tax professional and figure out how to structure their business, their income, and their investments in a way that maximizes the advantages of the new tax law.
Daniel Adams – Senior Vice President, Business Banking Area Manager, Wells Fargo Bank – Dan leads a team that provides commercial real estate loans, treasury management, and credit lines to businesses in Southern California and Nevada. They provide loan structuring, underwriting and risk analysis for operating businesses and commercial real estate investors, and also offer working capital optimization technologies to help businesses operate more efficiently. Dan’s team originated over $300 million in loans in each of the past four years, including Small Business Administration, Healthcare Finance, Equipment Leasing/Purchases, and conventional lending products. Dan is a veteran U.S. Marine artillery officer with multiple deployments to the Middle East and Southwest Asia and also an adjunct Graduate Finance Professor at several local universities.
Wells Fargo’s Business Banking Group serves the needs of small- to mid-size privately held businesses throughout the country. They provide a proactive approach to a team of local Relationship Managers and others to provide customized service and rapid response to help our customers succeed financially.
Questions about the event? Contact us here
How My Views on Commercial Real Estate Are Changing
By: Blake Imperl
As I am approaching the end of my first month as an intern at Gabhart Investments, I’d like to reflect on what I’ve learned, and what has changed thus far.
What I’ve Been Doing
Over the past few weeks, I have been spending a lot of time reading the material Curtis has provided me on Property Valuation & Investment Analysis. Although it is mainly an overview of the subject, it has proved to be some highly valuable content. This material essentially picked up where I left off in my Real Estate Investment Analysis class that I took last semester at San Diego State. I have been brushing up on subjects like tax benefits, 1031 exchanges, expenses, leverage, returns, evaluating cash flow, and much more. I still have a great deal of learning to do on these subjects, but it is exciting to see how what I’ve learned in the classroom correlates to real world applications. It is my intention to continue to read up on these subjects and ask as many questions as I can.
I’ve also been observing how Curtis and his team assemble marketing packages for commercial properties they are listing. I was doing things similar to this at my last internship at Realty National, so I’ve enjoyed seeing how this translates in the commercial arena
Commercial Real Estate Blog Posts
Another task I have taken on is the editing of Curtis’s blog posts. My first edit was a post on property walkthroughs. One tremendous benefit of doing this has been the information I’m learning is sticking much deeper than if I just glanced over it. It’s proved to be a great learning tool for me and I’ve even taken on the task of researching some of the topics I was curious about. Writing has always been a passion of mine, so getting the opportunity to revise and write some stuff has been great. I’m excited that I will get to continue to edit blog posts during my time here.
This past week I had a great learning opportunity with Curtis to do a walkthrough of a 13-unit apartment building in Fallbrook. I was able to learn about some of the things you should be looking for in a property, both on the interior and exterior. This was a neat real life application after reading Curtis’s article on property walkthroughs. This is certainly the kind of stuff you’d never learn in a class room.
13-Unit Apartment Building In Fallbrook
La Jolla Multi-Family Building
Another property we looked at was a 5 unit multi-family building in La Jolla. This was a very intriguing property because it had great bones, was less than a block to the beach and offered several routes for renovation. When walking the property, we looked at things like the condition of the floors, the bathrooms, kitchens, balconies, electrical, etc… It was far from move-in-ready, however, at the right price this could prove to be a great deal.
Curtis and Abe inspecting the condition of the upstairs balcony
the interior of the detached studio
Co-Star Lunch & Learns
In addition to the property walkthrough, I’ve also attended two Co-Star lunch and learns with Curtis and his assistant Dianne. The one that stood out to me was on the housing forecast over the next few years in San Diego County. I enjoyed this meeting because this is a real problem we will be tasked with fixing over the next decade. This past semester in my investment analysis class I did a great deal of research on this subject, so it was neat to hear the industry take on the issue.
Lastly, I have very much enjoyed the opportunity to pick Curtis’s brain. He’s always offering me valuable tips and knowledge about real estate and just life in general. Whether it be tips on client relations, listing properties, or even just financial management, I’ve been trying to act like a sponge of knowledge. He’s always honest about things and I respect that.
My views on real estate are growing stronger than ever and I’m excited all the learning opportunities that lie ahead. I am finding that the San Diego Commercial Real Estate Market contains more possibilities than I ever could have expected. Stay posted for my final update in August!
In a bit,
Intern, Gabhart Investments
I received this email a few days ago from the 1031 exchange company I like. The article below describes some situations where people tried to do a 1031 exchange and turn it into there personal residence incorrectly and because of that not only had to pay the taxes but penalties in addition.
Doing it correctly can be a powerful way of getting some of your money out of your properties tax free but not without risk or planning. If memory serves me right (consult with these guys for professional advice) the property needs to be rented for 3 years before you move in. In addition there are other requirements involved and maybe Vince and Ryan can shed some light on those requirements.
Let’s just play this out and say you got all your ducks in a row you could potentially exchange into a single family home you wouldn’t mind living in, rent it out for the appropriate amount of time and get $250,000 if you are single and $500,000 tax free if you are married by moving in for 2Â years in a 5 year period.
I know quite a few people who have done this successfully and moved into there dream retirement home in San Diego using this method. Consider looking into it if you have an apartment building or other piece of real estate you would like to sell but don’t want to pay the taxes.
**BREAKING 1031 EXCHANGE NEWS!!!**
Goolsby v. Commissioner (April 1, 2010); T.C. Memo. 2010-64
How Soon After a Taxpayer acquires property through a 1031 exchange can the Taxpayer treat the property as a personal residence?
The Tax Court recently held that property acquired by taxpayers in a Section 1031 exchange did not qualify as replacement property when the taxpayers moved into the property two months after acquiring it.Â Taxpayers were also held liable for the accuracy-related penalty.
In October 2002 taxpayers signed a purchase agreement to acquire a single family property in Georgia (the Pebble Beach property). The purchase agreement was contingent upon sale of taxpayersâ€™ personal residence in California. In February 2003 taxpayers sold their principal residence in California and began living with their in-laws in Georgia. In March 2003 taxpayers sold rental property located in California and used a QI to structure an exchange. Taxpayers purchased the Pebble Beach property as replacement property.
The court ruled that taxpayers did not intend to hold the Pebble Beach property for productive use in a trade or business or for investment at the time of exchange, and therefore it was not valid replacement property. The court first noted that taxpayers moved into the Pebble Beach property two months after acquiring it. Further, they did not move into it temporarily until renters could be found. Their efforts to rent the Pebble Beach property were minimal. They merely placed an advertisement in a neighborhood newspaper for a few months, and no further efforts were made to gain more exposure for the Pebble Beach property. Moreover, taxpayers began preparations to finish the basement of the Pebble Beach property, having a builder obtain permits for construction, within two weeks of purchase.
The court surmised that taxpayers were contemplating use of the Pebble Beach property as a personal residence before the exchange. It noted that taxpayers made purchase of the Pebble Beach property contingent upon sale of their personal residence in California. They sought advice from the QI regarding whether they could move into the property if renters could not be found.Â Â Taxpayers did not research whether covenants of the homeowners association would allow for rental of the Pebble Beach property before the exchange. They also did not research rental opportunities in the area prior to the exchange.
Taxpayers contended that purchase of the Pebble Beach property was not extravagant when compared to costs of California properties. The court responded that the relative values of properties were irrelevant. Taxpayers also argued, as evidence of their intent not to reside at the Pebble Beach property that they lived with their in-laws upon their move to Georgia.Â The court dismissed this argument as non-persuasive.
The court also found the taxpayers liable for the accuracy related penalty due to a substantial understatement of tax.Â Taxpayers failed to present any evidence that they acted with reasonable cause and in good faith.Â The taxpayers did not use counsel and represented themselves.
This case highlights that taxpayers should not be too quick to move into property acquired in an exchange. They should make substantial efforts to rent the property and avoid evidence of intent to use it as a residence.Â Â The taxpayers asked the QI if they could move into the property if renters could not be found.Â You probably get this or similar questions from clients frequently.Â Be careful with your answers and let the client know about the fate of the Goolsbys.
If you have ANY 1031 Exchange inquiries, or questions relating to the above article, please contact our offices.Â Pacific Capital Exchange looks forward to meeting ALL YOUR 1031 EXCHANGE NEEDS!Â Call us today at 1-888-398-1031 or visit our website at www.pcx1031.com.
Visit our Website:
Ryan S. Auer, CES
Executive Vice President
Chief Operating Officer
Pacific Capital Exchange Services
(619) 246-7478Â Cell
(888) 398-1031 Toll Free
(619) 923 2524 eFax
For the most updated information & news on real estate & Gabhart Investments go to our facebook & twitter pages
We are about to reveal to you the details of what is one of the best kept secrets in the Internal Revenue Code. The 1031 Exchange is arguably the most powerful mechanism in the Real Estate business that allows you to make money, and keep it with you without having to pay taxes on your profits. This is a valuable tool that allows you to keep the proceeds of your property sale. This mechanism allows those who are trading their properties â€œupâ€ to retain their profits by deferring the tax liability. It is therefore crucial that whenever you are about to sell a property, you should always first consider a tax deferred exchange before making a traditional sale (and purchase).
So what is the 1031 Exchange?
The 1031 Exchange is basically a strategy and method of selling one property and reinvesting the proceeds in a like-kind™ property and thereby deferring the capital gain taxes. To qualify for this tax deference one must exchange the property in accordance with the rules set forth under section 1031 of the Internal Revenue Code. It is not considered as a normal sale and purchase but as an exchange, and this exchange can offer significant tax advantages to real estate buyers.
Why Should I go for the 1031 Exchange anyway?
There are numerous reasons you should consider the 1031 Exchange before selling your property. Some of the more common ones include:-
• Defer the payment of capital gain taxes.
• Leverage â€“ continue to use your proceeds to further investments.
• An exchange is effectively an indefinite interest free loan from the government.
• Upgrade or consolidate your property investments.
• Diversify risk â€“ own multiple properties rather that just one.
• Relocation to a new area.
• Benefit from the differences in regional growth or income potential.
• Be relieved of property management let the lessee take responsibility to sublet and maintain the property.
• Change property types among residential, commercial, industrial, retail, etc.
So what are the rules of 1031 Exchange?
While it can become a little complex let me outline the basic rules here for you.
• The property that you sell and buy both must be real and used for productive use in a trade, business or for investment purposes.
• The properties being sold and purchased must be â€˜like-kindâ€™ (more on this later).
• The proceeds of the sale must be routed through a qualified intermediary and not yourself or your agent otherwise the proceeds will become taxable.
• Only the amount of the sales proceeds that are reinvested will be tax free. Therefore any cash proceeds that you retain will be taxable.
The replacement property must be subject to an equal or greater level of debt than the property sold or the investor will either have to pay taxes on the amount of the decrease in debt, or invest additional cash funds to offset the lower level of debt in the replacement property.
How long do I have to execute the 1031 Exchange?
The timeline allowed to conduct the transaction can be broken down into various parts.
Identification Period : Once you have sold the property you must identify the replacement property within 45 days of the sale. The 45 day rule is very strict and is not extended even if the 45th day should fall on a Saturday, Sunday or legal holiday. So it is better that you actually scout for appropriate properties even before your sale is executed.
Exchange Period : The exchange period is 180 days from the date the property is relinquished. Therefore the replacement property must be received by the investor within 180 days of relinquishment or the due date for the taxpayer tax return for the taxable year in which the transfer of the relinquished property occurs, whichever is earlier. Again, should the 180th day fall on a Saturday, Sunday or legal holiday, it will not be extended and it treated as a strict deadline.
What are the limitations on the new properties that I can buy under the 1031 Exchange?
One has a variety of freedoms along with limitations when considering replacement property / properties. These are:-
3 Property Rule : You may identify any three properties as possible replacements for your relinquished property. More that 95% of exchanges actually use the 3 property rule.
200% Rule : As long the total value of all the properties that you identify for replacement does not exceed
200% of the value of the relinquished property, you may identify any number of properties as possible replacements for your relinquished property.
95% Exemption : As long as you end up purchasing at least 95% o the aggregate value of all the properties identified, you may identify any number of properties as possible replacements for your relinquished property.
Like-Kind™ Property : According to IRC 1031(a) Like-Kind mean similar in nature or character, not withstanding differences in grade or quality. One class of property may not be exchanged for property of a different kind or class under the 1031 exchange rules.
Here are some examples of qualified 1031 like-kind properties and exchanges:-
• Apartment building for farm/ranch
• Office building for hotel
• Raw land for retail space
• Unimproved property for commercial property
• Airplane for airplane
Whereas examples of non like-kind properties include primary residences, stocks, bonds, notes, partnership interests, developed lots help primarily for sale and property that needs to be resold immediately after the initial purchase or completion of improvements.
So how do I actually conduct a 1031 Exchange?
The normal caveats applyâ€¦be sure to consult a lawyer and do not take the guidelines below as completely full and final, etc. etc. but here are the basics:-
Proper Listing : Once you have identified that a 1031 exchange is in your best interests be sure that the listing agreement specifies that you intend to use the property for a 1031 exchange.
Sales Contract : Once you have received and negotiated an offer be sure that everyone is clear about that fact that you are intending to acquire a new property under the terms of Section 1031 of the IRS code.
Facilitator : You will then have to open an escrow account and begin working with a facilitator. The facilitator will prepare all documents required for a 1031 exchange. The facilitator will work with the escrow company during the first phase of the process. The exchange agreement will need to be signed by everyone involved and all the earnest money must be deposited with the title company before the escrow is closed.
Finding a Replacement Property : You will then have to find a replacement property within 45 days of closing. After that you will have 180 days (or less if the investor tax return filing date fall earlier than 180 days) to acquire and close the property making sure that everyone know it is part of a 1031 exchange.
Closing the Replacement Investment : Once you open an escrow account on the new property the facilitator will work on the documents required in phase two of the 1031 exchange process. Until the second phase of the transaction has closed your earnest money and any other funds will be held in a trust by the facilitator in the escrow account.
Those are the basics of the transaction. If sufficient interest is generated about this blog pos then I would be happy to provide more details on points like reverse 1031 exchanges (more complex transactions where the investor buys the replacement property before relinquishing a property), referrals for qualified intermediaries (those who have signed a contract with the IRS for the purpose and have received a QI-EIN) etc.
If you need more details do not hesitate to contact a lawyer, meanwhile, happy 1031 exchanging!
For the most updated information & news on real estate & Gabhart Investments go to our facebook & twitter pages