QINews 

                                                                                  Volume - 6.3  October, 2008

Christine proudly reports that daughter Holly is engaged to be married to Hazen Converse; an August 15, 2009 date has been set for the big event. Daughter Erin and son-in-law Dan have relocated from Raleigh, NC to Rutland, VT and have become first-time homeowners.  With all three of the girls snuggly back in New England, visits will no longer require dependence on the airline industry.

George has been sworn to secrecy, but we are free to announce that he will be a grandfather again in November.  Daughter Ellie, son-in-law Nirm and Mills (age 2) will welcome a new little one to a new home in Hoboken, NJ. before Thanksgiving. Congratulations Grandpa!
 

Phyllis is pleased to announce that her son,  Rick Grima Sr., was sworn in as the newest police officer on the Whitefield, NH force on August 26. Rick was most recently a dispatcher for the Grafton County Sheriff's Department, and has spent many years as a member of the Whitefield Fire & Rescue squad. Way to go Rick!

Congress has kept us busy this year trying to second guess what "new" stimulus package was going to be delivered and how it would impact our industry and our clients.  There have been a few gifts; stimulus checks and first-time home buyer interest free loans and a few big disappointments; prorated Section 121 exclusions (used on the sale of a primary residence) that impact tax planning strategies.  Section 1031 was unscathed but Section 121 has taken a big hit.

Second Home Conversion Could Be Painful

It's time to take immediate action if you acquired property with the intent of holding it for rental/investment purposes and later converting it to your primary residence. Congress took a strike at unsuspecting "conversion-ists" by taking away the benefits afforded in Section 121 if the property was previously used as a second home or otherwise rented to others and later converted to a personal residence.

If you act quickly and you qualify based on the time period the property has been held as investment/rental property in your hands, you may be able to duck this sledgehammer but you must make your primary residence declaration before December 31, 2008.  

If you think this is a strategy that is about to fall apart on you, call us to discuss your options. Those gentle ocean waves can blow up into a tax tsunami if you delay! Read more here.

Watching the Olympic Games in Beijing this summer reminded us of the dedication that our athletes possess to be competitors on the world stage and ultimately be medal winners.  Planning and years of preparation are essential to achieve the highest rewards.  The same is true for investors, a dedicated plan is essential for the maximum reward.

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

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

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

The third hurdle depends on where you live and file your tax return, many states also tax capital gains at the state level and this can range from 3%-9%. 

Unfortunately, too many taxpayers dutifully pay the tax each year without understanding that the tax can be deferred, interest free, if the sale is handled as a Section 1031 Exchange.   Every taxpayer regardless of whether that taxpayer is an entity or individual, as long as the property is not personal use property, can utilize exchanges as a tax deferral strategy and never pay the tax!

The sellers of real property are often to preoccupied with the "Sale" to realize that if they were more strategic in their investment decisions, they could reap long term financial benefits.  The concept is simple, don't touch the cash!  The object in an exchange is to defer the capital gain tax, recapture of previously taken depreciation and any state gain tax.  If you go to the closing without employing a Qualified Intermediary (QI) to handle the sale as an exchange, the tax will be triggered as soon as the cash is touched.  The time to defer the tax is before the buyer shows you the cash.  If you focus on the cash, the fatal attraction, it will cloud the strategy to successfully do a Section 1031 Exchange.  Employing a QI is paramount to setting up the sale as an exchange with all of its tax benefits. 

Don't become another tax fatality, defer the taxes with a Section 1031 Exchange!
 

The Real Estate Market: A Second Look  

2008 has been the year we have been watching our dollars being shredded at every turn, at the gas pump, the grocery store, the stock market, at the banks and financial institutions.  This could be the time to plan your next market move; you can't judge the entire real estate market by what is going on in your own neighborhood. 

There are very active markets around the country and specific sectors are doing very well.  Health care and educational facilities are very attractive especially in the Carolinas and Texas.  Assisted living facilities, and medical office buildings are also very hot! There is always something positive to be said for exiting active real estate management with the associated tenants, trash and toilets for more passive, institutional investments.  Commercial/investment property is marketable in every business cycle.

Section 1031 can be the strategy to strengthen your portfolio during hectic economic times.

Splitting Heirs 

The transfer of wealth from one generation to another will hit its peak in just a few years and understanding the tax impact on the heirs is an important consideration.  Traditionally, financial planners have focused most of their efforts on helping clients accumulate wealth, now is the time to plan for the transfer of that accumulation. 

It has been reported that more than half of the nation's personal wealth is held in non-financial assets, such as houses, land, farms and personally owned businesses. Based on past experience, the value of this wealth will grow over the next half century, and at the same time most of it will change hands. The majority of this huge transfer of wealth will go to spouses, children and charitable causes. A significant portion also will go to state and local estate taxes unless a plan is developed to prevent it. 

Section 1031 is the perfect strategy to assist clients in moving their active real estate investments into passive investments, without paying capital gains tax.  Tenancy-in-Common (TIC) and Umbrella Partnership Investment Trusts (UP-REIT) properties provide an excellent transfer investment vehicle.  Heirs will gain tax advantage through a stepped-up basis upon the death of the owner and they will not inherit deferred taxes or a management nightmare in the process.   A sale of the property is not necessary; cash flow is easily divisible to the heirs if they elect to hold their newly inherited investments.  Cash flow from passive investments takes little time and attention and there is less arguing between the inheriting parties. 

Cashing out of wholly owned real estate requires an agreement of the parties as to broker selection and price.  The sale of passive investments such as TIC's or REIT shares is simplified; TIC's are not generally sold until the entire project is sold or refinanced.  A growing majority of REIT shares can be traded openly on the market in a variety of increments thereby negating the need to fully liquidate the investment.  In either case, the sale of investment real estate by the heirs will be at a stepped-up basis so the assets can be passed without the deferred taxes.

We have just represented a client that selected Oil & Gas Royalties as one of its Replacement Property choices.  These subsurface property interests do qualify as suitable Replacement Property.  In this case, the client sold a stand alone property and elected to utilize the 200% Rule in identifying new property.  This provided the client with the flexibility to produce a list of properties within 45 days that did not exceed twice the value of the old property.  The client then had the opportunity and the time to perform adequate due diligence to select the most suitable properties for acquisition.  In the end, the client selected a 3% interest in Oil & Gas, a 2% interest in a TIC property and a 100% interest in property located at the shore.  The clients real estate investment was relocated and reallocated to provide a much greater diversity and protection against downside exposure.  

Case Study #22- Build to Suit

This slower economy has been the perfect environment for new construction projects.  Our client, an experienced real estate developer, sold a multi-unit apartment complex that he had held for many years and elected to have us facilitate a build-to-suit exchange by first entering into an Exchange Agreement and utilizing a Qualified Exchange Accommodation Titleholder.  We created a single purpose corporation to acquire a piece of raw land that had been fully permitted and constructed a medical office facility as a tenant specific project.  The contractor had greater availability due to the slower economy and the target tenant did not have the expertise to undertake an elaborate new facility.  Our client  will deliver the new building to the tenant within 180 days.  He will have the benefit of relocating his real estate investment and dealing with one recession proof tenant instead of 65 tenants with 65 stories and complaints. 

www.section1031.com

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Contact Christine S. Latulip at 603-444-0020 for information.