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New Arrival!
George has spent his requisite time in the sunny
south this winter and we are glad to have him back in
the office. Since our last issue, he traveled to Italy
to attend his niece’s wedding and in February, he
became a grandfather for the first time! George’s
daughter, Eleanor, gave birth to a bouncing baby boy
named Millard (Mills) Foss Shanbhag on February 7th
weighing in at 7 lbs, 4 oz and 20 ½ inches long.
Mom, dad, baby and grandfather are doing well.
Christine has been working on family ancestral charts and has uncovered a relative that was a neighbor and friend of George Washington. Chris reports that her research on the Internet has reduced the country to a small nation once again. Incidentally, George Washington was quite the landowner with over fifty thousand acres to his credit. |
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Reverse Exchanges
We have introduced this concept in previous
newsletters but we thought it was important enough
to present it to you again. Through the mechanism of
a Reverse Exchange, it is possible and practical to
acquire your target property before your existing
property is sold. To better understand the principals
involved, we have reproduced an article that we
wrote for the New England Real Estate Journal in
January and have included it as an insert in this
newsletter. Don’t hesitate to call with any questions
about how this process can be utilized for your
situation.
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Watching economic cycles and trying to predict when
to get in or when to get out of your real estate
holdings can be a daunting task. Maybe you missed
the peak or maybe you’re at the bottom of the
market and it goes up as soon as you sell. Well, we
listen to economic forecasts all the time to help us
better understand our business and our clients. We
are truly blessed in New England to have strong
market influences. We believe that these will remain
strong for the foreseeable future.
So, what’s hot? As in all real estate investments, what always becomes a key factor is location, location, location. Water front, ocean or lake and especially land. It doesn’t stop there! Medical facilities, hospitals and other medical services buildings will be a growth market. The boomers are getting older and there is a lot of functional obsolescence in this market. Also, student housing in and around universities deserves a second look. So if you’re not satisfied with your current investments, this could be the right time to exchange for real estate that will stand the test of time. |
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1099-S Reporting
More good news from the Internal Revenue Service!
Sellers of a principal residence may now provide
written certification to except the transaction from
1099 reporting. Tax regulations generally require a
real estate reporting person (settlement agents,
attorneys, etc) to furnish a payee statement to the
seller regarding that transaction on Form 1099-S,
Proceeds From Real Estate Transactions. These
sales are now excepted from the reporting as long as
the property was the principal residence within the
meaning of Section 121. A written certification
sample is available in Section 6045(e)(5). These
provisions became effective as of January 22, 2007.
For more information, contact Timothy S. Sheppard
for the Office of Associate Chief Counsel at (202)
622-4910.
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Ownership of real property is done in a variety of
ways. Many clients own property in their own
individual names, that of an LLC, a trust, or in the
name of a corporation. The key issue for clients
doing Section 1031 Exchanges is for the owner of the
existing property to be the same entity or individual
that will own the new property. The easy way to
remember this: same taxpayer identification number
before and after the exchange.
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I recently read Tax Court Memo 2006-33, a mixed
use case that was part business, part residential and
wanted to bring it to your attention. Each year, we
represent clients as their Qualified Intermediary in
Section 1031 Exchanges who have either operated an
owner occupied bed and breakfast, as was the case
in this proceeding, or some other combination of
business and personal use, such as vacation rentals.
In summary, the case is this: “Because petitioners
use a portion of their bed and breakfast inn as their
personal residence, the general disallowance rule of
sec. 280A(a), I.R.C., and the exclusive-use limitation
of sec. 280A(f) (1) (B), I.R.C. are applicable, and
expenses relating to the portion of the inn that is
used for both business and personal purposes (i.e.,
dual-use portion) are not allowable.”
The outcome of this case is that clients who exceed
the personal use limitations (14 calendar days or
10%
of the days actually rented, whichever is greater) will
run the risk of having their deductions disallowed. If
you would like to read the entire case, it can be
found at
www.ustaxcourt.gov/InOpHistoric |
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Campground for Two Residences
This is a case that comes up several times a year,
usually it involves an owner occupied B & B, but the
principles are the same. Our clients owned a
functioning campground in which they occupied 25%
of the property as their personal residence. After
raising their family and working the business for 18
years, they were ready to sell but didn’t want to pay
capital gains taxes or become an absentee landlord of
new property.
We assisted them with a strategy to sell the
campground and acquire two properties as their
Replacement Property. Since part of the property
was used personally, they protected 25% of the real
property sale from taxes by using Section 121, Sale
of Personal Residence. Another 10% of the sale
included Personal Property, not the subject of the
Exchange, and the remaining portion (65%) was
Exchanged under Section 1031.
The first Replacement Property was acquired and rented to their son and his family in a western state. The second property was a duplex located in state. They acquired it using proceeds from the exchange for the commercial or rental portion of the property and the balance with their own residential funds. They will reside in one half of the property and their daughter and family will reside in the other half, the investment rental side. Eventually, our clients can gift these properties off to their children. This allows for the transfer of wealth while mom and dad can direct the benefits during their lifetime. It has the added bonus on knowing who you are renting to! |
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