Selling Property

Question: Is there typically a 1099 on a Short Sale

One of our team members asked the following question today:
Can you or the team answer a question about 1099 income on a short sale.  I thought a home owner who sold via a short sale wasn’t liable for the difference with the Debt Forgiveness Act?
I’ve just received an approval from the bank on my short [...]

One of our team members asked the following question today:

Can you or the team answer a question about 1099 income on a short sale.  I thought a home owner who sold via a short sale wasn’t liable for the difference with the Debt Forgiveness Act?

I’ve just received an approval from the bank on my short sale but they say the seller will be issued a  1099 for approx. $150K.  She would do better with a foreclosure than have that type of tax burden.

Here is the answer by Deborah Beneke, CPA at Olsen Thielen

Regardless of whether the transaction is covered under the Debt Forgiveness Act or not , she will be issued a 1099. Further if the property goes into foreclosure, a 1099 will also be issued and she could still be liable for debt forgiveness income depending upon her circumstances.

However if she does qualify for the exemption available under the Debt Forgiveness Act, the amount of debt forgiveness income exclusion must be reported on Form 982 on her individual tax return. As a result, even though a 1099 was issued she will not have any tax liability.

Again, she must qualify for exemption. It must have been her principal residence two out of the last five years. AND the debt that is to be excluded must be qualified residence indebtedness. In other words, if she refinanced on the property and used the proceeds for other uses (for example to pay off credit cards), the debt forgiveness income would be taxable up to the amount used for other purposes.

If she can prove insolvency or is in bankruptcy, there would be no debt income either. Again a Form 982 needs to be filed. She should consult her tax professional to analyze her situation and determine if she would be subject to adverse tax implications. Renting out the property should not be a problem if it is short term. She will need to pick up net rental income (if any) and recapture any depreciation if there is a gain on disposal (unlikely).

Sold: 6554 Brookview Drive NE, Fridley

11/17/09-Update.  Property is sold.
After extensive rehab, this 1947  single-story home is coming on the market today. It has 3 bedrooms, 1 baths with 1024 square feet, located on almost .5 acres. The updates are too numerous to mention, but here are a few:

New Windows.
New Bathroom.
New Kitchen (including Cabinets and Appliances).
Updated Electrical/Mechanical/Plumbing systems.

See pictures [...]

11/17/09-Update.  Property is sold.

After extensive rehab, this 1947  single-story home is coming on the market today. It has 3 bedrooms, 1 baths with 1024 square feet, located on almost .5 acres. The updates are too numerous to mention, but here are a few:

• New Windows.
• New Bathroom.
• New Kitchen (including Cabinets and Appliances).
• Updated Electrical/Mechanical/Plumbing systems.

See pictures and more details at 6554 Brookview Drive NE, Fridley.

More Protection for 1031 Funds

The FDIC insurance limit was increased from $100,000.00 to $250,000.00. The change in coverage limits is effective from October 3, 2008, through December 31, 2009. A link to the FDIC website gives more information: http://www.fdic.gov/news/news/financial/2008/fil08102a.html
Many investors conducting 1031 exchanges feel better knowing that the exchange funds are more protected. There are also ways to get [...]

The FDIC insurance limit was increased from $100,000.00 to $250,000.00. The change in coverage limits is effective from October 3, 2008, through December 31, 2009. A link to the FDIC website gives more information: http://www.fdic.gov/news/news/financial/2008/fil08102a.html
Many investors conducting 1031 exchanges feel better knowing that the exchange funds are more protected. There are also ways to get more protection by dividing the exchange funds between multiple banks. This is good news for taxpayers!

Call me with questions 1-877-373-1031.
Jeff Peterson
Commercial Partners Exchange Company, LLC
a Qualified Intermediary for 1031 Tax Deferred Exchanges

Save Money in Taxes When You Sell

What can a 1031 Exchange Do for You?
by By Jeff Peterson
When you go to sell your appreciated property, it would be a real waste to give away much of your hard earned equity because of capital gains taxes. A 1031 exchange appeals to only one kind of investor: The investor who wants a [...]

What can a 1031 Exchange Do for You?
by By Jeff Peterson

When you go to sell your appreciated property, it would be a real waste to give away much of your hard earned equity because of capital gains taxes. A 1031 exchange appeals to only one kind of investor: The investor who wants a better investment without getting socked with unnecessary capital gains taxes!

Lets face it, real estate is an incredibly versatile investment. You can rent it, improve it, leverage it, cash out—you name it, someone has probably done it. But not all real estate is created equal. At some point you may want to cash in on your equity in a piece of investment property without actually getting out of real estate. By re-investing your equity from your old investment property into a new like-kind property, you can use a 1031 exchange to defer the taxes.

Why defer taxes?
Let’s start out with why you would want to defer taxes in the first place. Some investors might be thinking, “If I have to pay them, I may as well pay them now and get it over with.” Not necessarily!

Suppose you have a duplex rental unit across town. A four-plex down the street goes up for sale. You could sell your duplex, pay the capital gains tax, and then buy the four-plex down the street. But using a 1031 exchange will roll your profits into your next real estate property without the tax bite. The tax is not forgiven, just deferred indefinitely—but you conserved your equity by not having to pay taxes on your net profits. Buying the four-plex keeps your money working for you, which compounds and builds your wealth faster over time.

Another reason to defer tax is that there may well be a better time to pay tax. An important principle in tax planning is to defer taxes when you have a high income and pay taxes when you have a lower income. One popular strategy is to cash out after you retire when you are in a lower tax bracket.

A third reason to defer tax is to manage your estate planning. With appropriate estate planning, you can simply keep exchanging properties, which will defer the taxes on the gains indefinitely. Meanwhile, the properties can continue to generate income. Let your heirs worry about the tax on the gains! Defer, defer and die. Under the current tax rules, your heirs will get to “step up” the basis in the property, effectively wiping out the deferred tax liability that you carried with you thought your life. This step up in basis law may be changed in 2010.

Finally, the age-old important and fundamental principle of the “time value of money” tells us that that a dollar in your pocket today is worth more than a dollar you will receive tomorrow. That is because if you have a dollar today, you can use it today—you can invest it, build more wealth with it, which means tomorrow you will have your dollar plus a day’s growth or interest. That’s not a lot if we’re talking about an actual dollar, but it’s a lot if we’re talking about, say, a small apartment building you’ve owned for a few years.

Suppose that if you sell that apartment building, you would realize a tax liability of $100,000. If you were to roll that $100,000 into an investment that appreciated 4.5% annually (a pretty conservative rate of appreciation), at the end of three years, the $100,000 would be worth $114,117. The $100,000 today has a future value of $114,117. So what is the future value of $100,000 today? Asked another way, how much do you have to invest today at 4.5% to have $100,000 in three years? About $87,630. If you had the choice today between $87,630 and $100,000, you would choose the $100,000. If you had the choice three years from now between $100,000 and $114,117, you would choose the $114,117.

In other words, you would choose to preserve the entire gain on that apartment building.

Is a 1031 right for me?
As I said, a 1031 exchange is right only for the investor who wants a better investment. Now let’s look at a few examples.

Suppose you have a parcel of raw land. It’s doing nothing for you—just sitting there, not producing any income. You might want to exchange this property for another property, one that would provide you with some cash flow and deductions (such as depreciation).

Suppose you own a property whose appreciation has leveled off. Maybe you own some rental housing in a once-hot, now-cold neighborhood. You can do a 1031 exchange to acquire a property whose value will continue to grow.

Suppose you own a management-intensive commercial property that is becoming more trouble than it is worth. Use a 1031 exchange to shed the headaches and obtain a more worry-free property.

Executing a 1031 exchange requires faithful adherence to the IRC regulations. You want to work with a company that fully understands the parameters and deadlines of the regulation. Commercial Partners Exchange Company specializes in the 1031 exchange. We offer Qualified Intermediary services and can help you determine if a 1031 exchange is right for you.

Jeff Peterson is President of Commercial Partners Exchange Company. His company is a facilitator of standard deferred 1031 exchanges, build-to-suit construction improvement exchanges, reverse exchanges and aircraft personal property exchanges. Mr. Peterson is an adjunct professor at William Mitchell College of Law and a frequent speaker and CLE presenter throughout the Midwest for various business and professional organizations on numerous issues related to 1031 exchanges.  Jeff can be reached at 612-643-1031 or jeffp [at] cptitle [dot] com or check out www.jeffpeterson.name or get more information on 1031 exchanges at www.1031podcast.com

Scam: How to Sell Your House in 5 Days-Update

Back in November, I came across an article that talked about how this writer saw an ad on Craig’s list for a property that was 50% below the market price for the neighborhood. It had him intrigued. He proceeded to check out the upcoming open house only to find out that it appeared to be [...]

Back in November, I came across an article that talked about how this writer saw an ad on Craig’s list for a property that was 50% below the market price for the neighborhood. It had him intrigued. He proceeded to check out the upcoming open house only to find out that it appeared to be some sort of bait and switch program going on with an unlicensed agent to sell this house.

I originally called this How to Sell Your House in 5 Days a Scam. Recently, I was doing some geek work on this blog and noticed that I get many searches from Google about How to Sell Your Home in 5 Days. It got me wondering why this post off all my posts would be popular, especially 8 months later.

It turns out there is actually a book written on how to sell your home in five days! It outlines how you advertise your house for 50% of the desired price, have an open house, and then start an auction and bidding war to get the sale price up to where you want it. All in five days. The writer claims he has sold 150,000 houses this way (yeah, right). Amazing.

Upon further review, I would not necessarily call this program a scam, but it is definitely on the strange side of real estate sales. I imagine it could work in the right neighborhood, with the right owner pushing the process, in the right market, with the right house, at the right price point, but I can’t imagine it working more than 10% of the time. I suppose it ranks up there with hiring a clown to entertain the children during an open house, so the parent can tour the house in peace.

Have you read every book on investment properties? Have you spent hundreds of dollars on investment real estate seminars, but still you have no started? Give Scott a call.

Prepping to Sell your Investment Property-Revisited

I believe that most real estate investors are probably more excited about the day they will sell their investment property, than the day they buy it! I first wrote about this topic back in August 2007. After seeing about 500 more properties since then, I thought I would revisit my original prepping to sell list [...]

I believe that most real estate investors are probably more excited about the day they will sell their investment property, than the day they buy it! I first wrote about this topic back in August 2007. After seeing about 500 more properties since then, I thought I would revisit my original prepping to sell list and make some additions. On the original list, I talked about items that you should fix, repair, or update yearly on your Minnesota investment property to make it easier once it comes time to sell.

Below are some of items that you must do prior to putting your property on the market:

1. Clean out that basement or garage! Are you still storing the stuff from the evicted tenant from 5 years ago?
2. Tune up the furnace and water heater. The mechanicals in an investment property are typically the most neglected part of the building. At least try and pretend you paid attention to them while you owned it.
3. Have your leases up to date with future lease end dates.
4. If you have any vacant units, fill them immediately!
5. Raise the rents to make your property show better cash flow.
6. Lastly, if the front steps are crumbling, fix them. This is often the first impression of the property maintenance history of your building!

While not an exhaustive list, doing these will actually help your investment property stand out from the competition.  And when trying to sell your investment property, every little bit helps!