A payoff letter showing legal fees is an indication that the mortgage is in default, and the seller must now act in compliance with The Home Equity Theft Prevention Act. Title companies are constructing these transactions with grave strictness due to the fact that any 'equity seller' can cancel a transfer that is in material violation of the Act for two years after the recording of the deed. Purchasers using the property as a primary residence are exempt from the Act. Other exemptions apply.
Lines of Credit -- A Disappearing Act
Lines of credit are a rare and precious commodity these days in that, in today's market, they are as hard to maintain as they are to obtain. Rapidly declining real estate values are resulting in existing lines of credit being reduced or even eliminated at the lender's discretion. Typically, lending standards allow for credit approval as long as borrowers had more than 20 percent equity in their homes. That changed during the housing boom a few years back, but now, things are back to normal. Lenders may also decrease or suspend existing credit lines based on payment status and history, changes in creditworthiness, as well as a customer's relationship with them. A new credit line status could cause direct and indirect complications including a lowered credit score. Consumers should stay ahead of the game and contact their bank to determine the loan-to-value ratio for their loan.
To seasoned real estate professionals, 1031 Exchanges are a familiar concept involving the transfer of proceeds from the sale of one investment property into another of 'like kind' of equal or greater value in order to avoid Capital Gains tax. The 1031 proceeds cannot wind up in a personal residence, but an investment in businesses like rental houses, condominiums, apartment buildings, retail centers, or industrial buildings is appropriate either as a sole owner or an owner with fractional interest. Generally speaking, title must be held in the same way that it was held previously, so if the prior owner was a partnership or a corporation, then title to the new property must be held in the very same way.
The most popular form of real estate ownership when multiple investors are involved has been that of an LLC or partnership for many reasons including the ability to avoid double taxation (as a corporation and to the shareholders) and to limit one's exposure to personal liability. Add to that the tremendous benefit of being able to avoid Capital Gains tax on profits secured from investments, and it seems like a win-win situation all the way around, except for one small glitch. Investors cannot use a tax deferred exchange to sell their respective interests independently of the partnership and then use the 1031 process to reinvest the proceeds because individual partnership interests are considered personal property. Since proceeds from the sale must be transferred into another of 'like kind' as already established, this would mean that the proceeds would have to end up in a personal property to make the exchange valid, which unfortunately, is not allowed. The investor would either have to secure the involvement of the entire partnership in order to proceed, or restructure the entire partnership in order to convert his interest and the interests of the other investors into that of tenants-in-common prior to doing the swap.
Exchange expert Pamela Michaels of Asset Preservation, Inc. says that formally restructuring the partnership ultimately results in its dissolution and in each of the partners becoming owner of an undivided pro rata interest in the real property formerly owned by the partnership. Subsequently, as long as the investors behave consistent with their new status as tenants-in-common and not as partners, their particular interest in the property can now be exchanged for another property using the 1031 process.
In addition to partnership converts, 1031 TIC exchanges are available to anyone interested in leveraging their financial positioning via the sale of investment property at a profit, and is motivated by any or all of the following:
a. Deferred payment of income tax
b. Long-term investment opportunities
c. Reinvestment in otherwise unaffordable high-end real estate
d. A reasonable cash flow on the full amount of equity in the sold property with protection from income tax
e. Professional property management
Investors should keep in mind that, based on IRS regulations, they have only 45 days from the date of the sale to identify the property they wish to exchange and 180 days to complete the purchase. That being said, William Passco of Passco Companies LLC says the search for the sponsoring company and property should begin very early preferably before completing the sale of the 'down leg' property. Waiting is not advisable especially in the case of the converted partnerships because if the property is exchanged shortly after the partners have become tenants-in-common, there is a risk that the exchange will be rejected. Per Michaels, the IRS may take the position that even though the partnership at the entity level held property for investment purposes, the individual investors did not hold title to their respective interests as tenants-in-common long enough to qualify as having held such interests for investment purposes, and acquired their respective interests as tenants-in-common solely for purposes of selling the property. It is therefore recommended that investors interested in restructuring their interests do so as far in advance as possible'even a year or more prior to sale of the 'down leg.'
When considering a 1031 TIC exchange, investors should also keep in mind the pros and the cons of such a transaction. For example, 1031 TIC exchanges can actually allow one to defer the tax on realized gains from the sale of an investment property indefinitely. In fact, a series of these exchanges over a long period of time can result with the final up-leg being part of a taxpayer's estate following death. Per Passco, in a case like that, the income tax was never paid, and while estate tax may be incurred upon settlement of estate matters, the heirs received the property with a stepped up basis equal to the value of the asset on the date of death. Once the property is sold at that value, no income tax is incurred because there would be no gain over basis. This is a serious pro, but it needs to be weighed against the overall costs associated with TICs and particularly in the case of a restructure where transfer tax is assessed upon the deeding of the property from the partnership to the investors as tenants-in-common. Operationally too, TICs are restrictive. There is no preferred position regarding profits, voting rights are equal, and an investor may not be able to prohibit the sale of another's interest. As a result, careful consideration of the pros and the cons is recommended to ensure whether this particular transaction is truly for you.
Despite the surplus of for-sale housing, developers are reporting an increasing number of parties interested in rentals. Current market conditions and difficulty in securing adequate financing are being cited as popular reasons. People are nervous about purchasing not only from the standpoint of an unstable financial future, but perhaps also for fear of a hasty purchase amidst an overwhelming variety. Contrary to the expectations of rental housing owners, however, occupancy rates in multi-family dwellings are not exactly soaring. Per the New York Times, the vacancy rate for apartments at the end of March was 6.1 percent, up from 5.7 percent a year ago, the result of slow job growth. Regardless, some high-end developers feel that in markets like this one, renting comes easier than buying, and many are becoming creative in their endeavors to increase their occupancy rates. One developer is currently offering a 'rent now, buy later' deal where buyers can rent for a whole year, and then, if they decide to buy, apply the entire year's rent toward the purchase price. Other developers admit being unsure as to which direction they should be going in and are taking a wait-and-see approach before deciding on which market to be in ' rental or sales ' and where.