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A tax deferred exchange allows us to sell a piece of investment (i.e. rental), trade or business property, buy a new property with the gain or profit from the sale, and not owe taxes on the sale immediately. If you eventually sell the new piece of property, you would owe taxes at that time. Generally, all gains and losses on sales of real estate are taxable, but an exception lies where the property sold is traded or exchanged for "like-kind" property. The new property is seen as a continuation of the original investment, so taxes are not due at the time of the sale.
Many people view tax deferred exchanges as being for huge corporations, or only for professional investors. I believe that everyone should take advantage of these where they can. Strategy -- purchase a rental home below market value, rent it for a year, sell it, and buy two rental properties with your gain. Note that if you do this too many times, the IRS may take the view that you are not a long term investor, and disallow such exchanges. When you get ready to do a tax-deferred exchange, you will need the services of a qualified CPA or Attorney. This is a basic introduction only, and you should always get professional advice from someone who has all the details on your deal, since so much liability is at stake. In my course I list the company that I use for these real estate exchanges. They are a national company and can help you out wherever you are in the country. I have used them for several deferred exchanges, and they have been an excellent resource and extremely competent.
Let's look at how one of these deals would work. Assume that you own a rental property that has gone up in value. You'd like to sell this property and then reinvest the proceeds into some other rental real estate. You can avoid the tax bill if you can find suitable property to exchange for. The difficulty of the tax deferred exchange is that the property you are going to purchase must be identified within a certain amount of time, and it must be closed within a certain amount of time after it is identified. Unfortunately, no extensions are possible.
Identifying Property
You must identify property in a written document signed by you, and delivered to the party assisting you with the exchange (cannot be related to you!) on or before 45 days from the date you sold the original rental property. There is a growing body of support for identification of properties, and closing of new properties before the original property is sold. This is somewhat controversial and outside the scope of this discussion.
Technical Note: You can identify more than one property as the replacement property. However, the maximum number of replacement properties that you may identify without regard to fair market value is three properties. You may identify any number of properties provided that the total value of these properties is not more than 200% of the value of the original property you are selling. Note that you don't have to close on all the properties you identify. You can name several if you're not sure what will close, or not close, but you have to observe the rules in this technical note in terms of the value of properties you identify. If at the end of the identification period you have identified more properties than you are allowed, you are generally treated as if no property was identified. This means that you pay taxes!
Time Limits For Completing the Exchange
If you have correctly complied with the identification phase of the exchange, you have up to 180 days to complete an exchange, but the period may be shorter. Specifically, property will not be treated as like kind property if it is received more than 180 days after the date you transferred the property you are relinquishing, or after the due date of your return (including extensions) for the year in which you made the transfer.
For multiple property transfers, the 45 day identification period and the 180 day exchange period are determined by the earliest date a property is transferred.
Avoid Boot!
Boot is defined as any money or any type of property of unlike kind (example, a car received as part of down-payment). You will be taxed on this boot regardless of whether or not you carry out the exchange correctly. You will want your exchange company, or attorney to examine your transaction closely to make sure you don't receive anything that could count as boot. Special rules apply for exchanging property with assumed mortgages.
Summary
The tax-deferred exchange is a great way to maximize your wealth. By keeping your investments growing without immediately paying taxes, you can do wonders for your net-worth. You will need to search out a good intermediary. I am happy to provide the name of mine for our members. This may seem like a dry subject, but it is important to understand when you begin to accumulate some rental properties.
Remember that this article is to provide basic information only. If you are planning on doing a tax deferred exchange, you really need to speak with a professional that handles these transactions on a regular basis. Information here is subject to change by IRS regulations or statute, so be sure to use current information provided by your accountant or other professional when planning a strategy involving tax deferred exchanges.
Overview on Short Sales and Foreclosures
The Basics of “Short Sales”
by William Bronchick
You will likely come across dozens of properties in foreclosure with little or no equity, that is, the seller owes at close to or more than the property is worth. In these situations, lenders are sometimes willing to accept less than the full amount due, commonly referred to a "short pay" or "short sale."
Negotiating a short sale with the lender is a difficult process, generally because it is a daunting task finding a bank officer who has the authority to accept a discount. You will have to call around to locate the lender’s “Loss Mitigation Department.” More than likely, each lender you deal with will have a separate name for this department, so be patient when calling. Much like getting your phone bill corrected, you can expect the process to involve a lot of waiting on hold and being bounced around an intricate maze of automated voice mail systems. Once you get in touch with the right person, then the negotiating begins.
From the lender’s perspective, a short sale saves many of the costs associated with the foreclosure process - attorney fee's, the eviction process, delays from borrower bankruptcy, damage to the property, costs associated with resale, etc. In a short sale scenario, the lender gets the property back faster, so it is able to cut its losses. Your job as the investor is to convince the lender that it will fare better by accepting less money now.
The lender will want some information about the property, the borrower and the deal he has made with you. Specifically, the lender wants to know what the property is worth. The lender will generally hire a local real estate broker or appraiser to evaluate the property (called a broker’s price opinion or “BPO”). You can also submit your own appraisal or comparable sales information. In addition you will want to offer as much specific negative information about the property as possible. Also, include some relevant information about the neighborhood and the local economy if things are bad (copies of newspaper articles with “bad news” may help). A contract’s bid for repair estimates should also be submitted, which, of course, should be the highest bid you can obtain!
The lender will also ask for financial information about the borrower. Sort of a backwards loan application, the borrower must prove that he is broke and unable to afford the payments. The borrower must show that he has no other source of income or assets to repay the loan. This process may involve as much, if not more paperwork than an original mortgage application! The borrower should submit a “hardship letter”, which is basically a sob story about how much financial trouble the borrower is in. This may require a little literary creativity, and some help on your part. Don’t lie, just paint a picture that doesn’t look good.
Finally, the lender generally wants to see a written contract between you and the seller. The lender wants to make sure the seller isn’t walking away with any cash from the deal. Generally, the contract must be written so that the buyer pays all costs associated with the transaction, so that the “net cash” to the seller is the exact amount of the short pay to the lender. A preliminary HUD-1 settlement statement is often requested, which can be difficult, since many title and escrow companies simple won’t prepare one in advance of closing. You can prepare your own HUD-1, and simply write “preliminary” on the top.
Don’t be surprised if your short sale bid is rejected. Lenders aren’t emotionally attached to their properties, so they aren’t as likely to give you “steal.” Many short sales fall through if the BPO comes in too high, which is often the case. You can’t pull the wool over a lender’s eyes - if the property isn’t is need of serious repair, it is unlikely you can convince the lender the property is worth a whole lot less than the appraised value.
If you are interested in these properties please contact me and I can furnish you a list of properties
Ask many a home buyer about the type of house they are looking
for and many will reply "We are looking for something we can
fix up and live in (or resell). We like the idea of gaining some
quick sweat equity." The classic "fixer-upper" home.
Unfortunately, there is a bit of fantasy in the notion, though.
First of all, there are many more fixer-upper buyers than there
are fixer-upper properties. Second, the current thinking in many
minds is that anyone can make a killing in the Real Estate market,
which is not always the case. Third,
many buyers totally mis-estimate both the cost and the time involved
in fixer-uppers, severely impacting (and in some cases destroying)
the profit potential. Unless you are fully prepared to deal with
the realities of fixer-uppers rather than the fantasies, it probably
is a good idea to look elsewhere for a home.
This does not mean that there isn't equity to be gained (or profit
to be made) by purchasing the RIGHT property at the RIGHT price.
The important notion is to understand that there are several factors
that will make the difference between winning and losing in such
a transaction.
The Mindset
The first factor that must be understood is that it isn't going
to be easy. The only people who think that finding, buying, fixing
and selling a home is an easy task are those who have never done
it. Those with any experience (even if only once) will tell you
that it rarely is as simple as it appears. In general, it is best
to assume that repairs will cost twice what you estimated, take
double the amount of time and,when finished, the house will be
worth less than expected. If you keep that in the forefront of
your thinking, the chances of being burned are much less.
Foreclosure sales are often good sources for fixer-upper properties.
A couple of resources that specialize in listings of those types
of homes are and . All three of the resources above offer free
trial periods to evaluate their services and search for foreclosure
listings in the area in which you are interested.
Start Out Small
Some of the worst examples of mistakes made by buyers of fixer-uppers
are first-time buyers who bite off way more than they can chew.
Examples of this are houses that have structural problems or will
take an exceptionally long time to repair, or are located somewhere
other than a desirable neighborhood. These can be a horrible drain
on finances, time and peace of mind.
A much better strategy for the inexperienced is to purchase a home
in a desirable neighborhood that is in need of cosmetic attention--new
paint, carpeting, appliances, landscaping and the like. These repairs
can either be handled by the homeowner or are easily contracted
out, saving time, effort and money. Yes, money can be made on homes
needing major renovations, even if they
are in less popular neighborhoods, but these are jobs for professionals,
not homeowners (and definitely not for first-time homeowners!)
Avoid Surprises
The most expensive situations are often those that are the least
expected--those nasty little (and often big) surprises that jump
out at you. You can avoid many of these surprises, though, with
a couple of easy steps taken BEFORE final commitment to a property.
1) Have the property thoroughly inspected. Have
the inspector detail all obvious (as well as potential)
defects in the property. NOTE: The seller may say "we
are selling the house as-is, so NO inspections." Avoid
this property like the plague.
2) Run the numbers. You must
know the market values for houses in the neighborhood
in which you are interested that need no repairs.
Running the numbers means working them backwards
to see how much equity or profit may be available
(or even IF there will be any) in the deal.
You will need to begin by computing the realistic
value of the home when all repairs are made.
From that point, you will need to subtract
any selling expenses you will incur (commissions
and the like) as well as the full cost of repairs
and, most importantly, the amount of desired
profit or equity.
Example:
$600,000: Expected Sale Price, Repaired
-40,000: Selling Expenses
-25,500: Repair Expenses
-50,000: Desired Profit/Equity
$485,000: Maximum Property Purchase Price
Don't be deluded into thinking that you'll be able to sell for
more than the market value or do the repairs for less than the
estimates. If the numbers don't fit--with a good amount of "wiggle
room" for more expense or handling costs or if the property
does not sell quickly--don't waste your time or your money!
Summing Up
When considering a fixer-upper, whether for resale or to live in
with increased equity, go into the process fully prepared so you
will avoid many surprises. For your first project, only consider
structurally sound homes in good neighborhoods requiring cosmetic
repairs only. Have any property you are considering fully inspected
and then get firm estimates for all needed repairs. Most importantly, "run
the numbers" to be certain that the potential for gain is
truly there. If you are satisfied on all counts, you may very well
be able to be successful with your fixer-upper project “Remember
not making a decision is still a decision!
Building a Home in the Keys
Buying
a lot and building your dream home may be the way to go. The
cost of building will vary widely from $150.00 per square to
$300.00 and up.
Basically lots in Florida as far as price goes will run as
follows.
Most expensive
• Open-water—Atlantic or Gulf
• Open-water Inter-Coastal or other Rivers-Lakes
• Canal Homes with Open water views (Bay or Atlantic-Gulf)
• Canal homes-Boatable and quick access to open-water
• Dry Lots—price varies widely, based on the community
and area.
*As
to canal lots and how boat ability affects prices.
If the depth of the canal and the width allows for a 50ft boat
or sailboat-it will be more expensive than a lot on a canal that
is shallow and usually not as wide. The bigger the boat, the more
room needed to turn around.
*Access to open water is another factor that influences prices.
If
you’re only minutes (half hour) to good fishing-diving,
expect to pay more.
Also homes on shorter canals will generally have better water quality.
In the Keys we call these swimming canals. The tides flush them
out easier and the water is clear.
As of September 2005, per an MLS search,
Vacant
lots-Location-Number available and starting price.
• Key Largo, 89 starting at $30,000
• Marathon, 446, starting at $35,000
• Key West 20, starting at $275,000
For prices on the individual keys please contact me. The prices will vary depending on depth of boating etc—see information below.
Permit prices and restrictions will vary in each community. Generally the more environmentally sensitive the area is, the more restrictions there are in getting a permit. (Since the water is one of the main reason people want to be here, the state and the communities want to keep it that way.
Important:
Regarding pricing. The closer to the water and the deeper the boating,(boat draft-a 50 foot requires deeper water and wider canals than a flats boat) the higher the prices.
Another thing to do is find out what flood zone the property is in per FEMA maps and then talk to a local insurer on how that will affect your rates. Do this ahead of time.
#In all cases if you find a lot that you like, my suggestion is that you ask for a letter of build ability from the local zoning commission as a clause in your sales contract. Always-always, talk with the county yourself to get the update on the laws.
So, yes, you can build here and it’s done all the time, but make sure you ask all the necessary questions and if you can, get it in writing.
See the Biz directory for builders if that’s the way you want to go. If you want a new home contact a residential agent.
REGARDING BUILDING
Ask the REALTOR that you pick to help find you a good builder that will respond quickly. Another consideration is to buy a lot and build later (be careful here as building codes and laws can change due to density controls) I would first see how long it takes to get a building permit and then if you get one how long you can wait. In the Keys when you get a permit there is a limit of a couple years during which time you have to at least start the process (bring electric to the site-do a septic check etc)
Since all this varies widely make sure you get all the answers, Probably best to go the the permit department yourself and have a discussion
Monroe County permits
You
will probably need a building permit if you are:
• Building a new building or Adding to an existing building
• Renovating an existing building
• Demolishing an existing building
• Constructing a prefabricated structure
• Moving or installing a mobile home
• Installing/Modifying other miscelaneous structures
• including fences, pools, decks, fireplaces, etc.
You
probably also need a permit if you are working on your structure's:
• Electrical System
• Plumbing System
• Heating or Air Conditioning
• Ventilation Systems
State
and or Municipal Licenses required
• Plumbing
• Electrical
• Asbestos Abatement
• Roofing
Building
Departments
• MIDDLE KEYS OFFICE
• 2798 Overseas Highway
• Suite 300
• Marathon, FL 33050
• 305289-2501
• fax: 305 289-2515
•
• UPPER KEYS OFFICE:
• 88800 Overseas Highway
• Tavernier, FL 33070
• 305852-7100
• fax: 305 852-7103
•
• LOWER KEYS OFFICE:
• Juvenile Justice Building
• Room 2030
• 5503 College Rd.
• Key West, FL 33040
• 305295-3990
• fax305 295-3994
http://www.co.monroe.fl.us/pages/gmd/bld.html
Florida
Building Codes
The purpose of the Building Code is to protect the safety, health, and general welfare of the citizens through structural strength, stability, sanitation, adequate light and ventilation, and safety to life from hazards attributed to the built environment. This is accomplished through the implementation of building, plumbing, mechanical and electrical codes along with various state and local codes and standards
Information
on Complaints Against Contractors:
Don't get nailed! Many citizens in Florida have fallen victim to
dishonest, unlicensed or improperly licensed contractors. Florida
Statute 489 requires all construction contractors to hold a valid
contractor's license prior to engaging in contracting. Always require
that a contractor show you a valid contracting license before you
sign a contract. Some indications that a contractor may be unlicensed
are: the contractor requests a large deposit or all of the money
up front before any work has commenced, the contractor asks you
to pull a "homeowner permit", the contractor pressures
you to sign a contract "today or I can't give you this special
price." To verify licensure of a contractor, you may call
the State of Florida Dep't of Professional Regulation at 941 338-2373
or search their contractor licensing database. The City requires
proof of licensure from contractors who pull permits for properties
located in the City, so be sure to require that the contractor
pull the permit in his name, not your name
So always play it safe and do it right. This will certainly help you in the Insurance area also---The extra structural costs for doing it better really pay off if a Storm hits and or you decide to sell
#The information above is based on my experience in the Florida keys, which is highly regulated due to environmental concerns. With regard to making any decisions, be sure to check with local and state permit and zoning authorities and/or a Real Estate attorney
Renting your home out as a seasonal(vacation
rental)or long term.
Long term renters are easy to find as there is a shortage of homes
for rent. So, if you want to buy something for retirement or a vacation
home and rent it out to help your payments-this is typically the
easiest way. (Long term rentals are considered to be anything over
6 months, as the tenants don't pay the 11.5% Florida tax)
• Generally long term rentals should be unfurnished.
• Initially we do a credit check before submitting a lease
to you, then with your approval of the lease, we collect the first
and last months rent plus a security deposit which is typically a
months rental amount. We are very proactive in this area and I assure
you the home is handled professionally.
• As to utilities- The tenants take the lease to the water,
electric, phone and cable people and have the utilities put in their
name and of course they pay their own deposits. Garbage down here
is included in your tax bill-so there is no garbage bill.
• Seasonal rentals. Currently we can only rent monthly or 28
days, meaning the owner can only rent the home out 12 times per year.
This means about 5 months of income-Jan-Feb-Mar and July-August.
There are some April and June monthlies
• As to finding people to rent for the rest of the time! We
deal a lot with navy transfers÷they generally need something
for 2-3 months while they sell their home and buy another. So if
it is the off season, Our rental department will try to fill your
home up this way. Another way to fill in the gaps is to Companies
that come down here. Most of the major government and private building
projects are done by outside firms. Their management people will
generally want a nicer situation so they will generally rent homes
at better than average rates.
• As to what is the best rental situation , that is size, which
areas, views, pools, how water and boating accessibility affects
rental amounts and the typical rental amounts for both long and short
term, plus the fees involved, please contact me. As to extra costs
and what is necessary to have a Home as a Rental.
• When you rent your home out you need to license it through
the County. This costs $25.00 and we handle the paperwork for you.
The County and the Tax people want the home licensed so they know
where there may be tax dollars coming in. When your home is used
as a rental, in effect you are operating the same as a hotel or motel
and so come under their safety guidelines.
• Every bedroom and the main living area must have a hardwired
smoke detector and there must also be an escape light. This light
comes on in case of a power outage-this also must be hardwired. (About
$350.00 installed smoke detectors and escape light for a 2/2)
• There also needs to be a professional quality refillable
fire extinguisher that is approved by the fire department (about
$55.00). This would be the same as you'd find in a restaurant or
hotel room. There needs to be a dead bolt on the door that works
from the inside and is a different key than the main door. All of
these issues help protect your liability in cases of fire/break in.
• When the home complies with all of the above and we have
the signed contract, then it can go into the rental pool.SPECIFICS
OF THE AGREEMENT
1 Coldwell Banker agrees to manage the home for a period of one year
with the contract automatically renewing unless either side gives
90 day notice.
2 Our fee for vacation rentals is 20%---what is really important
here are the following points.
• There are no hidden fees-such as credit card charges etc.
• We typically send you the money within 2 weeks of receiving
it÷we do NOT hold it until the first of each month or split
it out each month. We always collect cashiers checks from the renters
so when the money is received, it is quickly processed through our
main office and sent to you.
• There are no charges for going up on our Web sites÷5
in all.
• There are no charges for the pictures that are taken.
• There are no charges for any specific flyers, brochures or
ads that we run on our rental properties.
• Please go to www.rentalsfloridakeys.com
• We actively and aggressively manage your home. Meaning we
get the best customers (qualified) We play by the 2 people per bedroom
limit, and we work to keep it filled other than your personal usage
• All of the computers in the 5 Coldwell Banker Schmitt offices
throughout the Keys are linked. If a customer inquires about a home,
it will show up on the rental agents computers.
• We have Handymen, Electrical, Plumbing, Landscaping, Pest
control and appliance people that respond when there is an emergency.BOOKING
THE HOME FOR THE OWNER.
This is very simple. You would call the rental manager and have him
block out the home when you want to use it. We don't charge a fee
for any of that. Generally you would have us arrange for the home
to be cleaned after you leave.FLORIDA BED TAX Florida charges a 11.5%
tax on all hotel, motel, home rentals. We collect the money from
the tenant and disperse it to the tax agency.CLEANING SERVICE The
tenants pay this fee which varies based on the size of the home.
On average a 2/2 is $100 and a 3/2 is $125.00.PETS AND SMOKING If
the home is no smoking, that is put in the rental file and the tenants
are informed before they book the home. If the home allows pets,
we collect a pet deposit which is added to the standard security
deposit of $500.
How are emergency repairs handled?
• We have handymen available that can take care of small emergencies
or updates, as the owner requires. Since our company manages over
300 rentals, we also have a good working relationship with Plumbing,
Electrical, Appliance and Carpet, Tile people.
What about Hurricane preparation?
• In the event of an impending Hurricane, the handyman or someone
else can be hired to put up the storm shutters, bring in the lawn
and patio furniture, etc for a fee-as we have too many homes for
us to do them individually. This agreement should be set up in advance
by the homeowner and the handyman. We will help you find someone
to do this.
What makes a good Vacation Rental
• A clean, well-maintained home on a canal or open water.
• Typically one of the bedrooms should have a set of twin beds
if the renters are bringing children.
• Good linens and towels and a backup set. This is especially
important for monthly renters.
• The washer, dryer and refrigerator should be newer if possible.
• A good Television hooked up to cable (about $35.00 per month)
and a CD or tape stereo system.
• The kitchen must be completely outfitted. A microwave is
also very important for renters.
• Patio and/or Lawn-Deck furniture. If there is an upper deck,
a table and chairs plus loungers.
• On the water side, below a set of loungers and chairs.We
get a lot of repeat renters÷if the renters have a good experience,
they will come back. We see this especially with people that book
two to three months a year.
Where do we get the renters
Most of our renters come through the Internet and one of 3 sites.
www.floridakeysrealestate.com www.rentalsfloridakeys.com www.fkren.com
• All of our sites are linked to Key West or www.flakeys.com
which averages over 500,000 views per month. Basically if anyone
looks at Key West they find our sites.
• The balance come through National Advertising placed in magazines
such as Island Living, Florida Sportsmen, Salt Water fishing and
Dive magazines as well as regional publications and our own buyers
guide.
• Also all of our computers are networked meaning if someone
is looking for a specific situation such as open water it will show
up on the computer immediately as to area, availability and price
plus all other details.
Who handles the renters?
• All of our offices have a dedicated rental manager whose
job is to rent the homes. In conclusion, there is a lot to
discuss on rentals and this is used to just get you information regarding
the main issues.
BUYING RENTAL UNITS-DUPLEX-OR MORE UNITS
• There are Duplexes throughout the lower Keys and a few 3-4
unit complexes. The 3 to 4 units are generally in Key West or Marathon.In
looking at the return, generally it runs around 10% in the Keys÷this
includes the large guesthouses. When a return of 14% or more comes
up they generally go very quickly.
DUPLEXOn the water generally start at $600,000. Nicer ones (maintained-updated
appliances-tile) go for $775,000 and up. A dry lot duplex can start
at about $550,000. These generally have the best return percentage.3
TO 4 UNITSGenerally in Key West or Marathon.
• In Key West, these can be good, especially if it's located
in Old Town and one or more of the units has a transient license,
meaning it can legally rent weekly.
• These type of situations run from about $850,000 and up.
In Marathon from about $750,000 and up.
MOTELS-MULTIPLE UNITS
• These are generally found in upper keys, Marathon and of
course Key West. The more affordable ones ( one to two Million dollars)
are generally from Marathon north to Key Largo. See Commercial section
of my site. If there is a specific situation you want please let
me know.