Last Week in Review:
THINGS COULD BE WORSE…much worse. While last week’s news showed some weakness in housing and a few assorted economic reports, the Stock market seemed to fare pretty well with good reports recently from big bellwethers such as Apple and Microsoft. And home loan rates were stable to slightly improved for the week overall. But let’s look back in time to exactly 78 years ago today, October 29th, 1929.
We are told that real estate cannot be a bad investment. What matters most is not location but how the mortgage is structured. Is your home a good investment…find out!
Great case studies involving the re positioning of lazy idle equity into a powerful position of wealth advancement and preservation.
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As the end of the year approaches, Mortgage Planners and their clients are thinking about how to make wise tax choices. Following are some of the most common tax questions that mortgage professionals ask. The responses are meant as general advice. For specific tax advice, speak with your own CPA.
Q: Can real estate professionals deduct all of their real estate losses against income?
• In many cases, real estate losses are allowed against real estate earnings.
• A real estate professional is not generally a mortgage professional but is considered someone who works a minimum of 750 hours a year in real estate trades or business and puts in at least 50 percent of their time in real estate trades or businesses.
• Either you or your spouse must materially participate in the managing of real estate investments at least 50 percent of your time. If you have a property manager, you have to put in more time than them.
Q: Can I deduct trips when taking care of properties I own?
• You can deduct trips to check out your properties two times a year, absent any special reasons, such as natural disaster.
• For timeshares, you cannot deduct caretaking trips.
Q: What is the best way to buy and hold a real estate title – individually or through an LLC?
• Do not own real estate in a corporate name (this is not an LLC) because it is similar to a marriage — easy to get into but difficult to get out of.
• Getting real estate out of a corporation can be a taxable event.
• Corporations are generally designed for liability protection so do not put your largest asset into something that is subject to creditors.
• Consider owning real estate in a one-owner LLC because it is treated as if it is in your name and there is no flow through.
• Own each piece of property in a separate LLC so that they are all protected individually.
• You can also take your properties as a multi-owner LLC but then for tax purposes, the property is treated as a partnership.
• You can own property in a joint ownership but this does not limit liability like an LLC.
Q: Should I own property in my pension plan or retirement account?
• There is a lack of flow-through benefits.
• Real estate generates a lot of tax benefits but if it is in a retirement plan, they are not usable by you. They are locked into the plan.
• Pensions and IRAs must be used upon attaining age 70 1/2. This means you must distribute the property. You will then be taxed unless you own the property in a Roth IRA.
• Generally, real estate owned in pension plans and IRAs must be debt free or you will have transaction penalties.
Q: What tax return software do you recommend for those who own investment property?
• None. Do not do your own return.
• The IRS has found that those who do their taxes are 11 times more likely to make errors. This increases your chance for an audit.
Q: What are the options when buying real estate from a tax perspective?
• An option is the right for someone to buy your property at a fixed price within a set timeframe.
• Usually you pay for this option and this money is called the option premium.
• The price of the home is the exercised price.
• You have a time period until that option expires.
• During the term of the option, there are no tax deductions. You only get the deduction when the option expires.
• The option premium is treated at part of the sales price. If the option lapses, it goes away.
Q: Advice for wealthy clients who buy a high-priced home:
• You can deduct interest up to $1 million.
• You can deduct interest on another $100,000 for home equity debt for a total of $1.1 million.
Q: Help your client in this situation using a 4-step method:
• Tell the client you want to limit the acquisition indebtedness to $1.1 million. For example, on a $5 million home, they put up $3.9 million in cash and the rest is their debt.
• Wait 91 days from closing. There is a regulation that any debt incurred for the acquisition of a home within 90 days will be treated as acquisition indebtedness.
• After 91 days, refinance and take this money and invest it.
• Document where the refinance proceeds went. If you can show they refinanced the property and used that money for investments or a business, the interest on that extra debt becomes investment interest.
Bottom line:
This is a great strategy for high-end clients and a win-win for everyone involved.
Sandy Botkin is a CPA, attorney and principal lecturer at the Tax Reduction Institute. He is a former trainer of IRS attorneys and the author of “Lower Your Taxes: BIG TIME” and “Real Estate Tax Secrets of the Rich.”
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Fayetteville is home to the University of Arkansas. Northwest Arkansas is also headquarters to Wal-Mart, Tyson Foods and JB Hunt Transport. The city of Fayetteville has a population of 75,000. In addition to David’s personal production, Bassett Mix & Associates has 25 additional agents.
David was voted the #1 Realtor in Northwest Arkansas by the Northwest Arkansas Times, four out of the five past years.
The team consists of an In-House Closing Coordinator, an Office Administrator, an Office Manager and a Technology Professional.
Justin handles the research on data for the subdivisions that they focus on, allowing them to communicate from a position of strength on their results as compared to the board averages.
Bassett Mix focuses on pre-inspections on their listings in order to eliminate any objections later. Their average time on market has gone from 30-60 days to over 200 days in some cases as a result of overbuilding in new construction. In this way, they are marketing a “Pre-Inspected Home” just like a “Pre-Owned Car”. Consequently,
David trains his agents to understand that the listing process will be so much more enjoyable if they help their seller settle on a realistic price eliminating a point of contention through the marketing period of the property.
In order to update the seller, during an exceptionally long listing period, the agent is instructed to select a certain day of the week that they will contact the seller for a regular update. Good news, no news or bad news — the seller is being updated.
David’s team has discovered that the key to their web presence is to ensure that the site is customer friendly - allowing for interactivity, and ultimately, an opportunity for the visitor to obtain information in exchange for their contact information.
David and his company create high quality, full color, glossy brochures that help make the subject property stand out. While there is a higher cost in doing this, the separation from the crowd is the desired end result. Since 70% of the brochures taken out of brochure boxes are from neighbors, it serves as a better listing tool. Historically, the newspaper has been one of their highest expenses, but the reality is that those ads are not for buyers…they are to please sellers. Consequently, their team is now working to make sure that sellers understand that buyers come from other sources - not ads in newspapers. Their website is now their best source for buyer contact.
David sends his monthly mail outs to 600 contacts in his personal database.
David points out that in a business where you are dealing with the public, you must genuinely care about people.
When David receives referrals, he brings one of his agents into the transaction but makes sure that he remains committed throughout the transaction.
Three weeks after closing, and after the initial closing gift is delivered, David visits the clients with another gift in an effort to even further solidify the relationship and to ensure a smooth transition.
