The Bottom Of The Market Feels Like A Bumpy Road

It’s the New Year, and just in time the banks are raising interest rates, but just a little – so far. However, the banks are also relaxing their down-payment requirements because they are seeing increased confidence in the housing market. The truth, according to one banker friend I spoke with is because they are not making any money. They need to make loans to make money. In some markets borrowers can now borrow 95% of a property’s value. Of course one would hope this means property values are not going down any further and loan applicants are going to be scrupulously vetted?

Despite favorable sales figures as we finished out this year, Tim Warren Jr., CEO of the Warren Group sees home prices bouncing up and down along the bottom during the next 3-6 months, and possibly throughout most of 2010 even though sales figures will appear to continue trending positively. This is the way it was in the early 90’s as we pulled out of the last recession. Some economists call this an “L” recession. For sure the recovery is going to be slow, but I do think it is safe to say we are at the bottom albeit a bumpy bottom. I believe in making a decision about when is the best time for you to buy an investment property one indicator you should pay attention to is interest rates. When interest rates go up this can herald the onset of an inflationary period.

Warren feels it was the rush to take advantage of the initial first-time home buyer tax credit by signing contracts before November 2009 expiration that contributed the biggest boost to the market. Wednesday’s WSJ reported that first-time buyers made up 51% of purchases in November, according to NAR. The initial first-time home buyer tax credit has been extended and broadened to include more potential buyers which may once again give a boost to the housing market. Contracts have to be signed by April 30, 2010 with closing dates on or before June 30, 2010. According to Carl Reichardt, an analyst with Wells Fargo, “The spring selling season would be critical to determining whether a possible double-dip is at hand, or whether housing’s recovery will regain steam.”

Tim Warren believes another reason for the upturn is the brighter unemployment figures in Massachusetts which in turn enhance consumer confidence. Okay, but one of my sources tells me the actual national unemployment figure is above 17%, if you factor in the non-registered ‘shadow’ unemployed.

News Flash: Massachusetts unemployment rate drops slightly from 8.9% to 8.8%
Read about it here > http://www.businessconnector.biz/news/show/523

In January, it is predicted that 1,000,000 unemployed workers will lose their benefits. Another prediction is going to be a surge in commercial foreclosures as more companies lay off workers and close doors in leased office spaces. But who knows? I still believe in miracles.

1031 Exchanges and Vacation Homes actual text for IRS Rev. Proc. 2008-16

IRS Rev. Proc. 2008-16 on Safe Harbor for Like-Kind Exchange of Dwelling Unit

IRC Section 1031 IRC - Section 280A Document Date: February 15, 2008

This revenue procedure is scheduled to be published in Internal Revenue Bulletin 2008-10, dated March 10, 2008.

Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determination of correct tax liability.

(Also Part 1, §§280A , 1031).

Rev. Proc. 2008-16

SECTION 1. PURPOSE
This revenue procedure provides a safe harbor under which the Internal Revenue Service (the "Service") will not challenge whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment for purposes of § 1031 of the Internal Revenue Code.

SECTION 2. BACKGROUND
.01 Section 1031(a) provides that no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment (relinquished property) if the property is exchanged solely for property of like kind that is to be held either for productive use in a trade or business or for investment (replacement property). Under § 1.1031(a)-(1)(a)(1) of the Income Tax Regulations, property held for productive use in a trade or business may be exchanged for property held for investment, and property held for investment may be exchanged for property held for productive use in a trade or business.

.02 Rev. Rul. 59-229, 1959-2 C.B. 180, concludes that gain or loss from an exchange of personal residences may not be deferred under § 1031 because the residences are not property held for productive use in a trade or business or for investment.

.03 Section 2.05 of Rev. Proc. 2005-14, 2005-1 C.B. 528, states that § 1031 does not apply to property that is used solely as a personal residence.

.04 In Moore v. Commissioner, T.C. Memo. 2007-134, the taxpayers exchanged one lakeside vacation home for another. Neither home was ever rented. Both were used by the taxpayers only for personal purposes. The taxpayers claimed that the exchange of the homes was a like-kind exchange under § 1031 because the properties were expected to appreciate in value and thus were held for investment. The Tax Court held, however, that the properties were held for personal use and that the "mere hope or expectation that property may be sold at a gain cannot establish an investment intent if the taxpayer uses the property as a residence."

.05 In Starker v. United States, 602 F.2d 1341, 1350 (9th Cir. 1979), the Ninth Circuit held that a personal residence of a taxpayer was not eligible for exchange under § 1031, explaining that "[it] has long been the rule that use of property solely as a personal residence is antithetical to its being held for investment."

.06 The Service recognizes that many taxpayers hold dwelling units primarily for the production of current rental income, but also use the properties occasionally for personal purposes. In the interest of sound tax administration, this revenue procedure provides taxpayers with a safe harbor under which a dwelling unit will qualify as property held for productive use in a trade or business or for investment under § 1031 even though a taxpayer occasionally uses the dwelling unit for personal purposes.

SECTION 3. SCOPE
.01 In general. This revenue procedure applies to a dwelling unit, as defined in section 3.02 of this revenue procedure, that meets the qualifying use standards in section 4.02 of this revenue procedure.

.02 Dwelling unit. For purposes of this revenue procedure, a dwelling unit is real property improved with a house, apartment, condominium, or similar improvement that provides basic living accommodations including sleeping space, bathroom and cooking facilities.

SECTION 4. APPLICATION
.01 In general. The Service will not challenge whether a dwelling unit as defined in section 3.02 of this revenue procedure qualifies under § 1031 as property held for productive use in a trade or business or for investment if the qualifying use standards in section 4.02 of this revenue procedure are met for the dwelling unit.

.02 Qualifying use standards.

(1) Relinquished property. A dwelling unit that a taxpayer intends to be relinquished property in a §1031 exchange qualifies as property held for productive use in a trade or business or for investment if:
(a) The dwelling unit is owned by the taxpayer for at least 24 months immediately before the exchange (the "qualifying use period"); and

(b) Within the qualifying use period, in each of the two 12-month periods immediately preceding the exchange,

(i) The taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, and

(ii) The period of the taxpayer's personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental.

For this purpose, the first 12-month period immediately preceding the exchange ends on the day before the exchange takes place (and begins 12 months prior to that day) and the second 12-month period ends on the day before the first 12-month period begins (and begins 12 months prior to that day).

(2) Replacement property. A dwelling unit that a taxpayer intends to be replacement property in a §1031 exchange qualifies as property held for productive use in a trade or business or for investment if:

(a) The dwelling unit is owned by the taxpayer for at least 24 months immediately after the exchange (the "qualifying use period"); and

(b) Within the qualifying use period, in each of the two 12-month periods immediately after the exchange,

(i) The taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, and

(ii) The period of the taxpayer's personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental.

For this purpose, the first 12-month period immediately after the exchange begins on the day after the exchange takes place and the second 12-month period begins on the day after the first 12-month period ends.

.03 Personal use. For purposes of this revenue procedure, personal use of a dwelling unit occurs on any day on which a taxpayer is deemed to have used the dwelling unit for personal purposes under § 280A(d)(2) (taking into account § 280A(d)(3) but not § 280A(d)(4)).

.04 Fair rental. For purposes of this revenue procedure, whether a dwelling unit is rented at a fair rental is determined based on all of the facts and circumstances that exist when the rental agreement is entered into. All rights and obligations of the parties to the rental agreement are taken into account.

.05 Special rule for replacement property. If a taxpayer files a federal income tax return and reports a transaction as an exchange under § 1031, based on the expectation that a dwelling unit will meet the qualifying use standards in section 4.02(2) of this revenue procedure for replacement property, and subsequently determines that the dwelling unit does not meet the qualifying use standards, the taxpayer, if necessary, should file an amended return and not report the transaction as an exchange under § 1031.

.06 Limited application of safe harbor. The safe harbor provided in this revenue procedure applies only to the determination of whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment under § 1031. A taxpayer utilizing the safe harbor in this revenue procedure also must satisfy all other requirements for a like-kind exchange under § 1031 and the regulations thereunder.

SECTION 5 . EFFECTIVE DATE
This revenue procedure is effective for exchanges of dwelling units occurring on or after March 10, 2008. No inference is intended with respect to the federal income tax treatment of exchanges of dwelling units occurring prior to the effective date of this revenue procedure.

SECTION 6 . DRAFTING INFORMATION
The principal author of this revenue procedure is J. Peter Baumgarten of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue procedure contact Mr. Baumgarten at (202) 622-4920 (not a toll free call).

Is Your Property Eligible for a §1031 Tax Deferred Exchange?

Since Martha’s Vineyard is a vacation community, many properties are purchased for investment purposes and not as primary residences. Therefore the Section 1031 Tax Deferred Exchange option (also called Starker exchange) is especially intriguing and ideal for many investors.

Many media articles, dozens of websites and some real estate agents are quick to pontificate offering themselves up as §1031experts, but not giving a clear or complete picture of the §1031 exchange process. It seems many taxpayers believe they can exchange a vacation home at any time and that’s just not the case” says Tom Oldfield, attorney and partner in Olympic Exchange Accommodators based in Washington state.

I believe the process is too dicey and very complicated. It is constantly changing and has many sensitive factors and critical pitfalls that can make or break a deal. As a real estate broker and exclusive buyer agent, my duty is as a facilitator to my principal; I am not an accountant or tax advisor, attorney or qualified intermediary (QI). I have relationships with several good QI’s and will refer and assist anyone interested in pursuing a §1031 exchange. According to David Greenberger, an attorney and California licensed QI, here are some questions a taxpayer should be asked when contemplating the purchase of an investment property:
· Are you considering selling or buying any property for investment or business purposes?
· Are you considering putting any of your equity from one property into another?
· Are you considering selling any property and buying any other property within 6 months of each other?
· Can I put you in touch with an accommodator who can give you basic information and guide you through your particular facts and situation?
· Do you need further advice or information from a tax advisor?
· Have you got a clear plan for your real estate?
· Should you be considering new categories of real estate or regions for your replacement properties?
· Should you start looking for replacement properties now so that you give yourself more time than the prescribed 6 months from close of the relinquished property?
· Are you aware your deposit for the replacement property may come from the exchange account you set up once you have sold your first property in the exchange?
· Should I follow up with you once you have closed on your replacement property to track performance and help you decide whether you might want to enter into another exchange on additional properties you may own or to discuss a reverse exchange when new properties become available?