Friday, October 21, 2005

Case Study #4 Who can't benefit from a TIC exchange?

I really do want to help everyone hang onto their capital gains.

However, sometimes things just don't work out.

Recently, I had a client that had a rental he was selling for $410,000. He had paid 200K 3 years ago. He really wanted to get out of the landlord business, and sounded like a good candidate for a 1031 Exchange into a Tenant in Common Property. He thought the whole concept sounded wonderful.

Indeed it would have been, except for a few minor details. He had already done a 1031 exchange into his current rental property. His adjusted basis was only 49K. In addition, he had borrowed against the property and had a mortgage of 300K.

After cost of sale expenses, he only had about 90K equity. That means, he had a bit over 75% debt. There are virtually no good TIC properties that have that kind of debt to equity ratios.

My client would have had to bring about 130K in cash into the exchange to make it work. The numbers actually worked out ok if he took out an equity line on his residence, but it was not something he wanted to do.

A Private Annuity Trust didn't make sense either, as he would have had to pay too many taxes on his mortgage repayment (debt over basis) to justify the costs and benefits.

So, he is in the market to purchase yet another rental property and be a landlord for a while longer until his equity increases to the point where either capital gains saving strategy makes sense for him.

At least he knows now how to plan for his future gains.

Paula Straub
http://www.savegainstax.com

Monday, October 17, 2005

Article from Interview with Paula Straub

Secrets to Deferring Capital Gains Tax
By Sarah Vaughn


Are you tired of the hassles of being a hands-on landlord, but afraid of being nailed by Capital Gains Tax if you sell your current income property?

There is a way out.

It's called a 1031/Tenant In Common (TIC) Exchange , and financial advisor Paula Straub (www.savegainstax.com), who specializes in this kind of deferred capital gains tax investment, says it is an attractive option for owners of investment property who are looking to tap into their equity without having nearly 30% of their profits swallowed by capital gains tax.

"The 1031 Property Exchange program is specifically designed for commercial property owners who have highly appreciated investment properties, " Straub says.

Under the regulations of the 1031/TIC Exchange program, an investment property owner can "exchange" their current commercial property for a "like-kind" investment property of equal or greater value, deferring the payment of capital gains tax and maximizing their profits. A relatively new tax program, the 1031/TIC Exchange program wasn't sanctioned until 2002.

"Many commercial property owners who might qualify for the 1031 deferred tax program don't even know about it" Straub remarks. And she's working hard to let investment property owners with highly appreciated real estate know that they have options.

An experienced financial planner, Straub works as a conduit of information for her clients. For qualified commercial property owners, there are even more benefits to the 1031/TIC Tax Deferred Exchange program.

"You'll have a monthly income stream from an investment property, without all of the hassles that go along with being a hands-on landlord, " Straub advises. "You won't have to deal with the stresses of rent collection every month or after hours plumbing problems. And your new investment property will pass directly to your heirs. Under current tax law, your beneficiaries won't have to pay any capital gains tax. They will receive the property at the stepped-up basis."

Straub understands all of the subtle nuances of the 1031/TIC Exchange program. Her goal is to educate her clients using clear and concise language . She points out that there are three very important elements of this deferred capital gains tax transaction that you don't want to overlook.

"You need an unbiased third party intermediary, a lawyer or qualified CPA, who will handle all of the paperwork for you," Straub says. "You'll also need a quality 1031 Esponsor Sponser Company with access to a portfolio of grade A commercial real estate, and your new commercial investment will have to be serviced by a reliable and experienced property management company."

Working as a liaison between these three companies, Straub advises her clients how they can make the best investment possible. She is one of the few financial advisors who provides over-the-phone consultations about the 1031/TIC Exchange program. A nationwide program, you can learn about this unique investment opportunity from Straub without leaving the comfort of your home.

No one knows the 1031 Deferred Tax program better than Straub, and to many investment property owners, this Exchange Property program may sound like a dream come true. In truth, a 1031/TIC transaction is fairly complicated, and Straub warns that doing it on your own could lead to some unexpected and unsatisfactory results.

"On your own, you can find yourself involved with a 1031/TIC sponser company that doesn't deal with quality real estate investments."

She advises her clients to work with 1031 Investment Exchange companies with solid track records. An investment company that urges an investment in inferior properties, or properties that need a lot of work is only one of the many pitfalls that investors want to avoid.

"Strip malls and apartments that have huge tenant turn-over and require constant maintenance may be a bad investment. You want a 1031/TIC sponser company that handles quality office buildings that are leasing office space to long-term corporate clients."

Involvement with unreliable property management companies that don't service the investment property to the highest possible standards can be another problem for commercial property owners interested in the 1031/TIC Exchange program. Poorly managed properties make investors a target for lawsuits from unhappy tenants, and results in the eventual loss of equity as the building may depreciate instead of increasing in value.

Straub also advises her clients not to use a family attorney or CPA as a qualified intermediary . She connects her clients to qualified third parties who are experienced with the 1031/TIC Exchange program and will handle the transaction according to the strict IRS guidelines.

"There are many deadlines that must be adhered to when you're making this kind of property exchange," Straub says. "If you don't meet them, you'll find yourself paying out of your own pocket the taxes you are trying to defer."

For investment property owners who are interested in the 1031/TIC Exchange program, working with an experienced financial advisor like Paula Straub is the only way to avoid all of the pitfalls of this complicated transaction.

"I've done the research. I know how to find the value. I know which investment companies you should be working with and who to avoid" -- which should give any investor considering the option of the 1031/TIC Exchange program a lot of peace of mind.

Another valuable concept for capital gains deferral is the Private Annuity Trust, according to Paula. Different situations call for different solutions. This will be covered in a follow-up interview.

For more information about the 1031/TIC (Tenant in Common) Exchange program, consult financial advisor, Paula Straub, at http://www.savegainstax.com or send her an email at askpaula@savegainstax.com.

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