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Re: pull cord sooner rather than later?
Old 07-26-2006, 10:13 PM   #21
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Re: pull cord sooner rather than later?

Quote:
Originally Posted by honobob
Califdreamer From your posts I think this is what you need to figure out first. It looks like your plan would work but it would be hard to "undo". I'm in N. CA. and faced with similar situation except I know where I'll retire (Honolulu!!!) but I'm also unsure if I want to LEAVE CA because it's HARD to come back. I don't want to rent my single family home from long distance for a long time but recently found out that if I rent for two years to three years I can pocket my $250K capital gains (single like you) exemption and then 1031 $250-300K excess to another rental in Honolulu. Even tho I lived in Hawaii for 5 years and plan for it to only be a base in retirement I'm not positive that I would not want to come back to the Bay area. So this way I have up to three years of keeping my 5.25% mortgage and my LOW prop 13 tax base ( worth over $4,000 a year) and avoid paying taxes on my excess capital gains. Have you considered what your property taxes and utilities will be in your $250K downsized home? Could actually be more than staying in your present more expensive home. Since I'm close to 55 I could also take my low tax base if I choose to a downsized property here in Alameda County (prop 60) or to one of the six counties that still take tax base transfers(prop 90). If I downsized to a condo I would be more inclined to rent from a distance to keep my finger in the future crazy CA home appreciation.

I have 5 properties in 3 states and my plan now is to sell 3 over the next 10+ years investing the equity in the stock market if I can figure it out or possibly 1031 to a commercial property. I'll always have my retirement condo and 1 rental that will supplement my small pension.

Hi honobob,

Your post popped up while I was busy writing the last post. I think the most difficult part of this decision is whether I value retiring earlier or delaying it a bit and staying in San Diego. I like it here as much as anyplace I've ever lived... and I've moved around quite a bit. Yesterday, a number of things prompted me to re-examine my situation and seriously look at the idea of relocating and bailing sooner rather than later. Today, as I look over the numbers and think about how good life is here, I have second thoughts. And so it's gone for a while.

Interesting point about keeping your Bay Area home and renting it out just to keep a foot in the market. Predicting what will happen to real estate in CA is really difficult. I just read an article in Sunday's LA Times with an "expert" citing a price decline of 7% as a "worst case scenario." Others believe the market must revert to the mean and predict price declines of 30 or even 40%. I believe we'll see declines between 10 and 20%, but that's just a wild ass guess when it comes down to it.

I bought my current home in 2002 so I do have a pretty good deal on propty taxes though others who have owned their current home longer obviously have it better. It does seem propty taxes are generally higher in other states. Of course the home value could be low enough to more than make up the difference.

You know, I've left CA in the past and I always seem to find my way back. If the market heats up in a few years it would be hard to return. It would be a shame to lose the option to come back some day. If I had to pick a place to be "stuck" Honolulu would do just fine 8)

Good luck maneuvering your real esate equity... watch out for those cap gains!





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Re: pull cord sooner rather than later?
Old 07-26-2006, 11:27 PM   #22
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Re: pull cord sooner rather than later?

"Can't he purchase a home w/ 1031 wherever he intends to move, rent it out for a year, and then turn it into his primary residence and move into it? This is legal as far as I know."

No not exactly.

The IRS says that a 1031 turns on intent. You have to prove that you intended to trade it for a rental property. To do that you have to jump through some hoops.

It can be done but it takes some doing.

First you must rent the property to establish it as a replacement rental. Then you must keep it as a rental for say two years to establish intent. There is no specific guide line from the IRS on this but most CPA's will tell you two years. (I have heard one but I wouldn't do it).

Now you can live in it.

But if you sell it you will have to pay all the tax originally due.

To sell it tax free you still must meet the two out of five year rule AND you must have owned it for a total of five years.

Not to sound like a no-it-all but I've been through this.

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Re: pull cord sooner rather than later?
Old 07-26-2006, 11:59 PM   #23
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Re: pull cord sooner rather than later?

Quote:
Originally Posted by boont
"Can't he purchase a home w/ 1031 wherever he intends to move, rent it out for a year, and then turn it into his primary residence and move into it? This is legal as far as I know."

No not exactly.

The IRS says that a 1031 turns on intent. You have to prove that you intended to trade it for a rental property. To do that you have to jump through some hoops.

It can be done but it takes some doing.

First you must rent the property to establish it as a replacement rental. Then you must keep it as a rental for say two years to establish intent. There is no specific guide line from the IRS on this but most CPA's will tell you two years. (I have heard one but I wouldn't do it).

Now you can live in it.

But if you sell it you will have to pay all the tax originally due.

To sell it tax free you still must meet the two out of five year rule AND you must have owned it for a total of five years.

Not to sound like a no-it-all but I've been through this.

boont
If I understand this correctly, someone could sell a rental propty and do a 1031 into, let's say, a single family home as long as that home was going to be used as a rental and not the residence of the new owner. Two years after the exchange, the owner could experience a "change of heart", remove the tenants and move into the home. Let's say the owner stays in the home for three years. Can the owner then sell the property and take $250k (assuming single not married) tax free?

As a practical matter, this would be a pain to do. But it's an interesting way to extract equity from rental propty tax free. I wonder how this would stand up in an audit.
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Re: pull cord sooner rather than later?
Old 07-27-2006, 12:38 AM   #24
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Re: pull cord sooner rather than later?

Quote:
Originally Posted by boont
*

To sell it tax free you still must meet the two out of five year rule AND you must have owned it for a total of five years.



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Re: pull cord sooner rather than later?
Old 07-27-2006, 12:42 AM   #25
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Re: pull cord sooner rather than later?

oops

I think it's like boont said,* but I was under the impression that in addition to owning for a 5 year period and living in it for 2 you could only do this type of transaction once every 5 years.

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Re: pull cord sooner rather than later?
Old 07-27-2006, 02:32 AM   #26
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Re: pull cord sooner rather than later?

"Let's say the owner stays in the home for three years. Can the owner then sell the property and take $250k (assuming single not married) tax free?"

That is correct. If you meet the requirements that I outlined you would qualify for the $250/$500 exemption.

The total of 5 years rule is a fairly recent change because the IRS saw people abusing the 1031. They would do an exchange, rent it for a year, move into it and sell it.

They changed it so one has to own the property a total of five years to do a conversion that would exempt it from taxes.

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Re: pull cord sooner rather than later?
Old 07-27-2006, 08:40 AM   #27
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Re: pull cord sooner rather than later?

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Originally Posted by MasterBlaster
Martha:

From your point of view what is the upside of a LLC over a TIC deal ?

Is it knowing the management and the other players ? Or is the structure of the LLC itself ?
If it was structured as a TIC, I would not want to be an owner in my individual name because all owners are personally liable for any debts of the entity. With an LLC the most I have at risk as a passive investor is my investment. I think the LLC structure just works better for real estate investments. But some people like TICs because they can do a 1031 into the TIC. I don't like the risks. I also don't like most of the TIC agreements I have read that gives absolute power to management.

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Re: pull cord sooner rather than later?
Old 07-27-2006, 08:43 AM   #28
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Re: pull cord sooner rather than later?

Quote:
Originally Posted by califdreamer
If I understand this correctly, someone could sell a rental propty and do a 1031 into, let's say, a single family home as long as that home was going to be used as a rental and not the residence of the new owner.* Two years after the exchange, the owner could experience a "change of heart", remove the tenants and move into the home.* Let's say the owner stays in the home for three years.* Can the owner then sell the property and take $250k (assuming single not married) tax free?

As a practical matter, this would be a pain to do.* But it's an interesting way to extract equity from rental propty tax free.* I wonder how this would stand up in an audit.
However, to the extent you took depreciation on that property and the previous property you will have to pay tax on the section 1250 gain (the depreciation), usually at the 25% rate. This is true even if you later convert the property to your homestead.
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Re: pull cord sooner rather than later?
Old 07-27-2006, 08:46 AM   #29
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Re: pull cord sooner rather than later?

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Originally Posted by macdaddy
Keep in mind it's been hard to go wrong in real estate in the last 10 years.* It will be much harder the next 10 years.* I have done really well but wouldn't project results from the past 10 years out to the next 10.* Now, I assume that appreciation will follow inflation and buy only for the cash flow.
Absolutely. However, I think that there will not be a soft landing for this bubble. Maybe in a year or two there might be some excellent deals out there. Our real estate investor friend and I both think that in about a year the foreclosures will really hit and there may be some great deals at that time.

Sorry for the third post in a row.
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Re: pull cord sooner rather than later?
Old 07-27-2006, 10:26 AM   #30
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Re: pull cord sooner rather than later?

Quote:
Originally Posted by Martha
If it was structured as a TIC, I would not want to be an owner in my individual name because all owners are personally liable for any debts of the entity. With an LLC the most I have at risk as a passive investor is my investment. I think the LLC structure just works better for real estate investments.
In your dealings, does the LLC typically obtain nonrecourse financing? Or do you, as a member or shareholder, have to personally guarantee part or all of the debt? If the former, what kind of LTV's are you usually able to get nonrecourse financing for? -thanks
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Re: pull cord sooner rather than later?
Old 07-27-2006, 10:27 AM   #31
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Re: pull cord sooner rather than later?

Quote:
Originally Posted by califdreamer
I've taken a closer look at the balance sheet and budget needs for ER and wanted to run it by the group. I've received a lot of good info and advice since first posting in Dec 05 and wanted to get feedback on most recent financial situation. This is sort of an updated "Hello I am..." post.

Hey calif

Interesting numbers.

My gut feeling is yes go for it.

66,000 pre tax, I am gonna do it on 40,000 here in North Carolina.

We sold the house, bought a great new one with a small 50K mortgage at 6% fixed.

I am going to finish my contract thru jan 07 then my pension kicks in.

I have had so many teaching offers here in NC that I will probably take a sub job in feb and decide if i would like a full time gig for the following school year.

The sub job will bring in about another 12K a year which would bring my funds up to 50+ a year.

Seems doable since my medical bennies are covered.

I figure the 5 months of work at my 80K salary will be enough to pay off a big chunk of my new mortgage.

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Re: pull cord sooner rather than later?
Old 07-27-2006, 10:30 AM   #32
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Re: pull cord sooner rather than later?

Quote:
Originally Posted by Martha
However, to the extent you took depreciation on that property and the previous property you will have to pay tax on the section 1250 gain (the depreciation), usually at the 25% rate.* This is true even if you later convert the property to your homestead.
Ah, you're reading my mind, Martha. Great point.

As for those excellent deals in a year or two... they'll be even better in three years or four.
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Re: pull cord sooner rather than later?
Old 07-27-2006, 10:39 AM   #33
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Re: pull cord sooner rather than later?

Quote:
Originally Posted by justin
In your dealings, does the LLC typically obtain nonrecourse financing?* Or do you, as a member or shareholder, have to personally guarantee part or all of the debt?* If the former, what kind of LTV's are you usually able to get nonrecourse financing for?* -thanks
The loans were technically recourse loans, but the LLCs are single purpose entities so the only real recourse is against the assets of the LLC, which are mortgaged to the lender anyway. *"Non-recourse" technically means that the borrower itself has no personal liability. No personal guaranties are required for these kind of projects. *Even if guaranties were required, it would be from the managing member only and it would be highly atypical to require guaranties from passive investors. *I do a fair amount of securitized financing in my work and I never see personal guaranties from passive investors. *

Loan to value? *I am not remembering. *I think in the 75 to 80% range.

TICs usually don't have non-recouse loans either as often owners do a 1031 exchange to get into the TIC and I believe the loan has to be recourse to make the exchange work. *

Most non-recourse loans I have seen have been to limited partnerships, for tax reasons.
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Re: pull cord sooner rather than later?
Old 07-27-2006, 11:15 AM   #34
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Re: pull cord sooner rather than later?

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Originally Posted by Martha
He is the best negotiator I have ever know. He makes CFB look like a CFB.
I *am* a CFB!

I am however going to have to take umbrage at the suggestion that someone is a better negotiator than I am...whats it going to take to change your mind?

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Re: pull cord sooner rather than later?
Old 07-27-2006, 11:18 AM   #35
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Re: pull cord sooner rather than later?

Quote:
Originally Posted by Martha
The loans were technically recourse loans, but the LLCs are single purpose entities so the only real recourse is against the assets of the LLC, which are mortgaged to the lender anyway. "Non-recourse" technically means that the borrower itself has no personal liability. No personal guaranties are required for these kind of projects. Even if guaranties were required, it would be from the managing member only and it would be highly atypical to require guaranties from passive investors. I do a fair amount of securitized financing in my work and I never see personal guaranties from passive investors.

Loan to value? I am not remembering. I think in the 75 to 80% range.

TICs usually don't have non-recouse loans either as often owners do a 1031 exchange to get into the TIC and I believe the loan has to be recourse to make the exchange work.

Most non-recourse loans I have seen have been to limited partnerships, for tax reasons.
Thanks for the response.

I was considering a real estate investment locally that would have required me as a passive investor/partner in the partnership (not sure if LP or GP) to personally guarantee part or all (not sure) of the debt up to a certain amount ($750,000). The personal guarantee plus lack of disclosure of just about everything put the dampers on that deal! Of course it was a smallish deal involving purchase of a ~$2-3 million office building. Maybe the LLC's you were talking about were a little larger?

I had assumed recourse financing was more typical for these types of deals. Wonder if it varies regionally?
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Re: pull cord sooner rather than later?
Old 07-27-2006, 11:29 AM   #36
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Re: pull cord sooner rather than later?

Quote:
Originally Posted by justin
Thanks for the response.

I was considering a real estate investment locally that would have required me as a passive investor/partner in the partnership (not sure if LP or GP) to personally guarantee part or all (not sure) of the debt up to a certain amount ($750,000).* The personal guarantee plus lack of disclosure of just about everything put the dampers on that deal!* Of course it was a smallish deal involving purchase of a ~$2-3 million office building.* Maybe the LLC's you were talking about were a little larger?*

I had assumed recourse financing was more typical for these types of deals.* Wonder if it varies regionally?
Stay away from GPs.* They are not for passive investors. And limited partners in a LP should not be signing guaranties.*

A two to three million dollar deal is a different situation.* The loan generally will not be sold to institutional investors, but often participated out to banks who have to make bank examiners happy.* Lenders almost always require personal guaranties from the controlling owners. Sometimes they will limit the guaranties to the percentage of ownership in the deal.* I work on these small deals as well and they are very different from loans sold on the secondary market. The LLCs I am involved in have loans of 20 million plus.*

Structures for these small deals are all over the board.* If it is a general partnership no guaranty is required because partners are always liable for the debts of the partnership.* Limited partnerships are becoming rare. Most people are structuring these entities as LLCs or LLPs now because you have so much flexibility in the structure and for tax planning.* For small deals it is not unusual to have every member of an LLC guaranty the debt.* But there usually isn't many owners and you don't often have the situation where you have 50 2% owners.*

I don't think there are a lot of regional differences. I work on securitized loans all over the US. (Except your possibly regional difference of how you use the word "non-recourse" to mean no personal guaranties rather than to mean no personal liability by the borrower").
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Re: pull cord sooner rather than later?
Old 07-27-2006, 11:37 AM   #37
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Re: pull cord sooner rather than later?

The deal may have been structured as an LLP, not sure. They had good corp. counsel, so I would assume that is how it was done. The problem I kept running up against was the complete lack of disclosure. No offering letters disclosing basic terms of the deal. No draft of the partnership agreement. No budget. No projected financial statements. Nothing. This was one of those "don't touch it with a ten foot pole" deals for me. Who knows what I was paying for? Plus, the company I work for is the primary tenant. If the company goes under and doesn't pay rent, then all partners would share in paying the mortgage note based on % ownership in the owning entity. Too much risk for the potential of a 10% return per annum with extremely limited liquidity and zero control with a single person having in excess of 50% control. And no expected distributions (any surplus earnings would pay down the mortgage), and no exit strategy. This one screamed DANGER to me!
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Re: pull cord sooner rather than later?
Old 07-27-2006, 11:41 AM   #38
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Re: pull cord sooner rather than later?

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Originally Posted by justin
The deal may have been structured as an LLP, not sure.* They had good corp. counsel, so I would assume that is how it was done.* The problem I kept running up against was the complete lack of disclosure.* No offering letters disclosing basic terms of the deal.* No draft of the partnership agreement.* No budget.* No projected financial statements.* Nothing.* This was one of those "don't touch it with a ten foot pole" deals for me.* Who knows what I was paying for?* Plus, the company I work for is the primary tenant.* If the company goes under and doesn't pay rent,* then all partners would share in paying the mortgage note based on % ownership in the owning entity.* Too much risk for the potential of a 10% return per annum with extremely limited liquidity and zero control with a single person having in excess of 50% control.* And no expected distributions (any surplus earnings would pay down the mortgage), and no exit strategy.* This one screamed DANGER to me!
Screams danger to me too.*

I only invest after careful review of a private placement memorandum that includes all applicable agreements, budgets, etc.
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Re: pull cord sooner rather than later?
Old 07-27-2006, 11:43 AM   #39
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Re: pull cord sooner rather than later?

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Originally Posted by Cute Fuzzy Bunny
I *am* a CFB!

I am however going to have to take umbrage at the suggestion that someone is a better negotiator than I am...whats it going to take to change your mind?

I first need to think about what I want, then have each of you try to get it for me.

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Re: pull cord sooner rather than later?
Old 07-27-2006, 11:50 AM   #40
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Re: pull cord sooner rather than later?

You're going to have to do a little something for me first, just to let me know you're serious about this relationship and not just trying to use me to leverage someone else. I think that if we're both serious about this, having a little bit invested in the other might help us build the foundation of a better long term situation far beyond just this one deal.
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