The 1031 Exchange – An Effective Real Estate Investment Resource

A 1031 exchange is known as a like-kind exchange and can be an effective tool for those who have investment real estate.  When selling investment real estate, most people face a significant tax burden. A like-kind exchange can significantly reduce or even eliminate this burden, by deferring a capital gains tax which might otherwise arise at the time of the sale of investment property.

The 1031 Exchange Rule
Property can only qualify for a like kind exchange if the taxpayer follows specific rules as laid out by the US tax code. Investment properties can only be exchanged for properties that are another investment. For example, you cannot trade a business property for a residential property unless the residential property is going to generate income. One or more rental condominiums can, though, be exchanged for a multi-family home. The second (and perhaps most often violated) rule for a 1031 exchange is how the proceeds of the sale are handled. For example, you cannot take the proceeds from one sale and buy or pay off another property you own. This type of transaction will result in all proceeds being taxable. And very important, neither the taxpayer nor his or her representatives (attorneys and accountants included) can handle the proceeds during the exchange. The funds must be handled by a qualified intermediary. [Read more…]

Landlords can be liable if tenant doesn’t pay

If a tenant hires a contractor to make improvements to a property, but the tenant doesn’t pay the contractor in full, can the contractor sue the landlord for the difference?

It sounds unlikely, but it happened in one case recently.

Former Boston Celtics player Dana Barros leased a warehouse and hired a contractor to make improvements so he could turn it into a sports complex. Later, the contractor believed it hadn’t been paid in full, so it went to court against Barros and against the owner of the warehouse.

The warehouse owner argued that it couldn’t be sued because it was merely the landlord; it never signed an agreement with the contractor.

Most states have what are called “mechanic’s liens, such that if a contractor isn’t paid in full by someone for work on a property, it can place a lien on the person’s interest in the property.

In Massachusetts, the law applies to anyone who hires a contractor, as well as anyone acting on that person’s behalf or with that person’s “consent.”

And in this case, the Massachusetts Supreme Court ruled that Barros had hired the contractor with the “consent” of the landlord. [Read more…]

Always have a property inspected

A couple who purchased a condo in a building that turned out to be contaminated with toxic chemicals can recover only 65% of their losses, because they could have arranged an environmental inspection of the property before they bought it but didn’t do so, a Court of Appeals recently decided.

The couple bought a condo unit in a converted factory. The developer had installed a vapor barrier, but never actually decontaminated the dangerous chemicals on the site.

The buyers claimed that the seller’s real estate agents assured them the site was safe. It appears the agents believed that was true at the time, but when they later found out that the site still had problems, they didn’t say anything.

According to the court, the agents could still be liable, because even though they didn’t technically lie, they had a legal obligation to tell the buyers about the problems once they knew about them.

A couple who claimed they were misled about a property can’t recover all their losses, because they could have discovered the problems by hiring an inspector.

On the other hand, the court said the buyers were partly at fault because they never obtained an environmental inspection. The buyers merely relied on the agents’ statements, along with a local newspaper article and public “buzz” suggesting that the factory had been cleaned up.

A jury found that the agents were 65% at fault and the buyers were 35% at fault, and the court said this was correct – so the buyers can recover only 65% of what they lost.

Home Owners Insurance and Flood Insurance

Many people are surprised to discover that their standard homeowner’s insurance policy does not cover them in the event of a flood.

If you want flood insurance, you generally have to buy a separate policy. Typically these policies are sold by private insurers, but are backed by the U.S. Government through the National Flood Insurance Program.

Some federally backed mortgage programs require homeowners to buy flood insurance if they live in a high-risk area. Some private lenders require this as well, and they may require it even if the property is not in a high-risk area.

Just because a property is not in a high-risk area doesn’t mean that flooding is impossible.  [Read more…]

Tax Advantages from Buying, Selling, Refinancing Your Home

Owning a home provides a lot of tax advantages. Sometimes, though, the rules can be tricky.

Here’s a brief introduction to some of the many tax rules involved in buying, selling, or refinancing a home. But remember, the rules are complicated, and there are always exceptions. You’ll want to consult a real estate attorney or tax advisor to see how the general rules apply to your specific situation.

  • If I own a home, can I deduct my mortgage interest payments?

Yes, home mortgage interest is generally deductible on your federal income tax return on loan amounts up to $1 million. To get the deduction, you’ll need to itemize your deductions on Schedule A. For most people, this is the primary tax advantage of owning a home.

Your lender will typically send you a notice at the end of the year telling you how much of your payments were for interest as opposed to principal. [Read more…]