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This article was initially published in the Jul-Sep ’09 newsletter and has since been revised and republished in the Jul-Sep ’11 newsletter.

There are advertisements that advertise a “FREE” credit report and then charge you for various services. If you have to provide your credit card number to obtain your credit report, it is probably not going to end up being free. My understanding is that the only place where you can actually get a free credit report is through AnnualCreditReport.com. The site is supported by the three credit reporting bureaus: Experian, Equifax and TransUnion. You are entitled to get one free credit report from each of the three credit reporting bureaus each year.

You can request a free report by phone by calling 1-877-322-8228 and going through a simple verification process over the phone. Or, you can request that it be mailed to you by completing a request form that you can download from the website and then mailing it to:

Annual Credit Report Request Service P.O. Box 105281 Atlanta, GA 30348-5281

Or, you can go to AnnualCreditReport.com and obtain your report online. Without providing a credit card number, I got my 19-page Experian report within a few minutes. The three reports don’t necessarily agree, so had I been interested in applying for a mortgage, I would have pulled up all three of them.

This article was initially published in the Jan-Mar ’09 newsletter and has since been revised and republished in the Jul-Sep ’11 newsletter.

Many absentee owners hold on to Oahu real estate so that they can pass the property to their heirs and be able to avoid capital gains taxes. The acquisition basis for the heirs is the value of the property at time of death of the decedent.* Most heirs sell the inherited property shortly after acquisition; therefore, there is little if any gain that will be subject to capital gains taxes. A good portion of our business results from working with heirs. In most cases the decedent is a parent that had been receiving our newsletter for years.

*Note: Special rules apply to owners that passed away in 2010

While it is desirable to avoid unnecessary taxes, problems frequently arise when there are several heirs that have an equal interest in an inherited property. Our experience indicates that when there are three or more heirs, about half the time a conflict will exist concerning what to do with the inherited property. The most common problem is a lack of agreement as to whether the heirs should continue to hold on to the property as an investment or sell it and use their tax-free proceeds elsewhere. Most of the time, the heirs are siblings with very different opinions. Often, one or more of them is cash-short and wants to sell the property immediately while one or more of the others may want to hold on to it.

It is not unusual for there also to be disagreements between the heirs that are separate from viewing the property as a long-term investment. Three examples follow: (1) One or more of the heirs may want to hold on to the home so they can use it on a future Hawaiian vacation. This particularly applies if the home has been used in this regard in the past by some but not all of the heirs. (2) If the property is a former family home, there may be widespread emotional differences between the heirs when it comes to selling. One or more of the heirs may want to hold on to the property so they can have future access to it for themselves and/or their children. (3) One or more of the heirs may be living in the property, often either rent-free or at a rent that is well under market rent.

There are legal steps that heirs can take to force a sale; however, legal actions between family members usually create major discord. Most of the time, the heirs decide on a compromise that normally involves continuing to hold the property for a period of time. On several occasions, we have waited for several years to be able to sell such a property. Our experience indicates that one strong-willed family member often blocks what the majority of heirs favor.

Many absentee owners opt to avoid the possibility of such an intra-family problem by selling their Oahu property, paying the applicable capital gains taxes, and then leaving easily divided cash or securities to their heirs. Every few years I put an article similar to this in the newsletter. Occasionally, an owner will refer to it and add something like, “I love all my siblings but they would have difficulty agreeing on almost anything.”

The following information appeared in the Wall Street Journal April 9-10, 2011:

Don’t underestimate the harm that even one missed mortgage can do to your credit score. The severe consequences underscore that you shouldn’t shrug off even an accidentally missed payment. Instead, you should pay it and call the lender right away, begging forgiveness before it mars your credit record.

Being 30 days late on a house payment—even if it is an accident—can knock 100 points off a pristine 780 credit score, moving you from qualifying for the very best interest rates to the edge of subprime territory. The actual numerical drop is less severe if your starting credit score is 720 or 680, but the impact is greater, since your new score is likely to sink to a level where new credit is hard to get and very expensive.

FICO scores range from a low of 300 to 850, with scores of about 750 or higher generally qualifying for the best loan terms. FICO says a foreclosure or short sale where the size of the unpaid balance is reported are equally devastating to a good or excellent credit score, reducing it by as much as 150 points, to the high 500s or low 600s.

Recovering your original score takes about seven years. That also is how long the information stays on your credit report, where insurers and potential employers can see it. Returning to a mediocre 680 score may take only three years. Here are some other lessons from the FICO data:

Credit scores are intended to measure the risk that you won’t repay a current or future debt. So your careful payments over many years translate into a higher starting score. However, your score takes a major hit when you are 30 days late on a payment, falling 70 to 100 points.

The best way to rebuild a damaged credit score, ironically, is to use credit. “Avoiding borrowing altogether means you’ve frozen your credit history in a negative state,” says Maxine Sweet, Vice President of Public Education for credit bureau Experian. “You will be better off using a credit card judiciously and paying it off promptly, adding good-behavior points to your record.”

A person with a 620 score would pay almost 12% interest on a four-year $25,000 car loan, compared with less than 5% for someone with a 780 score—a difference of almost $4,000 over the life of the loan. On a 30-year fixed-rate $250,000 mortgage, a person with a 620 score might qualify for a 6% rate, but probably wouldn’t be able to get mortgage insurance, which is required if your down payment less than 20%. A person with excellent credit might land a rate less than 5% and pay about $3,000 a year less.

 

his article was initially published in the Jan-Mar ’10 newsletter and has since been revised and republished in the Apr-Jun ’11 newsletter.

Background: Stott Real Estate, Inc. conducts business as The Stott Team for listings & sales of real estate and as Stott Property Management for managing rentals. We have two adjacent but separate offices for these two divisions. Our marketing area is the island of Oahu; we refer business on the neighboring islands to agents who live and work on the island where the property is located. My son-in-law, Tim Kelley, supervises our Property Management (PM) Division. His primary assistant, Karen Texeira, has been with us for over 18 years. We manage over 400 rental units, making us one of the largest PM companies on Oahu. Most of our clients are absentee owners; however, we also handle rentals for several owners that live on Oahu. Tim has personal experience as an absentee owner, as he and my daughter, Tracey, use PM’s to manage several investment properties they own on the Mainland.

There are many superb PM’s on Oahu; any negative comments made by me towards PM’s in this article are not indicative of Oahu PM’s as a group. Having said that, many of our accounts were listed with another Oahu PM and then shifted to us. This article will discuss some common errors made by PM’s and/or owners. The article is designed to help owners increase their net rental income by learning from mistakes made by others that have cost them tens of thousands of dollars.

1. Absentee Owner Acting as a PM: Hawaii law requires that an absentee owner have a representative living on the island where their rental property is located. It does not need to be a licensed real estate agent; i.e., it can be a friend of the absentee owner provided the friend does not represent more than one owner. Some absentee owners, knowingly or unknowingly, violate this law and manage their rental property themselves. This can create problems if a dispute arises that ends up in small claims court and the absentee owner cannot document that they have an on-island representative; i.e., the absentee owner is found to be violating the law.

The purpose of the on-island representative is to have someone immediately available to the tenant in case problems arise. Therefore, the on-island representative should be more than a mere figurehead. The tenant should be advised to contact the representative for problems and emergencies. We recommend that the representative’s name and telephone number be written on the rental agreement with any future changes also being in writing and dated.

Oahu General Excise Tax (GET) @ 4.5% is owed on all gross rental income. An owner acting as a PM should obtain a GET license for payment of this tax. The owner’s GET number is required on some sales forms used when an absentee owner sells a rental property. Plus, Hawaii may be actively searching for owners that are currently violating the law. A few years ago, I was erroneously billed for several years of GET on a property I own in Gulfport, MS. The bill would have been sizable: several years of back GET plus a penalty of 50% of the non-paid GET plus interest at 8%.

The attorney we use for evictions states that the majority of his most difficult and expensive cases involve owners acting as a PM that are not familiar with the Landlord-Tenant Code and proper tenant check-in/check-out procedures.

2. The Economy & Evictions: Job layoffs, cutbacks, forced furloughs, etc. are having a major impact upon the rental market. Tenants with financial problems are often individuals who had good credit during tenant screening with a secure job like working for the city or state. However, with forced furloughs and job cutbacks, they find that they no longer can afford their rental payments. In most cases, they advise us that they are vacating and agree to forfeit their rental deposit. However, in some cases the tenants merely stop making payments.

Evictions are an unfortunate but necessary part of the business. With 400-plus rentals in our current economy, we would expect to average one to two evictions in process at any given time. Some PM’s and/or owners avoid evictions like the plague. When we take over a delinquent account, it is not unusual for the tenant to be at least three months delinquent without an eviction having been initiated. There are an endless number of excuses delinquent tenants can create for failing to pay their rent. They always seem to need just one more month to work everything out. Then one day, you discover that they have flown the coop with no forwarding address and left the property in poor condition. Barring unusual circumstances, tenants that get behind on their rent by more than a month are usually unable to catch up.

An eviction action is initiated in Hawaii by sending the tenant a five-day demand letter. This letter states that the tenant has five business days from receipt of the letter to pay all overdue funds or their lease will be terminated. The five-day demand letter usually forces the tenant to negotiate with us in a meaningful manner. However, the owner must be prepared at this stage to spend money on an eviction attorney if the tenant doesn’t pay their overdue rent or agree to negotiate. A voluntary vacancy is usually far less costly to the owner than an actual eviction, particularly if the property is left in good condition. The eviction process usually costs $1-2 thousand dollars. We have used the same eviction attorney for years; his cost for our clients runs about $750. If the rent has not been paid by the end of the month and the tenant has not responded and/or provided us a satisfactory repayment plan, we normally start the eviction process by mailing them a five-day demand letter.

3. Changing Market: As this is being written in June 2011, the rental market is improving. On a selective basis, we are now increasing rents. The last time I wrote this section, the rental market had gotten soft and this section discussed actions to prevent prime-rent tenants from vacating. If you would like a Rental Market Analysis or Property Management Information, check the applicable box on the postcard and return it. We encourage all owners to conduct their own independent research as to what constitutes a fair rental rate. Two good sources of information are Craigslist Oahu (http://honolulu.craigslist.org/oah/) and classified ads in the Sunday edition of the Star-Advertiser (http://staradvertiser.com).

4. Communication: The most common problem that arises between Owners and their PM’s is poor communication. In almost every case where we obtain an account from another PM, there has been a period of poor communication between the owner and their PM. Larger companies, like ours, have in-office staff personnel and toll-free telephone numbers to assist absentee owners in addressing issues. Smaller companies usually have to rely on telephone messages. You should discuss communication with your PM including how soon you can expect them to get back to you if you have left a message for them to call. The PM should also provide you a list of applicable personnel for you to contact if the PM is unavailable.

5. Long Leases: Tenant leases should normally be written for a maximum period of one year thereby enabling rents to be increased annually if warranted. A one-year lease also enables the owner/PM to have far more control over a problem tenant. Merely threatening that the lease will not be renewed often works wonders. Lengthy leases can create problems in a rising housing market, as some owners may want to try to sell at the height of the housing market. A lease has priority over a sale i.e., the tenant can stay in the property until the end of their lease even though the owner sells the property.

6. Internal Inspections: Periodic internal inspections of a property are essential to ensure there are no major problems and the tenant is taking care of the property. We’ve taken over properties that were in horrible condition requiring major work by the owner as neither the Owner nor the PM had inspected the inside of the property for a number of years. Our policy is to conduct an internal inspection of every property we manage at least once a year by a member of our staff with photos available to the owner.

7. Inventory & Condition Report: An Inventory & Condition Report establishes the move-in condition of the property. It is approved by the tenant and establishes the basis for damages should the property not be maintained properly. Without this form, Hawaii law states that the condition of the property when the tenant vacates is the same as what existed when the tenant checked into the property.

One of the most common problems we encounter with absentee owners that have been acting as their own PM is their failure to have proper tenant check-ins. Sometimes, their property has been re-rented several times with each new tenant taking the home without any paperwork establishing the actual move-in condition. If you are an owner/manager, you might want to consider having someone video your property to establish current condition. We routinely video properties on our tenant check-ins, and we have found tenants tend to take far better care of a property when they know video exists of the move-in condition.

8. Unsupervised Repairs: Absentee owners acting as a PM sometimes will authorize work to be done by their tenant who is then compensated by a reduced rent. Such agreements sound marvelous in the discussion stage. However, the discussion is usually verbal without a clear definition of the exact scope of the work to be done as well as without any direct supervision. It is not unusual for disputes to arise over the quality and/or amount of work done by the tenant. The tenant, believing they are not being compensated fairly, may then stop paying rent and/or initiate an action against the owner in small claims court creating a problem for an absentee owner that is violating the law. We suggest that you not authorize unsupervised repairs or improvements by your tenant unless they are very minor like fixing a leaking toilet.

9. Good Tenants: Sometimes, owners will deliberately provide their tenant an under-market rent because they are such “good” tenants. Tenants should not be provided a large discounted rent merely because they pay their rent on time and take reasonable care of the property. That is what an owner has a right to expect. Granted, a particularly good tenant that has a “green thumb” or makes minor repairs and/or improvements may warrant a small rent reduction but not hundreds of dollars per month. We’ve taken over properties where a tenant had been paying the same rent for over ten years merely because they were considered to be a “good” tenant that the owner didn’t want to risk losing.

10. Befriending Tenants: Some owners make it a point to become personal friends with their tenant. They then tend to stop treating the rental as a business and end up losing money.

11. Kid Gloves Syndrome: Some owners treat a tenant with kid gloves because they believe the tenant might be a future buyer for the property. Perhaps, the tenant has said something like, “if you ever consider selling, please let me know.” Less than 1% of the sales on Oahu involve tenants buying properties they are renting. However, some tenants are aware if they act like potential buyers for the property, they may be able to forestall any rent increases.

12. Pets: Allowing pets will increase the number of prospective tenants and often enables an owner to get a higher rent while retaining flooring that otherwise might need to be replaced. If your flooring is not in good condition, consider allowing pets. Tenants with pets will almost always agree to pay a higher rent and/or elect to retain older carpeting (in lieu of having it replaced) if the owner will allow pets.

13. “For Rent” & “For Sale” Simultaneously: We have had considerable success listing homes “for sale” and “for rent” at the same time. Usually the owner prefers one to the other but only if they can achieve a specific price; e.g., they’ll continue to rent the property if they can get $2,500/mo rent otherwise they want to sell it. Or, they want to sell it if they can get $750,000 otherwise they want to continue to rent it. So, we try both simultaneously and take the first that is acceptable. If the owner is realistic concerning both the rent and the sales price, our experience is that it tends to be a toss-up as to which comes first.

This article was initially published in the Jul-Sep ’09 newsletter and has since been revised and republished in the Jan-Mar ’11 newsletter.

Background: Gone are the days when lenders leaned over backwards to qualify borrowers for mortgages. After all the subprime lending problems, it has become increasingly more difficult for many potential homebuyers to qualify for desired financing. This section of the newsletter will discuss things a borrower can do to improve their credit score. The article is based upon a paper used by Keri Shepherd (808-223-4118), a local loan officer with Prospect Mortgage, who is often used by clients of The Stott Team. At the end of the article is information concerning how to obtain free credit reports. I recently did this and obtained a copy of one of my reports.

Check Your Credit Limit(s): Credit scoring software obviously prefers to see that you pay off the balance on all your credit cards each month. If it is impractical for you to do this, the guidance herein should assist you in being able to improve your score. Make sure your creditors report your credit limits to the credit bureaus. When no limit is reported, credit score software scores the amount as though your current balance is “maxed out.” For example, if you know you have a $10,000 limit on your credit card, make sure that the $10,000 limit appears on the credit report. Otherwise, your score will be damaged as severely as if you were actually carrying a balance of the entire available credit.

Evenly Distribute the Balances You are Carrying: A balance of over 70% of your total credit limit on any card damages your credit score the most. The next level is over 50% of your balance, then over 30%. In order to maximize your score without having to pay down your balances, evenly distribute your credit card balances among all your credit cards, rather than carrying a large balance on one credit card. For example, if you are carrying a $9,000 balance on a credit card with a $10,000 limit and have two other credit cards with a $3,000 and $5,000 limit, transfer your balances so that you have a $1,500 balance on the $3,000 limit card, a $2,500 balance on the $5,000 limit card and a $5,000 balance on the $10,000 limit card. Evenly distributing your balances will enable you to improve your score.

Do Not Close Your Credit Cards: Closing a credit card can hurt your credit score, since doing so affects your debt to available credit ratio. For example, if you owe a total credit card debt of $10,000 and your total available credit is $20,000, you are using 50% of your total credit. If you close a credit card with a $5,000 credit limit, you will reduce your available credit to $15,000 and change your ratio to 67%. There are two caveats to this rule. If an account was opened within the past two years or if you have over six credit cards, an account can usually be safely cancelled. The preferred number of credit cards accounts to maximize your score is three to five, although having more should not significantly damage your score. If a card was opened within the past two years and you have over six cards, you may safely close that account.

Keep Older Credit Cards Active: 15% of your credit score is determined by the age of the credit file. The credit scoring software assumes people who have had credit for a longer time are less at risk of defaulting on payments. Therefore, even if your old credit cards have high interest rates, closing those cards will decrease the average length of time you have had credit. Continue to use the old card at least once every six months to avoid the account being changed to “inactive status.”

Get Rid of Your Past Due Accounts: Within the delinquent accounts on your credit report, is a column called “Past Due.” Credit scoring software penalizes you for keeping accounts past due, so any “Past Dues” destroy a credit score. If you see an amount in this column, pay the creditor the past due amount reported.

Get Rid of Your Collection Accounts: Paying a collection account can actually reduce your score? Here’s why: Credit scoring software reviews credit reports for each account’s “date of last activity” to determine the impact it will have on the overall credit score. When a payment is made on a collection account, collection agencies update credit bureaus to reflect the account status as “Paid Collection.” When this occurs, the date of the last activity becomes more recent. Since the guideline for credit scoring software is the date of last activity, recent payment on a collection account damages your credit score. If you are trying to purchase a property or refinance an existing one and you have a collection account, wait to pay off the collection until you are closing on the loan and pay it through escrow.

Obviously, the best way to resolve this dilemma is to completely pay-off the collection account. If that is not practical, then see if the collection agency will remove all reporting to the credit bureaus. Request a letter from the collector that explicitly states their agreement to delete the account on receipt/clearance of your payment. Not all collection agencies will delete such reporting; however, it is worth the effort to try, for if there is no reference to a collection account in your report, your score will improve.

Get Rid of Your Charge-Offs and Liens: Charge-offs and liens do not affect your credit score when older than 24 months. Therefore, paying an older charge-off or a lien will neither help nor damage your credit score. Charge-offs and liens within the past 24 months severely damage your credit score. Paying the past due balances, in this case, is very important. If you have both charged-off accounts and collection accounts, but limited funds available, pay the past due balances first, then pay the collection agencies that agree to remove all references to credit bureaus second.

Get Rid of Your Late Payments: Contact all creditors that report late payments on your credit report and request a good faith adjustment that remove the late payments reported on your account. Be persistent if they refuse to remove the late penalties and remind them that you have been a good customer that would deeply appreciate their help. Since most creditors receive incoming calls in a call center, if the representative refuses to make a courtesy adjustment on your account, call back and try again with someone else. Persistence and politeness pays off in this scenario. If you are frustrated, rude and unclear with your request, you will be making it very difficult for them to help you.

This article was initially published in the Jan-Mar ’09 newsletter and has since been revised and republished in the Apr-Jun ’10 newsletter.

Purpose: The purpose of this article is to provide an overview of a 1031 exchange. The article is rather basic and not intended to be a guide to an actual exchange, as it omits rules that could significantly impact upon a 1031 exchange. I have prepared a more detailed paper in a question & answer format using layman terminology that explains the process in considerably more detail. To obtain a copy, check the applicable block on the enclosed postcard and return it. If you provide us your e-mail address, we’ll e-mail you a copy of both the 1031 paper and the HARPTA paper that discusses the Hawaii law that enables the state to collect estimated capital gains taxes from owners that might not file a Hawaii tax return.

Note: We have participated in a large number of 1031 exchanges and usually have several such transactions in escrow at any given time. However, we are not licensed to provide either legal or tax advice. Licensed professionals such as attorneys or CPA’s should be consulted for such advice. This comment applies to the entire newsletter.

Note: This paper will use the terms “old property” for the property being sold and “new property” for the property being purchased. A property may consist of more than one piece of real estate.

Background: Section 1031 of the Internal Revenue Code (IRC) provides for the deferment of long-term capital gains taxes on the sale of investment real estate when it is exchanged for other investment real estate of equal or greater value than the real estate being sold. A common misconception is you will have to find someone to trade properties with you. Most 1031 exchanges involve two entirely separate transactions. In one transaction, you sell your old property and in the other, you purchase your new property. There is normally no reason for the buyer of your old property and the seller of the new property to have any contact with each other. Often, the properties are located in two different states; e.g., most of our exchanges involve property in Hawaii being exchanged for property on the Mainland.

Qualified Intermediary (QI): The IRS mandates that you use a completely independent third party to supervise the exchange. Because this third party must be completely independent, it cannot be your real estate agent, accountant or attorney. The independent third party is usually referred to either as an intermediary or as qualified intermediary (QI); however, in some areas of the country the third party may be called either a facilitator or an accommodator. This paper will use the term “QI.” The QI can be located anywhere in the country; they do not need to be located near you or near either of the properties involved in the exchange.

The following steps have been changed; however, they help explain the role of the QI. The QI takes title to the old property for a brief instant in the process of having it sold from you to the buyer; i.e., title passes from you through the QI to the buyer. Similarly, the QI takes title to the new property for a brief instant in the process of having it sold from the seller to you. Therefore, the QI has owned both the old and the new properties and can exchange one for the other. Today, the QI no longer has to hold title to both properties. In 1991, the real estate industry successfully lobbied Congress to have the law changed, as escrow companies were charging double escrow fees; i.e. seller to QI and then QI to you. Today, in lieu of taking title to both properties, the QI is tasked to provide instructions so that both transactions are closed in a manner that conforms to Section 1031 of the IRC.

Properties & Timing: Both the old property and the new property must be investment real estate; in most cases they are rental properties. The two properties do not need to be the similar; e.g., you could exchange a house in Hawaii for two or more Mainland condos and vice versa. Almost any type of real estate qualifies such as a house, condo, store, office or even vacant land. However, your personal residence or a second home does not qualify. But, you could rent the new property first so that it qualifies as investment property and then occupy it yourself. Many of our clients do this; i.e., they use the equity in their Oahu property to assist them in purchasing a future Mainland residence. The new property must be rented for at least a year prior to being occupied in order for it to qualify as investment real estate.

With some very few exceptions, all of the exchanges made by our clients have been deferred exchanges where the old property is sold prior to purchasing the new property. It is possible to do this in reverse order and purchase the new property first. This is called a reverse exchange and is far more complicated and expensive than a deferred exchange. This article is based upon deferred exchanges. Over half of our deferred exchanges have involved absentee owners conducting their first 1031 exchange.

When the old property closes, the proceeds from the sale go to the QI who banks the funds until you’re ready to purchase the new property. To defer all your capital gains taxes, you must buy new property that is equal to or higher in value than the old property. You must also reinvest all the cash proceeds from the sale into the purchase of the new property. The QI maintains the funds from the sale of the disposable property and then makes those funds available in order to enable the purchase of the new property. You cannot have access to any of the proceeds from the sale property or those funds will be taxed.

There are two key time frames both measured from the closing date of the old property. Failure to meet either of these two time frames negates the tax-deferred 1031 exchange.

a. Within 45 days, the new property must be identified in writing to the QI. You can make changes to your identification any time within the 45-day-period; however, on the 46th day, you are locked-in to whatever has been identified as the new property.

b. Within 180 days, the new property must close. You can identify more than one property; so if your preferred new property falls out of escrow, you could shift to a replacement new property that was identified during the 45-day-period; however, it would still have to be closed within the 180-day-period. Most exchangers identify more than one new property.

Deferring Taxes: A 1031 exchange enables an owner to be able to defer both the federal and state capital gains taxes that they have on the sale of their old property and roll those taxes over into the new property. Note that the taxes are deferred, not excluded. The current federal capital gains tax rate for most exchangers is 15% on all component of gain except depreciation recapture, which is taxed at 25%. The state capital gains tax rate is 7.25% on all components of gain including depreciation recapture. State taxes are a deduction for federal taxes; therefore, the combined tax rate is about 21% rather than 22.25% (15% + 7.25%). It is unknown what the federal capital gains tax rate will be in 2011 and beyond. Without any action in Washington to change the existing law, the rate will automatically revert back to 20% in 2011. However, action to raise taxes is expected, therefore, the rate is likely to be higher than 20%.

Recent Rules: Three relatively recent rules apply to principal residences. The Tax Relief Act of 1997 enabled a homeowner to sell their principal residence and exclude up to $500,000 of gain (married) or up to $250,000 (single) providing they had occupied the home for an aggregate 24 out of the prior 60 months. So an owner only needed to own the property for three years, one year as a rental to qualify for the exchange and then two years as a principal residence to qualify for the Tax Relief Act of 1997. In October 2004, there was a change to the 1997 law. An owner who acquired their principal residence by way of a 1031 exchange must now own the property for at least five years before they sell it in order to be eligible for the exclusion. The owner still needs to rent it for one or more years so it qualifies for the exchange and then have it be their principal residence for at least two years. The exchanger also has to pay depreciation recapture on depreciation claimed (after May 6, 1997) while the property was a rental; i.e., depreciation recapture while the property was a rental will not be excluded.

The Housing and Economic Act of 2008 reduces the capital gains that can be excluded when a homeowner sells a principal residence that they acquired via a 1031 exchange, as the amount of the tax exclusion will be adjusted by the non-resident use of the property. This law became effective 1/1/09. The amount of time of non-resident use after 1/1/09 will be the numerator or top of a fraction with the bottom or denominator (think down) of the fraction being the total time since property acquisition. That fraction times total gain (exclusive of depreciation recapture after May 6, 1997) is the gain that will be taxed to the homeowner.

Example: Single Mary bought her Oahu home on 1/1/93 for $200,000 and rents it for 18 years until 1/1/11 when she occupies it as her principal residence. Two years later, on 1/1/13, Mary sells the property for $500,000 and has $300,000 of gain. The non-residence use of the property by Mary prior to 1/1/09 does not apply to the new law. Therefore, Mary has only two years of non-residence use (1/1/09 to 1/1/11) when she then occupies it as her principal residence. Two years later on 1/1/13 Mary will have owned it for a total of 20 years. Therefore, the fraction for non-resident use is 2/20. Or, the taxable gain is $300,000 x 1/10 or $30,000. The remaining $270,000 exceeds the $250,000 limit for single Mary, so Mary ends up with $50,000 taxable ($30,000 + $20,000) and $250,000 that is excluded. Mary would also owe depreciation recapture after May 6, 1997.

In my example, I used a long period of ownership before the eligibility date. If the property were acquired after the 1/1/09 eligibility date, the fraction will be much larger. For example, assume the property is acquired on 1/1/09, rented for three years and then occupied for two years, the non-resident use would be 3/5 or 60%. However, if it is rented for only one year and then occupied for four years, the non-resident use would only be 1/5 or 20%. Every day it is a rental property after 1/1/09 increases the capital gains taxes to the owner.

Granted, the new law has no impact if the owner never sells the property; however, few homes remain suitable for the same family over any extended period of time. Over time, most families desire a different location and/or a larger/smaller/more prestigious or a completely different type or style of home particularly after they retire or become empty nesters.

Reasons to Exchange: Most exchangers use 1031 exchanges to defer capital gains taxes. Many have long-range plans to eventually exclude their deferred taxes by converting a rental property into a principal residence even with ownership now a required five years. This is still a very viable investment tool, particularly for property bought prior to 1/1/09. Converting property into a principal residence is discussed later in the newsletter. On the following page is a paper prepared by a Mainland QI company that discusses non-tax reasons to conduct a 1031 exchange.

Some Final Thoughts: A 1031 exchange is not the right investment tool for everyone. Over the years, we have assisted many owners in making a decision not to conduct an exchange. Often, all that was required was for us to estimate the owner’s capital gains taxes. Contact me toll-free (1-800-922-6811), locally (808-254-1515) or via e-mail (team@stott.com) and I’ll discuss this with you. The following items will make our conversation more meaningful: (1) read my 1031 paper first, as it should answer many questions and often triggers some new ones; (2) note the figure on line 20 (Depreciation Expense) of the Schedule E (Supplemental Income and Loss) to your last 1040 federal tax return. I can estimate your taxes much more accurately if I know how you have been depreciating your property.

This can be a very useful investment tool to an investor that wants to pull cash out of their real estate without having to pay sizable taxes. There are a number of factors that are used to establish a principal residence such as: (1) the length of occupancy; (2) the location of employment; (3) the principal place of abode for family members; (4) the address used on the taxpayer’s federal and state tax returns; (5) the address where the taxpayer is registered to vote; (6) the location of the taxpayer’s bank(s); (7) the address used for automobile and driver’s license registrations; and (8), the location of the taxpayer’s religious organizations and recreational clubs. It is important to keep in mind, though, that you can only have one principal residence at any given time.

Assume you own property in Hawaii (HI property) with considerable equity and property in California (CA property) that is your principal residence. You sell the HI property via a 1031 exchange and replace it on the Mainland with (new property) that will be adequate to you as a residence for four years. You rent the new property for one year so that it qualifies for a 1031 exchange and then occupy it as your principal residence for four years to meet both the five years of ownership and the two out of five years exclusion requirement. Then you sell the new property and take the exclusion. If it is rented for one year and occupied for four years, the amount of gain being taxed, for your non-resident use would be 1/5 or 20%; i.e., only 20% of the gain would be taxable. You can only do this once every two years, so before you start, you should plan what you want to do with the CA property. You might want to sell it early on and take the exclusion. This would enable you to exclude gain from the CA property and the sale of the HI property as well as any gain from the sale of the new property.

Many readers of the newsletter alternate between living on the Mainland and in Hawaii with most of them claiming their Mainland home as a principal residence and their Hawaii home as a second home. Some of them may find it beneficial to shift their principal residence to Hawaii in order to claim the two out five-year exclusion. You have to occupy a principal residence for two out of the past five years to qualify for the exclusion; however, the months of occupancy do not need to be continuous. Moreover, you don’t need to actually have lived in it for two full years; e.g., an owner that now alternates between living in Hawaii and on the Mainland with their principal residence being their Mainland home, doesn’t change their principal residence each time they live for part of the year in Hawaii. Assume you own a HI property and a primary residence in CA. You start the process by shifting your primary residence to the HI property. However, the day you make that change is also the day that you can no longer claim the CA property as your primary residence. So you may also want to sell the CA property early on and take the exclusions.

The Red Hill Underground Fuel Storage Facility is located about three miles northeast of Pearl Harbor in a ridge of volcanic rock in an area that provides its name. The storage was built between 1940 and 1943 and is still in use today. In June 1995, the Facility was designated a Civil Engineering Landmark by the American Society of Civil Engineers and referred as the eighth great wonder of the world. There are a number of applicable articles available on the Internet. I used Google and searched for Red Hill Fuel Storage. There is a lengthy article written by J. David Rogers, Ph.D. that contains a number of interesting sketches. An excellent overview was written by CAPT George Sullivan, USN (Ret) for the May 2007 issue of Pau Hana Koa, a monthly newsletter for members of the Hawaii Chapter of the Military Officers Association of America (MOAA).

Several years before the Japanese attacked Pearl Harbor in 1941, the Navy recognized that the existing aboveground fuel storage tanks near the harbor presented a vulnerable enemy target. All of the fuel was stored in unprotected tanks next to the Submarine Base. Standard practice at that time for storage protection was to dig a trench and bury fuel tanks; however, this was impractical for the amount of fuel oil needed to be stored at Pearl Harbor. The Navy came up with a plan to dig a series of tunnels and insert tanks vertically. Finding a suitable site presented problems in view of the porous volcanic rock near Pearl Harbor. The Navy finally settled on Red Hill. At that time, Red Hill was under cultivation for sugar cane and pineapple plantations. The Navy leased the land, cleared and leveled it. Eventually the Navy acquired the property through condemnation.

The Navy’s plan to excavate huge vertical tank chambers instead of horizontal tunnels had never been attempted previously. There are twenty subterranean vertical vaults (cylindrical steel tanks) hollowed out of rock. Each tank has a height of 150 feet and a diameter of 100 feet. At the top and bottom of each cylinder is a hemispherical dome that adds 100 feet to the height, providing total tank height of 250 feet; i.e., each tank equals a 20-story building. Reinforced concrete surrounds each tank varying in thickness from about three feet to eight feet with the lower dome resting on a huge plug 20 feet thick. Surrounding the cement is rock. To determine the depth necessary to protect the tanks from an aerial attack, the engineers gathered information from the Army Air Corps, multiplied it four-fold and rounded the figure upwards to 100 feet of rock cover. The 20 tanks are located 200 feet apart in two straight rows. They can hold over 250 million gallons of fuel and are in use today.

Centered between the two rows are two tunnels, one above the other, connected by an elevator. The upper tunnel near the top of the tanks is approximately 2,300 feet in length with a width of almost 13 feet and a height of 11 feet. The lower tunnel is located below the tanks and contains three large fuel lines as well as a narrow tract on which a battery-driven locomotive operates to haul personnel and supplies. The lower tunnel is 3.4 miles in length, running between the tanks and a receiving pump house at Pearl Harbor. It takes the batter-driven locomotive 30 minutes to make the run.

Construction began at Christmas 1940; cavities were constructed by blasting out the surrounding volcanic rock. Then steel quarter-inch tanks were welded together to form the tanks. Most of the work was done in secrecy. Fuel piers were built at Pearl Harbor as well as roads, tunnels, pumps, etc. The number of men on the project reached a peak of 3,400 in June 1942 and remained at that level until October 1942 when the first two tanks were completed and turned over to the Navy for operation. By February 1943, the Navy had assumed operation of ten completed tanks. The remaining ten tanks were completed by July 1943 with a final cost in 1942 dollars of $43 million along with the loss of 17 lives.

The rules regarding lead-based paint will change as of April 22, 2010. The new rules require that contractors performing work that disturbs lead-based paint in homes, child care facilities, and schools built before 1978 must be certified by the Environmental Protection Agency (EPA) and follow specific work practices to prevent lead contamination. Before beginning renovation, repair and/or painting projects that may involve lead-based paint, contractors performing the work must have EPA Certification.

Lead-based paint was used in more than 38 million homes before it was banned for residential use in 1978. Lead can affect childrens’ brains and developing nervous systems, causing reduced IQ, learning disabilities, and behavioral problems. Lead is also harmful to adults, however, the greatest concern is to children under six years of age. Visible or invisible lead in dust is the most common way people are exposed to lead in homes. People can also get lead in their bodies from contaminated soil or paint chips. Lead-based paint was frequently used in wood framing for windows and doors. Small children may be exposed to the lead if they chew or gnaw on the wood framing.

Property owners have the ultimate responsibility for the safety of their family, tenants, or children in their care. As of April 22, 2010, they are responsible for ensuring that activities in pre-1978 housing that disturbs paint including remodeling and repair maintenance, electrical work, plumbing, painting, carpentry and window replacement is performed by an individual or firm that has been certified by the EPA. Certified Renovators are trained to use a test kit to determine if lead-based paint is present.

NOTE: The new law applies to anyone that is paid to perform work that disturbs paint in housing and child occupied facilities built before 1978 regardless at to whether they are a licensed contractor or not; therefore, it applies to unlicensed handymen.

NOTE: The training, certification and work practice requirements do not apply where the firm obtained a signed statement from the owner that all of the following are met:

The renovation will occur in the owner’s residence;

No child under age 6 resides there;

No woman who is pregnant resides there;

The housing is not a child-occupied facility; and

The owner acknowledges that the renovation firm will not be required to use the work practices contained in the rule.

To become licensed as a Certified Renovator, an individual must successfully complete an eight-hour accreditation-training program. Once a firm has a Certified Renovator on their staff, the firm is approved for lead renovation work. Larger firms will likely have at least one staff member that is approved by the EPA. Smaller firms may find it more cost and time effective to hire a licensed subcontractor to conform to EPA requirements.

Hawaii is located in EPA Region Nine: Regional Lead Contact U.S. Region Nine 75 Hawthorne St. San Francisco, CA 94105 (415) 947-8021

Congress created HAP (Homeowners’ Assistance Program) in 1966 to compensate eligible military and civilian Federal employees when the real estate market where they owned a home was negatively impacted by base closures or reduced operations. In 2009, HAP was extended to assist service members and DOD employees who are wounded, injured or become ill when deployed, surviving spouses of service members or DOD employees killed or died of wounds while deployed, service member and civilian employees assigned to Base Realignment and closure (BRAC) 2005 organizations, and military personnel required to make a Permanent Change of Station (PCS move) during the home mortgage crisis.

HAP is administered by the U.S. Army Corps of Engineers. Most of this article is taken directly from the DOD-HAP website located here. It is strongly recommended that anyone interested in this program thoroughly review this website as there appear to be various exceptions to the rules as well as ten pages of frequently asked questions and answers. This article does not address all the various rules and exceptions. It is designed merely to provide an overview of HAP with emphasis on military personnel required to make a PCS move since 2006. The information herein is subject to change and not guaranteed to be accurate.

Military Personnel Permanently Reassigned During the Mortgage Crisis

1. Permanent reassignment requires a move of more than 50 miles.

2. Reassignment ordered between 1 February 2006 and 30 September 2012.

3. Property purchased (or contract to purchase signed) before 1 July 2006.

4. Property was the primary residence of the owner.

5. Owner has not previously received these benefit payments

6. If you are a member of the Armed Forces who is or will be making a PCS, download the application packet and complete the application. Carefully read all instructions and mail your completed application to the USACE district responsible for the area in which your home is located. Once DOD implementing guidance is received the district will contact you concerning your eligibility and benefits.

HAP Private Sale Benefits: Eligible applicants may be compensated for the difference between 95% of the appraised fair market value of the property prior to the announcement date, and the appraised value of the property at the time of sale, or the sales price, whichever is greater. Closing costs are reimbursed for private sales.

HAP Government Purchase Benefits: An eligible applicant may elect to sell the property to the government and receive, as the purchase price, an amount not to exceed 75% of the appraised fair market value prior to the date of the announcement or the current total amount of outstanding mortgages whichever is greater.

HAP Foreclosure Assistance Benefits: If foreclosure proceedings have commenced, an applicant may elect to receive foreclosure benefits or private sale benefits. Foreclosure benefits may be paid directly to the applicant to reimburse for foreclosure costs paid by the applicant, or paid to third parties on the applicant’s behalf.

The American Dream has long been ownership of your own home. This continues even with all the foreclosures and bankruptcy problems that are taking place in late-2009 as this article is being written. In fact, a marvelous window of opportunity now exists with attractive sales prices coupled with low interest rates. Eventually, home prices on Oahu will stabilize and begin to rise again with mortgage rates likely to be higher than they are today.

The question for many families, particularly first-time homebuyers on Oahu is whether it is better for them to rent or to buy. Many people make such a decision based upon a comparison of monthly payments. If their rent is less than their monthly payment on a home, they may decide that it is cheaper to rent than to buy. This approach, though, fails to take into consideration a number of other factors that influence the total costs of homeownership.

It is important for anyone considering buying a home to understand the tax savings involved in owning a home. The interest on the mortgage and property taxes are both deductible for federal and state taxes. Typical savings are 25% to 35% of the mortgage payment (principal & interest) depending upon the type and amount of the mortgage, the interest rate and the buyer’s tax bracket. If the mortgage payment were $3,000 per month, the tax saving for most homebuyers would be in the range of $750 (25%) to $1,050 (35%). The savings can be obtained each month by adjusting your withholding allowances by filing an amended W-4 form with your employer. This is perfectly legal; in fact the second page of the W-4 form is a worksheet to assist the taxpayer in calculating the additional withholding allowances they should claim.

Two compelling reasons to buy rather than to rent are: first, it enables you to lock-in a permanent monthly principal & interest payment at today’s rates. If you purchase using a 30-year fixed mortgage rate, your principal & interest payment 10 or 20 years from now will be the same as they are today. In contrast, rent payments are likely to be increased every year or two by the landlord so that they keep pace with inflation. Second, it enables you to use a mortgage to increase the profit you will make on the home. Assume a $500,000 property is purchased with a $100,000 down payment and a $400,000 mortgage and the home increases in value by 10%, the owner makes $10,000 on their $100,000 down payment and $40,000 on their $400,000 mortgage. Investors refer to this as using other people’s money (OPM).

Nationally, the average annual inflation rate over the past 15 years has been 2.90%, which is relatively low historically; e.g., the average inflation rate over the past 30 years was 4.35%. So, the cost of living has increased by about 4.35% a year over the past 30 years. Many economists believe that inflation will increase over the next few years to enable the government to be able to pay its debts. This analysis will use 3%, which is considered to be very conservative. At an inflation rate of 3% per year, a $1,000 per month initial rent payment would be about $300 or 30% higher in ten years. Compounding the 3% per year increases the percentage to about 34.4% over ten years. And, if the property value keeps pace with inflation, the home will be worth about 34.4% more in ten years than it’s worth today.

If you look at sales prices of homes on Oahu since statehood, prices have risen at about 3% to 4% a year or very close to the inflation rate. However, it has not been a gradual increase. The Oahu Housing Market has experienced soaring appreciation once each decade of about 30% with the exception of the 1990’s when our local economy tanked. The 1960’s, 1970’s, 1980’s and most recently, the 2000’s all had periods of soaring appreciation. In between the periods of soaring appreciation, the housing market has usually been relatively flat.

The following example assumes a 3-4 bdrm, 2-bath, fee simple house in a reasonably nice neighborhood with a value today of $500,000 that is available for either sale or rent. Property taxes are $120; insurance is $80. The property would rent for $2,000 per month. I’m going to assume an FHA mortgage is used at 5½%; which is a little high as this is being written, however, mortgage rates are going to increase. For simplicity, I’m going to round many of the numbers; I’m also going to assume that property taxes and insurance remain constant

There are two clients; the first decides to rent the home and will be referred to as the “Renter.” The second decides to purchase the home and will be referred to as the “Buyer.” The Buyer purchases the property using a 3½% down payment ($17,500), which is the minimum on an FHA purchase. The FHA loan amount is $482,500. The analysis does not include the return the Renter could achieve by investing the $17,500 down payment that is not being used to buy the home. The analysis also does not include any federal programs to stimulate home sales such as the $8,000 tax credit for first-time homebuyers.

The Renter pays $2,000 per month initially that will increase at 3% a year to keep up with inflation. The Buyer’s monthly payments are $2,740 for principal and interest, plus an FHA mortgage insurance premium (MIP) of $220, plus $120 for property taxes, plus $80 for insurance for a total of $3,160. The Buyer’s tax savings (refer to the bottom of the page) is about 28% or $770, reducing the out-of-pocket monthly cost to $2,390 ($3,160 minus $770).

So, the first year the Renter would seem to be far better off paying $2,000/mo compared to the Buyer’s out-of-pocket cost of $2,390. At first glance, the Renter would appear to be ahead by $4,680 (12 x $390). However, the Buyer will have paid the mortgage down by $6,500 to $476,000 by the end of the first year, plus the value of the home will have increased by 3% or about $15,000 to $515,000. So, the Buyer’s equity that started with their down payment of $17,500 has increased by $21,500 to $39,000 ($515,000 less $476,000).

The Renter’s monthly payment does not match the Buyer’s cost until the end of year #6. At that time, the mortgage balance has been reduced by $44,930 from $482,500 to $437,570 while the property has increased in value from $500,000 to $579,640 for equity of $142,070 ($579,640 less $437,570). I acknowledge that property taxes are likely to increase over the years and there will be both repairs and fix-up costs to improve the home that are not included in the analysis.

At the end of year #10, the Renter is paying monthly rent of about $2,690 while the Buyer’s payment remains constant at 2,390 for a difference of plus $300 per month. At the end of ten years, the mortgage balance has been reduced by $84,240 from $482,500 to $398,260 while the property has increased in value from $500,000 to $671,960 for equity of $213,700 ($671,960 less $398,260). Eventually the FHA MIP will end; for simplicity, I’ve assumed it is a fixed expense.

Tax Savings: You need to use a calculator that will amortize. Assume the Buyer is married with $80,000 of taxable income and uses a $482,500 FHA mortgage @ 5½% with a $17,500 down payment. Further assume property taxes are $120/mo:

$482,500 @ 5½% = $2740/mo. for principal & interest End of first year balance (PV) using 348 (360 minus 12) months for (n) = $476,000 Initial balance ($482,500) minus $476,000 = $6,500 to principal the first year $6,500 divided by 12 months = $542/mo. average principal payment the first year $2,740 monthly payment minus $542 = $2198/mo. average interest payment the first year $2198 interest payment + $120/mo. property taxes = $2318/mo. deductible the first year $80,000 income = 25% federal tax bracket & 8.25% HI tax bracket for calendar year 2009 25% federal + 8,25% HI = 33.25% combined bracket 33.25% of $2,318 deductible = $770 tax savings using 5½% as the interest rate The tax savings thumb-rule for an FHA mortgage @ 5½% is about 28% of the principal & interest for most buyers; 28% of $2,740 = $767 compared to $770

The following article appeared in the October 25, 2009 issue of the Parade Magazine Sunday Newspaper Supplement:

Increasingly, strapped U.S. homeowners are opting to take out a “reverse mortgage,” a loan against a house’s value that is repaid when the borrower dies or sells the property. The number of federally insured reverse mortgages issued to senior citizens in the past three years alone—nearly 335,000—is more than the total from 1990 through 2006. Consumer advocates have long cautioned that reverse mortgages should be used as a last resort because of their high fees. Now, those warnings are growing louder due to a spate of fraud.

The National Consumer Law Center says seniors are facing the same kind of aggressive tactics that were common during the subprime-lending boom. And according to a recent report from the FBI and the U.S. Department of Housing and Urban Development (HUD), a host of “unscrupulous loan officers, mortgage companies, and loan counselors” are defrauding desperate Americans. In one scheme, people facing foreclosure are told that a reverse mortgage can save their homes, then “rejected” for the mortgage and steered into a deal that transfers title of their property to “ investors.” The end result: They lose their homes anyway.

Other scam artists sell loans that appear to be HUD-insured reverse mortgages but are not, according to the AARP, the nonprofit advocacy group for Americans 50 and over. Still others, billing themselves as “investment advisers,” persuade consumers to invest the proceeds of reverse mortgages in other financial products that come saddled with extra costs. And in some cases, the FBI report says, the proceeds of investment schemes are not invested—they’re simply stolen.

Homeowners should turn down any pitch that uses reverse-mortgage funds to purchase financial products. In fact, they should think twice before signing up for this type of loan at all. Other options—like taking a home-equity line of credit or even moving to a smaller place—may be able to meet your needs at a lower cost, according to the AARP.

The slump in the housing market coupled with low interest rates make the current rental market very attractive for investors that are interested in upgrading their portfolios. The investors need to be thinking long-term when analyzing the existing market. In most areas, there is a healthy supply of rental units on the market resulting in a “renter’s market” with lower rents in view of the higher inventory. Some owners have put their homes on the rental market vice selling thereby increasing the number of rental units. Add to that, job losses and credit issues which prompt some renters to go back home to live with parents or relatives or to share homes with other tenants in order to reduce living expenses.

Stott Property Management manages some 400 rental properties island-wide on Oahu. The current downturn in the economy has created longer vacancies, higher delinquencies, lower rental rates and fewer qualified renters. Evictions have increased as many tenants living paycheck-to-paycheck have lost their jobs or had their salaries reduced similar to the forced furloughs state workers are now experiencing. Some tenants find themselves living on credit cards that eventually end up creating poor credit ratings coupled with lack of income. Many of today’s tenants could not qualify to rent their current homes as both their financial situation and credit have deteriorated since they were originally qualified.

So, with all these problems, why on earth do I say that this is an attractive market for owners interested in upgrading their portfolios? That’s because you should always try to make an upward move in a down or depressed market if you have the funds to do so. Experienced investors try to take advantage of downturns to strengthen their competitive position for the next upturn by investing capital where it can achieve the most benefit to them. Their investments are often made with cash vice additional mortgage leverage. This may be the time for some owners to reallocate some of their investment resources.

Granted the home you sell will net you less; however, the replacement property will cost you less and with all our problems, there are still some good buys available, particularly if you project into the future when rents once again will rise. Assume you own a one-bedroom unit or studio unit in Salt Lake and want to upgrade to something larger or closer to town that will provide you more rental income and/or higher quality tenants. If your unit was worth $250,000 and prices declined by 30%, it would only be worth $175,000. Assume the replacement property had been worth $400,000 and also declined by 30% to $280,000, the difference between the two would be $105,000 ($280,000 less $175,000) compared to $150,000 ($400,000 less $250,000) with no market decline.

The vehicle that enables you to conduct such upgrades and avoid capital gains taxes is a 1031 exchange. We have seen a significant increase over the past year in owners using 1031 exchanges; it is an area where we specialize in providing assistance to owners. The first step is to ask yourself some simple questions: Are you happy with your investment; is it working for you or is there a way to trade it for something better? If a change might be in order, then it is time to talk to my son-in-law and Property Manager, Tim Kelley, about rental properties on Oahu and rental rates versus property costs. I’m available at the same time to talk to you about 1031 exchanges. Demand at the lower end is currently much stronger than at the upper end with prices at the lower end seeming to level out which is another reason for a move-up now, positioning yourself for the future.

Real Estate Owned (REO) is a term used to describe real estate acquired by lenders via a foreclosure or via a deed from the owner in lieu of a foreclosure. If the lender acquired the REO property via a foreclosure, the property has probably undergone an unsuccessful foreclosure auction. Since what is owed to the lender is often considerably more than what a property is worth, many foreclosure auctions do not result in a successful sale.

In some areas of the country, lenders handle the sale of their own REO’s; however, the trend is for lenders to use third party servicing companies that specialize in working with REO’s. These servicing companies work directly with real estate companies such as The Stott Team to sell their REO’s. When a housing market is depressed, REO’s become far more prevalent. The Stott Team is very involved in this facet of real estate; we belong to various REO organizations, attend periodic Mainland REO meetings/conventions and participate in Internet discussion groups with other REO agents. This article is based upon our experience representing both buyers and sellers; it is designed for absentee owners that might be considering purchasing an REO property either in Hawaii or on the Mainland. Some advantages follow:

1. The primary advantage of working with REO’s is that it often enables a buyer to purchase real estate at a discount; i.e., under market value; however, this is not always the case. Moreover, purchasing an REO may involve costly repairs; refer to item #4 in the next section.

2. REO’s are normally listed with real estate agents and in the local or area Multiple Listing Service (MLS). They can usually be found on various real estate websites. REO’s are normally vacant and should be thoroughly inspected prior to submitting a purchase contract.

3. In most cases, all liens will be removed with back taxes handled by the lender; i.e., the buyer normally gets the property free of liens. This is not always the case, though; refer to items #7 and #8 in the next section.

4. While foreclosure properties are often in deplorable condition, REO’s are usually restored by the lender to a minimum sellable condition. The listing company will usually be provided a budget for removal of trash, etc.

5. The lender that owns the property will often provide an allowance for specified repairs and/or buyer closing costs. The lender may also provide preferred financing.

Some Recommendations:

1. If you do not have experience working with REO properties, we recommend you work with a real estate agent that does have such a background. Prior to submitting an offer, your real estate agent should contact the listing agent to find out if there is anything unusual in the seller’s or servicing company’s paperwork and what normal seller expenses they do not cover such as conducting a property survey, conducting a termite inspection, treating the property for termites, etc. These expenses may be required by your mortgage company and, therefore, will become buyer costs if not paid for by the seller. So, you may want your offer to include a credit to cover them.

2. Many servicing companies charge a per diem such as $100/day if you cannot close as scheduled. Have your agent find this out in their call to the listing agent and if it applies, provide an ample cushion of time in selecting a closing date.

3. Servicing companies work in a number of different states. As a result, their paperwork will often include standard items or boilerplate that may not be applicable in your state. If you’re in an escrow state, the servicing company will usually designate the escrow company and/or the actual escrow agent to be used. The servicing company’s paperwork (contract addenda) will almost always be heavily weighted in their favor. There is usually a statement that if there is any conflict between their paperwork and the purchase contract, their paperwork has precedence. There is also usually a statement in their paperwork that the property was acquired via a foreclosure and the seller will not provide a property disclosure. The servicing company’s paperwork varies in length and complexity from company to company. It is very important to read it very carefully so you fully understand all the terms.

4. Most owners of homes that go into foreclosure have been struggling financially, which usually means the property has not received needed repairs or general maintenance for some period of time. The seller may agree to provide a buyer credit to cover some repairs; however, normally they will not make such repairs themselves unless it is to correct a safety hazard. Plan on having to make your own renovations and/or repairs. Have a contractor provide you cost estimates and then budget those costs into your offering price or credit.

5. The servicing companies have asset managers that work with listing agents. The amount of leeway given to an asset manager will vary considerably depending on the lender, the servicing company and the experience of the asset manager. Most communications between a listing agent and the asset manager are now done online; e.g., when an offer is received, the listing agent extracts key information from the offer and provides it to the servicing company via a form on the servicing company’s website. In some cases, a counter offer will be provided within hours while in other cases it may take several days and include a requirement to provide the actual offer to the servicing company and/or lender. So, be patient and anticipate that you may not have a response to your offer for some period of time.

6. The first counter offer from the seller is not necessarily their final answer. The servicing company may need to demonstrate to the seller that they are attempting to obtain a price within a specified range of the list price. Don’t be hesitant to counter the seller’s counter offer. You may go back and forth with counter offers several times before reaching a price and terms that are acceptable to both parties. Once a contract price has been established, it usually is very difficult to get the servicing company to agree to any additional expenses or credits. That’s why it is important to have the property inspected prior to submitting an offer.

7. Have the title company conduct an early title search for liens and outstanding taxes. One problem we’re experiencing these days, is service companies are listing properties before they have established clear title with ownership by the lender. This is a particular problem with non-judicial foreclosures.

8. Different states and areas of the country may have special laws or ordinances that apply to the sale of REO’s which is another reason for using an experienced REO agent. For example, Oahu has a law that states the buyer is responsible for paying up to six months of outstanding maintenance fees owed by the foreclosed owner (up to a maximum of $1,800). Therefore, it you are purchasing a condominium REO on Oahu, it is important that your offer cover this cost and make it a lender responsibility.

9. In many cases, a foreclosed owner has unsuccessfully attempted a short sale prior to the foreclosure. Then, the property went into foreclosure with an unsuccessful foreclosure sale by the lender. On Oahu, we are finding that many of the REO selling prices are considerably less than the short sale listing price. Have your real estate agent research the MLS history of any REO property you are considering.

The Tax Relief Act of 1997 instituted completely different tax provisions applicable to the sale of a primary residence under Section 121 of the Internal Revenue Code (IRC). The current law, sometimes referred to as “the 121 exclusion,” has been around for about ten years. However, considerable confusion continues to exist based upon the questions we’re periodically asked.

NOTE: The Stott Team is not licensed to provide legal or tax advice. Licensed professionals like attorneys or CPA’s should be contacted for such assistance.

A taxpayer can sell real estate held and used as his or her primary residence and exclude up to $250,000 in capital gains taxes if the taxpayer is single and up to $500,000 if the taxpayer is married and filing a joint income tax return. The taxpayer has to have lived in the property as their primary residence for at least 24 months when a change of employment, poor health, or other unforeseen circumstances have occurred.

For a married couple, only one spouse’s name needs to be on title; however, each spouse has to meet the 24-month occupancy test to qualify for an exclusion of up to $250,000 per spouse. And, they much file a joint income tax return in the year of sale. If two individuals are not married but both hold title and each meets the occupancy test, then each co-owner can qualify for the $250,000 exclusion. If you are in the military or Foreign Service, special rules apply and your 24-month home occupancy may be as far back as 10 years from the date of sale.

In most cases, a taxpayer does not need to have owned the property for more than 24 months if it has been their primary residence for the entire 24 months, as the taxpayer then qualifies for 24 out of the last 60 months. However, if a taxpayer originally acquired the property via an Internal Revenue Code (IRC) Section 1031 exchange, they must have owned it for at least 60 months to qualify for the $250,000/$500,000 exclusion. They need to have rented the property for at least a year so it qualifies as investment real estate for the tax deferred IRC 1031 exchange. And, then they need to have occupied it as their primary residence for at least 24 of those 60 months.

NOTE: A sizable number of absentee owners have used the equity in their Oahu property to purchase a future residence on the Mainland via an IRC Section 1031 exchange and avoid having to pay capital gains taxes. Contact us or call toll-free at 1-800-922-6811 if you would like to discuss what is involved.

A property does not need to be a taxpayer’s primary residence on the date of sale. If it has been occupied for 24 of the 60 months before the sale, it could have been a rental for up to 36 months. Home sellers of any age can qualify. There is no need to buy a replacement primary residence and the 121 exclusion can be used over and over again without limit but not more frequently than once every 24 months.

There is a little known, special provision for separated or divorced spouses. The purpose of this provision is to enable one spouse to be able to stay in the home for a period of time following a legal separation or divorce rather than having to sell the home for tax purposes, an example might be to postpone selling until the youngest child has finished high school. If one legally separated or divorced spouse qualifies for the 121 exclusion by occupying the home as their primary resident for at least 24 out of the last 60 months, the other spouse can also qualify for the 121 exclusion when the home is sold, even though the other spouse does not meet the occupancy requirement i.e., both separated or divorced spouses can qualify to exclude up to $250,000 of gain when the home is eventually sold.

If you don’t meet the 24-month occupancy test within the last 60 months prior to the sale, you may still qualify for a partial capital gains exclusion if your move was for (1) job purposes; (2) health reasons; (3) divorce or legal separation; (4) death in the immediate family; (5) unemployment; (6) decreased income leaving the taxpayer unable to pay the monthly mortgage or basic living expenses; (7) multiple births from the same pregnancy; (8) damage to the home from natural or man-made disaster or terrorism; and (9), condemnation, seizure, or other involuntary conversion of the property.

NOTE: If you owned and occupied your primary residence for only 14 months before you moved for job purposes, you would be entitled to exclude capital gains taxes of up to 14/24 or 58.33% of $250,000/$500,000.

The new Mortgage Relief bill just signed into law in December allows a taxpayer a two-year window from date of death of a spouse to claim an exclusion of up to $500,000 vice $250,000.

The City & County of Honolulu minimizes the number of property tax appeals that are filed by allowing only a very narrow window in which to file an appeal. The tax assessments are normally mailed on December 15th with January 15th being the cutoff date to file an appeal. Complicating matters are the Christmas Holidays that occur during this period. The usual grounds for justifying an appeal is having the tax assessment exceed the market value of the property by more than 10%. Example: If your market value is $500,000, the tax assessment must be greater than $550,000 to support an appeal. The appeal does not need to include supporting documentation when filed; however, the owner has to provide their opinion of market value. A $25.00 deposit must accompany each appeal. The residential tax rate is $3.29 per $1,000 of assessed value. This means that if your assessed value is too high by $100,000, your annual property taxes will be too high by $329. I have an appeal pending on a one-bedroom, fee simple condo Mary Lou and I own in Waikiki as a hideaway where the assessed value is too high by about $100,000. I filed the appeal because the assessed value was ridiculously high and I wanted to experience firsthand the appeal process.

Our unit is on the 24th floor of a 29-floor building. The assessed value is about $100,000 higher than the only two sales over the past 20 months of similar one-bedroom, one-bath units in the building plus it is higher than the four out of the five sales of larger two-bedroom, two-bath units. An identical unit directly below us was assessed at almost $100,000 less than our unit. Our building is not one of the newer, prestigious complexes in Waikiki. In calendar year 2006, there were 198 sales of non-beachfront, fee simple one-bedroom units in Waikiki, only one of the 198 sales was as high as our assessed value, etc.

I have difficulty believing the tax assessor ever looked at the 2006 sales data in our building or in Waikiki as a whole prior to establishing the 2007 assessed value for our unit. I believe the tax assessor merely took the 2006 assessed value and added about 20% to it to arrive at a 2007 figure. Neither the 2006 assessed value nor the 20% increase are justified by statistical data. In retrospect the mistake I made was not appealing the 2006 assessed value a year earlier.

When I received the assessment last December, I prepared a lengthy written appeal that I subsequently discovered was not necessary. All I needed to do was pay my $25 and provide them my estimate of value. On August 23rd, I received a letter stating that my case would be heard on September 11th and that I would be allowed 10 minutes to present my case or as an alternative, I could provide written testimony. I chose to provide the written testimony (six copies required) and have yet to hear the results. I was off-island the end of August, but had done considerable work on the appeal last December, so all I needed to do was update if for the past eight months and write a revised appeal. Still, I’ve spent a number of man-hours on this project, something to consider if you expect a written appeal to be successful.

As explained elsewhere in the newsletter, Oahu housing values are declining even though median sales prices do not support that statement. I am concerned that the tax assessors may merely add a healthy percentage to the 2007 assessed values to arrive at 2008 figures. If they do this, many of the 2008 assessed values will be way out of line with Oahu market values. Last year, we were overwhelmed with requests for market analyses in late-December and early-January and unable to respond to all the owners in a timely manner. If you think you might want to appeal your 2008 assessed value, I recommend you establish the market value of your home in October or November vice waiting until after you receive your assessment notice in December.

The Jan & Feb ’07 issues of Mr. Landlord contained a two-part article on protecting your real estate assets from legal claims through the use of liability insurance, trusts, and limited liability corporations (LLC’s) with emphasis upon equity stripping. This one page paper will briefly summarize the two-part article. Our paper is designed solely to provide readers information and not to provide guidance, as The Stott Team is not licensed to provide either tax or legal advice. I searched Google for Equity Stripping Using LLC’s and came up with 652,000 entries. The two articles in Mr. Landlord are useful in providing an overview; however, they do not provide actual guidance in setting up the LLC’s nor is their information as detailed or extensive as that provided on the Internet by companies that specialize in this area.

Liability insurance protects you against personal injury such as a slip and fall. However, liability insurance does not protect you against environmental hazards; fair housing violations, or disputes that might lead to lawsuits, such as tenant disputes, contractor disputes, and neighbor disputes. There are varying types of trusts that provide varying degrees of protection against legal claims. However, trusts do not provide you the limited liability of an LLC. Done properly, an LLC protects all of your assets outside of the LLC entity such as your home, savings, and valuables. However, an LLC does not protect the property equities within the LLC entity itself. If you own several rental properties, the equities of all your rental properties may be at risk.

Assume you own four rental properties each worth $250,000 with each having a mortgage of $150,000, for a total value of $1 million with $600,000 in mortgages and $400,000 in equity. What is at risk in a lawsuit is the $400,000 of equity, as the bank’s mortgage of $600,000 (your debt) has no value to the claimant. Equity stripping is a technique that makes the $400,000 in equity also become a debt through the use of two completely separate LLC’s. One LLC will become your Real Estate LLC and the other, your Lender LLC.

To enable equity stripping, your Lender LLC makes a mortgage loan to your Real Estate LLC for the existing equity that is in the rental properties or $400,000, thereby stripping out all the equity in the four properties. The loan from the Lender LLC to the Real Estate LLC has to be a real loan with a promissory note, transfer to funds, etc; i.e. an arm’s length transaction between the two LLC’s. Therefore, funds need to be provided to the Lender LLC to enable the actual transfer of the $400,000. Once the Real Estate LLC receives the funds, they can then disburse the money back to you to enable you to be able to repay any borrowed funds.

The mortgage loan provided by the Lender LLC is written without any monthly payments; however, interest will accrue and be added to the loan balance thereby offsetting any future equity growth in the properties via appreciation, upgrading, amortization, etc. The Real Estate LLC has no value as the market value of $1 million for the four rental properties has been offset by the $1 million of mortgage debt…$600.00 via the four mortgages held by the original lenders and $400,000 by the mortgage held by the Lender LLC. Therefore, the Real Estate LLC is not a target for claimants. Similarly, the Lender LLC also is not a target, as it only owns a paper mortgage. Both LLC’s need to file their own federal and state income tax returns as a “partnership flow-through tax entity,” thereby making the transactions tax free under the IRS partnership provisions. The Lender LLC reports imputed interest as ordinary income while the Real Estate LLC deducts the interest. Only two LLC’s are needed for all your properties. You can subordinate the equity stripping loan to a junior position for refinancing purposes, and you can equity strip your other assets such as your home, savings accounts, etc.

Mr. Landlord published by Home Rental Publishing/Mr. Landlord Inc., Box 64442, Virginia Beach, VA 23467 www.mrlandlord.com 1-800-950-2250

Periodically, we’re asked how heirs can avoid the probate process. The following information is from attorney/author Robert Bruss who recommends that properties be placed in a revocable living trust. The living trust has two benefits: (1) avoidance of Probate Court costs and the attendant delays after the trustor (owner) dies and (2), management of living-trust assets if the trustor becomes incapacitated. With a revocable living trust, the trustor can continue managing their living-trust assets including buying and selling real estate. However, if they become incapacitated through a stroke, Alzheimer’s disease, etc. and their assets need to be sold or refinanced to provide for their care, the successor trustee (often a son/daughter) can handle that without Probate Court interference. When the trustor dies, the heirs get a new stepped-up basis to the market value at time of death. This advantage may be lost in 2010 if Congress eliminates the estate tax. The basis then will be the decedent’s basis rather than the fair market value at time of death.

There is another problem that can create a delay in heirs being able to sell Oahu property, particularly if the property has vacation potential. Some heirs may want to sell the property right away to cash-out their share of equity while others may want to hold on to the property for their future personal use. There are legal steps to force a sale; however, this might create major intra-family conflict. Our experience indicates that when the heirs cannot agree on the sale of Oahu property, the heirs will usually wait for several years prior to selling. To eliminate this potential problem, some of our clients have conducted a 1031 exchange for tax purposes and bought several similar replacement properties (one for each heir) or they’ve purchased a replacement property that may not be too liquid, but provides a good cash flow. Others have paid the capital gains taxes and replaced their Oahu property with easily dividable securities. Contact us or call toll-free at 1-800-922-6811 if you would like to discuss this topic.

Hawaiian Street Names: is the title of a new book that contains the meaning of over 5,000 street names in Hawaii along with several pages of introduction discussing such things as the importance of diacritical marks such as the glottal stop. Example: ‘ai with the glottal stop means to eat while ai without the glottal stop means sexual intercourse. The 2007 addition should include most of the newer streets on Oahu. Contact us with your street name and we’ll e-mail you back the meaning of the street name.

Real Estate Tax Secrets of the Rich: is the title of another new book that some of you may want to purchase. The author is Sandy Botkin, CPA, 2007, McGraw-Hill, New York, 226 pages. I paid Amazon.com $16.47 for my paperback version. Considering the rather boring topic of taxes, the book is very easy to read with simple explanations and numerous drawings and cartoons. The chapters are short with summaries at the end. Also at the end of each chapter are citations to recent IRS rulings and tax court decisions. An Appendix at the end of the book provides various resources, most of them online. The book contains both basic and advanced tax explanations on virtually every tax topic applicable to homeowners and investors. The author has an excellent sense of humor making his book a reasonably easy, enjoyable read. The remainder of this section provides applicable information.

1. Improvements versus Repairs: Improvements made to personal residences and second homes increase your tax basis as well as adding value to the home. Repairs made to personal residences and second homes are considered personal expenses and are not added to basis. However, if you make what would normally be a repair become part of a general plan of improvements, the IRS has ruled that the whole expenditure can then be an improvement. For rental properties, it’s just the opposite; you are better off classifying fix-up expenses as repairs because repairs are deductible when they are incurred. The book discusses the difference between repairs and improvements in two separate chapters, one oriented towards personal residences and the other towards rental properties.

2. Excluding Gain When Selling Your Home: Several chapters deal with the $250,000 or $500,000 (single or married) maximum exclusion when you sell your own home and have occupied it for two out of the past five years. I found it interesting that a surviving spouse can wait for up to two years after the year of death to file for the full $500,000 exclusion if the surviving spouse maintains a household for dependent children. If there are no dependent children, the surviving spouse can claim the full $500,000 exclusion only in the taxable year of death. Taxable depreciation recapture is discussed on pages 1 and 7 of this newsletter.

A partial exclusion is authorized if ownership was less than two years and a move is/was for health or job purposes; this occasionally applies to owners that are either moving to or have moved from Hawaii to the Mainland. If the home ownership was only for 12 months and the owner is single, the maximum exclusion would be 12/24 times $250,000 or $125,000.

There was an entire chapter dealing with selling a former home to your own Chapter S Corporation if you rent the property and are about to lose the two out of five years of occupancy. By selling the home to your own Chapter S Corporation, you could claim the $250,000/$500,000 exclusion in the sale and then continue to operate the home as a rental through your own Chapter S Corporation.

3. Tax Splitting: There were several chapters that discussed minimizing taxes by splitting income/ownership among family members. Several examples were provided ranging from relatively simple techniques such as transferring rental property to children that are then taxed at their lower tax rates vice the higher tax rate of the parents. More complicated techniques involved buying rental property and having children own title to the land with the parents owning the building. The parents then rent the land from their children while depreciating the building. Another technique is to depreciate equipment used in investment property (washers, dryers, ranges, etc.) and then give title to the equipment to lower tax-rate children. The parents then lease the equipment back, paying monthly rent; i.e., first you depreciate the equipment and then you lease it or, in effect, you deduct the equipment twice.

There were more complex examples involving the sale and leaseback of a personal residence through a note to children that would cover their payments via rent from the parents. The home then becomes investment property with deductible repairs. Moreover, the children can visit their property (and their parents) via deductible caretaking trips. I encourage anyone considering a sale and leaseback of a personal residence to discuss the potential consequences of not having actual title to the property with a real estate attorney.

4. Seller Financing: A relatively long chapter discussed Seller Financing and how seller take-backs can create more wealth than selling for cash. I found this to be one of the more interesting sections of the book; however, it may not be too practical now with the relatively low mortgage rates that continue to exist.

5. Miscellaneous: Other chapters covered what you can claim or deduct while searching for investment property; hiring family members; maximizing your deductions when building a home; understanding depreciation; the pro’s and con’s of selling a home to an ex pursuant to a divorce decree; using 1031 exchanges and installment sales to reduce taxes; IRS record keeping requirements; minimizing passive loss problems; how to calculate gain or loss; understanding vacation home and second home rules; a whole chapter covering frequently asked questions; and another chapter on using today’s technology, primarily the Internet.

Real Estate Tax Secrets of the Rich is the title of another new book that some of you may want to purchase. The author is Sandy Botkin, CPA, 2007, McGraw-Hill, New York, 226 pages. I paid Amazon.com $16.47 for my paperback version. Considering the rather boring topic of taxes, the book is very easy to read with simple explanations and numerous drawings and cartoons. The chapters are short with summaries at the end. Also at the end of each chapter are citations to recent IRS rulings and tax court decisions. An Appendix at the end of the book provides various resources, most of them online. The book contains both basic and advanced tax explanations on virtually every tax topic applicable to homeowners and investors. The author has an excellent sense of humor making his book a reasonably easy, enjoyable read. The remainder of this section provides applicable information.

1. Improvements versus Repairs: Improvements made to personal residences and second homes increase your tax basis as well as adding value to the home. Repairs made to personal residences and second homes are considered personal expenses and are not added to basis. However, if you make what would normally be a repair become part of a general plan of improvements, the IRS has ruled that the whole expenditure can then be an improvement. For rental properties, it’s just the opposite; you are better off classifying fix-up expenses as repairs because repairs are deductible when they are incurred. The book discusses the difference between repairs and improvements in two separate chapters, one oriented towards personal residences and the other towards rental properties. 2. Excluding Gain When Selling Your Home: Several chapters deal with the $250,000 or $500,000 (single or married) maximum exclusion when you sell your own home and have occupied it for two out of the past five years. I found it interesting that a surviving spouse can wait for up to two years after the year of death to file for the full $500,000 exclusion if the surviving spouse maintains a household for dependent children. If there are no dependent children, the surviving spouse can claim the full $500,000 exclusion only in the taxable year of death. Taxable depreciation recapture is discussed on pages 1 and 7 of this newsletter.

A partial exclusion is authorized if ownership was less than two years and a move is/was for health or job purposes; this occasionally applies to owners that are either moving to or have moved from Hawaii to the Mainland. If the home ownership was only for 12 months and the owner is single, the maximum exclusion would be 12/24 times $250,000 or $125,000.

There was an entire chapter dealing with selling a former home to your own Chapter S Corporation if you rent the property and are about to lose the two out of five years of occupancy. By selling the home to your own Chapter S Corporation, you could claim the $250,000/$500,000 exclusion in the sale and then continue to operate the home as a rental through your own Chapter S Corporation.

3. Tax Splitting: There were several chapters that discussed minimizing taxes by splitting income/ownership among family members. Several examples were provided ranging from relatively simple techniques such as transferring rental property to children that are then taxed at their lower tax rates vice the higher tax rate of the parents. More complicated techniques involved buying rental property and having children own title to the land with the parents owning the building. The parents then rent the land from their children while depreciating the building. Another technique is to depreciate equipment used in investment property (washers, dryers, ranges, etc.) and then give title to the equipment to lower tax-rate children. The parents then lease the equipment back, paying monthly rent; i.e., first you depreciate the equipment and then you lease it or, in effect, you deduct the equipment twice.

There were more complex examples involving the sale and leaseback of a personal residence through a note to children that would cover their payments via rent from the parents. The home then becomes investment property with deductible repairs. Moreover, the children can visit their property (and their parents) via deductible caretaking trips. I encourage anyone considering a sale and leaseback of a personal residence to discuss the potential consequences of not having actual title to the property with a real estate attorney.

4. Seller Financing: A relatively long chapter discussed Seller Financing and how seller take-backs can create more wealth than selling for cash. I found this to be one of the more interesting sections of the book; however, it may not be too practical now with the relatively low mortgage rates that continue to exist.

5. Miscellaneous: Other chapters covered what you can claim or deduct while searching for investment property; hiring family members; maximizing your deductions when building a home; understanding depreciation; the pro’s and con’s of selling a home to an ex pursuant to a divorce decree; using 1031 exchanges and installment sales to reduce taxes; IRS record keeping requirements; minimizing passive loss problems; how to calculate gain or loss; understanding vacation home and second home rules; a whole chapter covering frequently asked questions; and another chapter on using today’s technology, primarily the Internet.

NOTE: The dates in parenthesis indicate the quarterly newsletter that contained the article. All the newsletter articles were written by The Stott Team.

NOTE:  The information found in some of the older newsletter articles may have been changed by more recent legislation.

NOTE:  We are not licensed to provide either legal or tax advice.  Licensed professionals as such attorneys or CPA’s should be consulted for such advice.