The importance of Exchange Team selection in Puget Sound

Picking Teams 1

How to win in the Real Estate Disposition Game

Can you remember being in grade school in the playground getting ready to pick teams for the game everyone wanted to play? Everyone would line up and signal and maybe even scream “pick me”. Under some stress, the two chosen captains usually strategically selected their team-mates who would best position them for a win.

If you were ever a team captain, you likely did not randomly pick kids to be on your team. You selected your team very carefully. You analyze the strengths and weaknesses of each player before coming to the decision hopefully a decision that would bring you victory! In the Oh So important game.

Picking Teams 2

In the investment Real Estate game selection of your team is even more important. Choosing a company to do real estate business with is a lot like picking the team out in the playground. The same strategies are in play in your thought process and you sincerely need to be cautious; since in this world there is a lot of players & very serious new player that has got to be dealt with – the tax man.Tax Man He’s very serious about wanting to be paid for having allowed you to score some points. ( i.e. build some equity which clearly is not spendable cash) However, you can and may need or at least want to defer paying him currently; especially if you can structure a tax deferred transaction that is right for you. A 1031 tax deferred exchange or an exchange of your real estate for a position in another asset or amalgamation that will “loan” you money may be a good solution for you.

Ultimately, this new player will get paid, since death & taxes cannot be avoided. You may however, defer both, if you own multi-family or retail investment property in the Pacific Northwest, Washington, Oregon or Idaho and are interested in evaluating your investment position please phone Jim Gorman4 at 253-853-1408 or email jegorman4@gmail.com to chat about our preparing at no obligation or cost to you a market profile on your property or scheduling an appointment.

 Visit our Website www.JimGorman456.com

Net Present Value

(Net Present Value) Discussion and Tips

Inflation Graph II

In real estate the best way to evaluate an investment is to net present value model the investment considering all factors including taxes & fees, which can become a bit of alchemy, in projecting future new & changing tax, interest & inflation rates & assuring it all calculates.

In finance, the net present value (NPV) or net present worth (NPW) is defined as the sum of the present values (PVs) of incoming and outgoing cash flows over a period of time. Incoming and outgoing cash flows can also be described as benefit and cost cash flows, respectively.

Time value of money dictates that time has an impact on the value of cash flows. In other words, a lender may give you 99 dollars for the promise of receiving $103 a month from now, but the promise to receive that same dollars 20 years in the future would be worth much less today to that same person (lender), even if the likelihood of payback in both cases was equally certain. This decrease in the current value of future cash flows is based on the market dictated rate of return and other factors like inflation, market factor & currency buying power.Inflation today

Cash flows of nominal equal value over a time series result in different effective value cash flows that makes future cash flows less valuable over time. If for example there exists a time series of identical cash flows, the cash flow in the present is the most valuable, with each future cash flow becoming less valuable than the previous cash flow. A cash flow today is more valuable than an identical cash flow in the future because a present flow can be invested immediately and begin earning returns, while a future flow cannot and because the buying power of the American dollars has historically been losing value over time.

Net present value (NPV) is determined by calculating the costs (negative cash flows) and benefits (positive cash flows) for each period of an investment. The period is typically one year, but could be measured in quarter-years, half-years or months. After the cash flow for each period is calculated, the present value (PV) of each one is achieved by discounting its future value (see Formula) at a periodic rate of return (the rate of return dictated by the market). NPV is the sum of all the discounted future cash flows. Because of its simplicity, NPV is a useful tool to determine whether a project or investment will result in a net profit or a loss. A positive NPV results in profit, while a negative NPV results in a loss. The NPV measures the excess or shortfall of cash flows, in present value terms, above the cost of funds. In a theoretical situation of unlimited capital budgeting a company should pursue every investment with a positive NPV. However, in practical terms an investor’s capital constraints and risk sensitivity limit investments to projects with the highest NPV whose cost cash flows, or initial cash investment, do not exceed the available investment capital. NPV is a central tool in discounted cash flow (DCF) analysis and is a standard method for using the time value of money to appraise long-term projects. It is widely used throughout economics, finance, and accounting.

NPV can be described as the “difference amount” between the sums of discounted cash inflows and cash outflows. It compares the present value of money today to the present value of money in the future, taking inflation and returns into account.

Make Money SignREAL ESTATE TIP #1, if you are the selling owner of real estate property do evaluate the impact of expenses & taxes on you and your transaction and do consider your exchange transaction opportunities; 1031 or other, if any.

REAL ESTATE TIP #2, If your buying real estate assure you have a positive net present value.

Example Purchase & Sale Transaction with Joe and Jane :-)

Graph for Losses and Expenses

If you own & are considering multifamily or retail selling income
property in the Northwestern US; and you are in a situation similar
to Joe & Jane Multi-family, you should carefully consider the
following sample tax & cost analysis & getting an alternate plan,
which might include doing a sophisticated exchange deal involving
a JimGorman456 entity. Joe & Jane bought their property in 1985 as
an investment, they now want to retire and/or cash-out. They
remodeled once and re-roofed once.

PROFIT AND LOSS

Joe and Jane really need to consider what they want to do, with or without a Realtor, Financial Adviser, CPA, or Attorney.

  • Sell under a typical Purchase and Sale (P&S) for $800,000 scenario. Paying over $250,000 (One Quarter of a Million dollars in Taxes & Expenses. – No Es Bueno !!)
  • Do a 1031 Exchange; with or without taking boot out, which trap all or part of their equity or cash.
  • Exchange into a business relationship that will allow them to borrow; up to the cash to Seller after taxes and expenses from a purchase and sale; and become a shareholder partner in the entity exchanged into. Thus, benefiting by having spendable cash and some additional benefit from the “Tax Trapped Equity.”

Phone Jim Gorman IV at (253) 853-1408, if your interested in a no obligation discussion of your options and willing to share data on what your considering.

 

IRS Rules & Regulations of a 1031 Exchange | Call 253-853-1408

TaxesYou must not have any access to the money from the sale of your property. The easiest and most effective way to accomplish this is by using a (QI) qualified intermediary. You will sell your existing property and the money will go to the intermediary who will hold the funds in an escrow account. When you purchase your replacement (new) property, the QI will deliver the funds to the closing agent and the new property will be deeded over to you. The intermediary’s fee will vary depending on location and the number of properties involved, but they will generally charge

TIP: While using a QI is not mandatory to complete a deferred exchange,   it is strongly recommended. Without one, you have to meet one of the IRS’ complicated safe harbor requirements to successfully complete your exchange.

1. You must reinvest all of the proceeds from the sale of your property into the new property. If you do not, you will have to recognize a capital gain based on the amount of money not reinvested.

2. Once you sell your existing property, you have 45 days to identify a replacement property. You may identify more than one replacement property, but if you do, you must comply with one of the following three rules:

Property Rule – You may identify up to three replacement properties without regards to their value; OR 200% Rule – You may identify as many properties as you want as long as the total value of all the properties does not exceed twice the value of the property you are relinquishing; OR 95% Rule – You may identify as many properties as you want but the property (or properties) you eventually buy must have a value equal to at least 95% of all of the properties you identified. For example, if you identify five properties worth $1 million collectively, the property you end up buying must have a value of at least $950,000.

3. The replacement property must be of equal or greater value to the property you are relinquishing. You must trade up in value or you will end up recognizing a capital gain for the decrease in value between your old property and new property.

TIP: Since you will have fees involved in selling your property, such as brokers’ fees, intermediary fees and other closing costs, the purchase price of the replacement property should be equal to or greater than the total debt on the property you relinquish plus the net amount of money you receive from the sale of your property.
In addition, the debt on the new property must be greater than the debt on the old property or the amount of equity in the new property must be greater than the equity in the old property. However, as long as you are trading up in property value and you invest all of the proceeds being held by the intermediary into the new property, the debt/equity requirement will take care of itself. That is because either the debt will be higher due to the higher purchase price of the new property or you will have to invest your own money (equity) in the new property to make up the difference.

4. Once you sell your existing property, you must close on your new property within the earlier of 180 days or the due date of your tax return (including extensions). It is important to remember that the 45 day identification period runs concurrently with the 180 day closing period.
Example: You sell your property on June 1st. You have until July 15th (45 days from June 1st) to identify your replacement property and you must close on the replacement property by November 27th (180 days from June 1st).

TIP: If you enter into a deferred 1031 exchange and sell your property between October 1st and December 31st, be sure to file an extension for your individual tax return due on the following April 15th. Otherwise, your window to close on the new property may be reduced by as much as 2 1/2 months.

5. The QI will contact the closing agent, complete the necessary exchange paperwork and transfer the funds to escrow for the purchase of your replacement property.

6. When you file your tax return, you must report the exchange on IRS Form 8824, Like-Kind Exchanges.

There is no penalty if you change your mind about doing a 1031 exchange after engaging a QI or if you do not meet the 45/180 day requirements. The QI will return your money to you and you will be taxed on the sale of your property as if you had sold it outright. However, you will still have the pay the QI their fee.

Boot in a 1031 Exchange

The term “boot” refers to any non-like-kind property that is exchanged. Boot 2

The most common forms of boot are cash and mortgages. The general rule is that if you receive more boot than you give up, you will have to pay tax on the net amount of boot you receive.

Cash Boot

In a traditional 1031 exchange (i.e. a swap), it is difficult to find two properties that are of exact equal value. So to compensate, one party gives cash (boot) to the other to make up the difference. However, in a deferred exchange, since you are selling your property first and must reinvest all of the sale proceeds in the replacement property to fully defer the capital gains tax, you will generally not be receiving any cash boot. However, any portion of your sale proceeds that you do not reinvest in the replacement property will be considered cash boot to you and you will have to pay tax on that amount.

Mortgage Boot

Caution: Suggested that you assure an equal Mortgage on the Property Exchanged For; or recognized the need to pay taxes on Mortgage Boot.MTG GRAPHIC

Mortgage boot is very common with 1031 exchanges. If the property you are selling has a mortgage on it, the relief of the mortgage will be considered boot to you. So to make sure you do not pay taxes on that boot, you must either have a bigger mortgage on your replacement property than you did on your relinquished property or you must invest your own money in the new property to make up the difference in the purchase price.

The formula for determining boot received is as follows:

Mortgage on your property surrendered
– Mortgage on the property received
– Additional cash paid by you towards the new property *
= Net boot received (not less than zero)
+ Any cash received by you in the exchange
= Boot received

* This does not include the money invested in the new property from the sale of your old property

You will have a taxable gain to the extent of the boot received. The important thing to note here is that you will be taxed on any cash boot received regardless of how much other boot you paid.

Surviving after Fees & Taxes in the new economy

Decision Making

Sale or Exchange of Property in the Puget Sound Area

It never was easy to acquire income rental properties that good people and companies will lease or rent from you.  If you have done this, and your current aspirations are to sell or exchange your property, “please” do contact us.  We are interested in acquiring small to medium size multi-family properties in the NorthwestPreferably in the South Sound area of Washington.

Property Management acquisition, negotiations and disposition, when it is the appropriate time, needs to be evaluated rationally and not to emotionally. Gorman456 can guide you by providing you with expertise in Real Estate dispositions, acquisitions, transaction management, valuations and property performance matters. If you are or may be considering selling your income property, it could be in your best interests to chat with us, before making any RE Agent commitments or electing to sell on your own.

We are not a real estate service organization, except for offering, on a selected basis, outside Property Management services periodically and on a hyper-selective basis.  We are rather, an Income Property acquisition & amalgamation enterprise, interested in doing RE business.

If fees and taxes are causing you to anguish on making a RE disposition decision, we may have unique and mutually beneficial options for your consideration.  We’d also enjoy explaining why “Standard, Traditional & Best Practice’s” may not work well for you in our “fees & taxes economy”.

Please feel free to contact us with regards to Property Management acquisition, negotiations and disposition, especially:

If you currently own multifamily property in the Puget Sound area and are considering selling or exchanging property please do not hesitate to contact JimGorman456 by email JEGorman4@gmail.com, phone at Cell (253) 853-1408 or, the reply function below, for a no obligation discussion of your opportunities.

Exchange with Gorman 456

WordPress Equity Loss GraphOn a selective basis in the Pacific Northwest; Gorman456 offers property owners interested in getting their equity out of   income producing retail or multifamily properties (2) two options.

Option #1 is a relatively standard purchase and sale deal, either with or without an owner’s real estate agent being involved . After sale dependent on your federal tax status you may be shock at the bite fees & taxes take from your sale amount.

Option #2 is a exchange of the property into Gorman456 LLC  which can prove advantageous to owners interested in avoidance of taxes & fees that can leave an owner that follows the traditional or standard realtor assisted owner sale path with about 60% of the final sale amount.

Gorman456 encourages that you evaluate or discuss with a qualified tax attorney or CPA the taxes & fees problems might be facing in a property sale. On a property that we are interested amalgamating in to Gorman456; on a confidential basis, we will estimate for you the taxes & fees your exposed to; and may offer you an very advantageous business opportunity.

 

 

 

 

 

Puget Sound Real Estate Exchanges, Sales & Acquisitions Blog

DON’T RUN “YOUR PROFITS” DOWN THE DRAIN !!

Money drain

If you are interested in Real Estate investing or if you own directly or indirectly commercial or Multi-family income property consider this typical “Baby Boomer” hypothetical case:

Tax deferral may be critical to you

In January 1985 you bought and close on the purchase of a new 6-plex Multi-Family property for $230,000 dollars all cash or with some debt financing which is now paid off. You have rented the facility out successfully for 30 years earning an acceptable return on your invested funds since rents about kept pace with the devaluation of the dollar over this period. You have also handled all the Property Management and Maintenance issues or contracted this out.
You now want to get your cash out and enjoy life.
But how? Since significant taxes and fees could be on your horizon and you may not have done nearly as well on this investment as you thought or can.
Let’s do some calculation on how these property owners may really fair. 1985 your asset was new and worth $230,000 – what you paid for it. It’s now 30 years later and somewhat more seasoned. But if we assume its value is tied close to the U.S. Department of Labor, Bureau of Labor and Statistics Expenditure category shelter you’ll need about $700,000 today to buy that same building, or something in the range of $110,000 to $120,000 per unit.
So if, thru your investment and work have kept up with the increasing cost of goods and services and if you had $700,000 today you could buy what $230,000 would have bought you in 1985.
Your problem is now how to get as much of this $700,000 as you can; given the fees, taxes and expense you could be facing where you follow the traditional purchase and sale real estate transaction path. Fees and taxes such as:

• Realtor fees, maybe 6% of the typical facilitated Purchase and sale amount.

• Capital Gains taxes (State and Federal) & Depreciation Recapture as ordinary income and 25% tax rate.

• Affordable Care Act taxes (Obamacare Tax) at 3.8% of any gain.

• Environmental Report or modernization remodel work, if any

• Inspection repairs

• Escrow and Closing fees

• Attorney document checking

Cumulatively this can amount to in the order of a 40% disappearance of a purchase and sale amount. You get about 60 cents of the sale dollar.
One favored way to avoid this hit is do what is referred to as a 1031 Exchange which will allow you to defer some of your transaction taxes and exchange your property for another property, so long as you do not get any “boot” which you get the privilege of paying taxes on, and you will be required to comply with the IRS’s 1031 exchange regulation that are detailed and controlling. Google 1031 Exchange, under IRC Code Section 1031 and/or see URL http://www.irs.gov/uac/Like-Kind-Exchanges-Under-IRC-Code-Section-1031 for an overview or these potentially troublesome regulation which are restrictive and must be complied with, please also note the several traps and opportunities to mess up on an 1031 Exchange, which definitely, by the way, will restrict your opportunities to get cash without paying the men in black. Having a qualified intermediary is critical for a 1031 Exchange.
The prevailing idea behind the 1031 Exchange is that since the taxpayer is merely exchanging one property for another property or properties of “like-kind” there is nothing received by the taxpayer that can be used to pay taxes. In addition, the taxpayer has a continuity of investment by replacing the old property. All gain is still locked up in the exchanged property and so no gain or loss is “recognized” or claimed for income tax purposes.
In order to obtain full benefit, the replacement property must be of equal or greater value, and all of the proceeds from relinquished property must be used to acquire the replacement property. The taxpayer cannot receive the proceeds of the sale of the old property; doing so will disqualify the exchange for the portion of the sale proceeds that the taxpayer received. For this reason, exchanges are typically structured so that the taxpayer’s interest in the relinquished property is assigned to a Qualified Intermediary prior to the close of the sale. In this way, the taxpayer does not have access to or control over the funds when the sale of the property closes.
In a 1031 Exchange that you take any cash out of, for some reason this cash is called “boot” and it’s taxable. Do you ever wonder why?
Perhaps the best way is to get spendable cash from disposition of Income Property is the exchange into DST, TIC or LLC capable of lending you money where you can get the cash you want or will accept; potentially to somewhat over the limit of your estimated equity from an Income Real Estate Property after taxes and expenses.
Many owners at this stage give in and opt for a Realtor facilitated purchase and sale transaction with Taxes, Expenses and the Real Estate agent fees, and often get “helpful” guidance from your Realtor as to what the asking price of your property should be.
The Author of this “White paper” has experienced this “Independent” guidance going several ways with property owners interviewing Realtor’s. Situation #1 where the selected Realtor suggests “That he can get the highest price for the property.” Usually in the order of 5 to 15% over the other Realtor’s sale price expectation. This may or may not happen. Situation #2. Where the selected Realtor sells his or his firm’s ability to market the property and asserts he is in contact with all kinds of buyers. Situation #3. Where the Realtor sells on the capabilities and size of his Firm, or its number of Agents and the concept that “big is better.” Situation #4 where the Realtor convinces the seller that he or his firm will be comfortable, confident and trustworthy in handling the sale and will work hard to assure mutual success with the Sellers. The Author prefers the latter suggests someone do applicable local Real Estate Market Research.