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A 1031 Exchange is a tremendous tax-deferment strategy used by many real estate investors. It is very important to follow the 1031 Exchange rules and to not create any red flags to the IRS.

You should avoid refinancing close in time to the date of an exchange. If you do the IRS may view any recent re-adjustment of debt as a tax avoidance trick and treat any loan proceeds received as taxable. Any new loan could be viewed as an artificial attempt to reallocate liabilities to avoid tax liabilities.

As an example, a taxpayer anticipating receipt of $500,000 in proceeds might want to only reinvest $400,000 into replacement property. The $100,000 that the exchanger does not want to reinvest will be taxed at the applicable capital gains rate.

A refinance loan arranged just prior to the exchange might be attempted to avoid this taxable result – i.e. just before exchanging, the taxpayer increases their existing loan balance by $100,000, puts the $100,000 cash into their own pocket and proceeds with the exchange while reducing their cash proceeds. They are thinking they have avoided the tax obligation on $100,000. However, this re-adjustment of existing debt would be deemed an impermissible tax avoidance mechanism by the IRS.

And trying to do a similar refinancing at the time of the exchange or shortly after, the same result may occur. As an example, a taxpayer who exchanges into a replacement property with a loan of $300,000 (required by the equities on the property he exchanged out of) shortly thereafter increases that new loan to $375,000 and obtains $75,000 cash. The result is what the taxpayer intended-i.e. $75,000 cash in pocket and a higher loan amount on the newly acquired property.

The IRS may treat this the same as a taxpayer failing to invest all their net cash proceeds in the replacement property as required.  They instead obtained a higher loan amount to put cash in their pocket.

There are times when doing a 1031 exchange refinancing is needed. If this is the case, careful planning is a must so the refinance becomes a minimal risk of a potential unfavorable tax liability.

Careful Planning Tips

A taxpayer refinancing close just befor, during, or shortly after an exchange should consider the following in structuring the loan transaction:

(1) Avoid integrating the refinance transaction with the exchange transaction.

Complete any pre-exchange refinance as far in advance as possible of the exchange. Try to do it before listing the property or before entering into any agreement related to the sale/exchange of the property.

Any post-exchange refinance should be a separate transaction from the exchange. Make sure that no agreements related to or in anticipation of the refinance are done or even negotiated during the pending 1031 exchange.

(2) If a refinance is close in time to an exchange, scrutinize the documents and the transaction as one to make sure the forms accurately reflect the essence of the transaction.

(3) Make sure the loan has an economic importance independent of the exchange (e.g., lower interest rate, more favorable terms, pre-existing need to refinance).

(4) Never use refinancing to reallocate existing liabilities for the sole purpose of tax avoidance.

The 1031 Exchange is an important tool in building wealth for real estate investors. But it is important to be fully aware of how and when you finance your investments.

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7 Fundamentals to a Joyful and Robust Life in Real Estate

Fundamentals are essential in any endeavor. As a real estate professional, you have an opportunity to create a lifestyle filled with joy, along with financial reward. My 7 Fundamentals to a Joyful and Robust Life in Real Estate will help guide you to building a brighter future.

1.  Combine your life style with your business style. Think about the type of business you want and the lifestyle you desire. Do you work so you can play? Or because you love your job? Or both? Keep yourself in balance. Success is different for everyone; the key is to make it work profitably and work well for you. Define your goals, then write a business plan. Refer back to your business plan whenever you feel lost or off-track. Readjust it as your directions change.

2.  YOUR business, YOUR way. You need to be yourself to handle the pressures in real estate. Be true to who you are. Be observant and learn from others, but adapt concepts and techniques into your own style. If you are built like a running back, be a running back. Don’t try to be a horse jockey. You will crash and burn if you pretend to be someone other than your true self. Stretch your comfort zone but stay who you are. Your future will thank you.

3.  Environment is important. We absorb what we are around. Make sure your physical workspace, your associates and the real estate model in which you work all maximize your ability to perform. You must feel good in your environment. A proper environment will put a smile on your face and give you an upbeat attitude that will radiate and affect your clients. Would you rather be in a situation where you are swimming upstream and making life hard, or go with the current and be more productive? Commission plans are important, but the overall environment is more important. When you are in an environment that fits you well, helping clients becomes a natural byproduct.

4.  Eat some humble pie from time to time. Someone who acts like they know everything doesn’t gain clients’ trust. Educate yourself enough to know a lot, but be humble – and honest — enough to tell clients if you need to get some answers. In real estate, you will have contact with various personalities and styles. Clients are like homes: none are perfect and they are different from one another. Being both humble and educated, you become open to ideas and solutions that will help you with all the types of clients you will encounter.

5.  Organize for action, not perfection. You are self-employed: the chief cook and bottle washer of your business, so you must to be organized. Setting up your systems and implementing them is important. But don’t get caught up in perpetual planning of perfection and falling into “getting ready” for business. Helping clients is Job One. Do things that bring in business. Create leads, follow leads, get in front of people. Own your day, get in the action.

6.  Automate. Putting technology to work for you will ultimately give you more time for both business and personal life. Establish automated workflows for buyers, sellers and escrows. Automate delivering valuable information to your sphere. Create landing pages on your website to generate leads. Choose systems and technology that are best for your business style, not just because they are the latest technology. Whether you are one person, a team or a small office, automation gives you time for things that require your personal touch.

7.  Start your day with real estate knowledge. First thing each morning, get up to speed on real estate news and activity in your market. Scan the headlines and articles of industry news. Go into your MLS and view the daily market report of new listings, under contracts, price changes, expirations and sold listings. Fortifying your knowledge daily puts you in excellent position when a casual conversation with an acquaintance turns into one in which he or she asks you a real estate question. Then you will prove yourself to be the local expert they have been seeking.

Create the future of your dreams by taking care of these 7 fundamental elements. When you do, your life and career can become joyful and robust.


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January nationwide existing-home sales for 2017 are off to a fast start.

  • National Association of Realtors (NAR) report existing-home sales for January went up 3.3 percentage points to a seasonally adjusted annual rate (SAAR) of 5.69 million.
  • January sales followed December 2016 upward trend of 5.51 SAAR.
  • The January 2017 sales data is 3.8 percentage points above January 2015 and is the fastest SAAR sales pace in nearly a decade.
  • Strong sales were in the Northeast, South and West. Whereas the Midwest experienced a small decline.

Will the fast start be an indication of a strong market for all of 2017? Data on inventory indicates it may be, but may take a few more months of upward supply in inventory to create enough buyers to take action.

  • Housing inventory moved up 2.4 percentage points to 1.69 million homes for sale following a rock bottom month of inventory in December of 2016.
  • Inventory is still 7.1 percentage points below January 2016 and at a 3.6 month supply.

NAR Chief Economist Lawrence Yun says, “Much of the county saw robust sales activity last month as strong hiring and improved consumer confidence at the end of the year appear to have sparked considerable interest in buying a home.”

“Market challenges remain, but the housing market is off to a prosperous start as homebuyers staved off inventory levels that are far from adequate and deteriorating affordability conditions,” Yun said.

National sales trends are just that, very national. Real estate markets have always been very local and can be contrary to national trends. For the latest market trends from a local perspective contact your local expert!