Seattle 1031 Rules

While many know of the general 1031 rules and application, few know the details of the 1031 process and exact what is allowed to be identified prior to the 45 day identification period. Below is a brief overview of some the limitations of what can be identified. For more formation, consider contacting a Seattle 1031 Broker. 

Identification Rules and Exceptions (1031 Exchange ID Rules)

For a successful 1031 that is IRS compliant, you must comply with at least one of the following identification rules or exceptions when completing the identification of your like-kind replacement properties:

Three (3) Property Identification Rule

The three (3) property identification rule limits the total (aggregate) number of like-kind replacement properties that you can identify to three (3) potential like-kind replacement properties.  The vast majority of Investors today use this three (3) property identification rule.

You could acquire all three of the identified like-kind replacement properties as part of your 1031 Exchange, but most Investors generally only acquire one of the three identified properties.  The second and third identified properties are merely identified as back-up like-kind replacement properties in case you can not acquire the first property.

You can skip the three (3) property identification rule and use the 200% of Fair Market Value Rule if you are trying to diversify your investment portfolio and wish to identify more than three (3) like-kind replacement properties.

200% of Fair Market Value Identification Rule

The IRS allows you to identify more than three (3) like-kind replacement properties as long as the total (aggregate) fair market value of all the identified like-kind replacement properties does not exceed 200% of the total (aggregate) net sales value of your relinquished property(ies) sold in your 1031 Exchange.  The limitation is only on the total (aggregate) identified value.  There is no limitation on the total number of like-kind replacement properties. 

For example, if you sold relinquished property(ies) in the amount of $2,000,000 you would be able to identify as many like-kind replacement properties as you want as long as the total (aggregate) value of the identified like-kind replacement properties does not exceed $4,000,000 (200% of $2,000,000).

95% Identification Exception

Its good to have choices, but be careful with this exception.  It is an exceptionally useful tool under the right circumstances, but can present some tricky problems. 

You may need to identify significantly more like-kind replacement properties than the first two identification rules permit.   There is no limit as to the total (aggregate) number or value of identified like-kind replacement properties permitted under the 95% exception as long as you actually acquire and close on 95% of the value identified.

However, if you do not acquire and close on at least 95% of the value of the identified like-kind replacement properties the entire 1031 Exchange transaction will be disallowed.

Hopefully, you find this helpful! For more information consider reaching out to a Kirkland 1031 Real Estate Broker.

You can reach me direction at the following: 

Scott Weitz

Kirkland Real Estate Attorney/ Designated Broker

University of Washington LLM in Taxation

T: (206) 306-4034

Scott@ryleepark.com

Seattle Business Sale: Asset vs. Stock Sale

Although deal lawyers generally describe their practice as involving “mergers and acquisitions,” the sale of a small or medium-sized business is usually structured as either an equity sale or an asset sale. Which structure is right for you depends on your circumstances. Below is a cursory overview of some of the differences between Asset and Stock Sales. That said, no two deal are the same so its best to look at sales on a case by case basis. For more information on a Seattle Business Sale, consider check our a Seattle Business Sale Broker, or call me (Scott) at 206.306.4034

Two ways of structuring a business acquisition:

Equity sale (Stock Sale): buyer purchases the equity from the owner or owners of the target company — stock in the case of a corporation and membership interests in the case of a limited liability company. The business is transferred to the new owners, corporate (or limited liability company) entity and all, and the target (i.e., the business being purchased) becomes a wholly-owned subsidiary of the purchaser. There is no change in the status of the target entity itself, and its contracts, assets, and liabilities remain with the entity.

Asset sale: specified assets are transferred from the target company to the purchaser, while the corporate or limited liability company entity remains in place and continues to be owned by its owners. The assets transferred might be all of the target company’s assets, or they might be more limited in scope. Similarly, some or all of the target’s liabilities might be transferred to the purchaser or retained by the target company, although most of the liabilities often stay with the target.

Pros and Cons

Now let’s take a look at some issues that buyers and sellers need to consider when structuring a business acquisition. In general, buyers prefer asset sales and sellers prefer equity sales.

Which one do I use? 

Do the parties want all of the target’s assets and liabilities to be transferred to the business buyer?

In an equity sale all of the assets and liabilities remain with the target company, so if the parties want only some of the target’s assets be transferred to the buyer, then an asset sale will be preferable. In addition, if the buyer wants to leave some or all of the target’s liabilities with the seller, then an asset sale will be preferable, because the buyer indirectly assumes responsibility for all of the known and unknown liabilities of the target when a transaction is structured as an equity sale.

As a practical matter, I always prefer Asset Sales for small business buyers to protect from the unknown liabilities (State & Local Taxes, IRS, etc)

Tax considerations

An advantage to the buyer of an asset sale is that the buyer can allocate the purchase price for tax purposes among the various purchased assets to reflect their fair market value. In addition, the buyer’s tax basis in the assets is equal to the purchase price of the assets. In the case of assets that have been depreciated by the target company, the buyer’s basis in the assets is higher than it would be on the books of the target company.

A disadvantage to the seller of an asset sale is the double taxation that can result if the target is a C corporation. The sale of assets is generally a taxable event that results in the assessment of tax at the corporation level. The sale proceeds are taxed again when they are distributed to the shareholders in the form of a dividend. In contrast, in an equity sale, the seller generally pays the applicable short-term or long-term capital gains rate on the sale of his or her stock, and there is only one level of taxation.

Governmental authorizations, permits, and licenses

Some governmental authorizations, permits, and licenses are not transferable. If the target company holds such permits and licenses, an equity sale might be preferable to avoid the necessity of transferring them to the purchasing company. Structuring a transaction as an equity sale won’t solve the problem in all cases, but it often does.

Contracts requiring consent for assignment

If the target company has important contracts that aren’t assignable without the consent of the target’s counter-party due to anti-assignment clauses contained in the contracts, an equity sale might be preferable. Because the target’s contracts remain intact in an equity sale, they generally are not assigned and thus consent isn’t required. The parties should use caution, however, because some contracts define “assignment” to include a change of control, which would be triggered in the event of an equity sale.

State corporation laws

State corporation laws need to be considered when a business is sold via an asset sale. The sale of all or substantially all of a corporation’s assets generally requires the approval of the corporation’s board of directors and shareholders. In contrast, a stock sale does not require the approval of the target company’s board of directors, although in most cases it requires the consent of all the shareholders.

For More Information on selling a Kirkland, WA business, consider contacting a Kirkland Business Broker. 

You can reach me directly at: 

Scott Weitz, Attorney, Designated Broker

Rylee Park Properties

T: (206) 306-4034 or scott@ryleepark.com

Seattle Short Sales: Extension of Mortgage Debt Relief Act 2014

Great news: Congress (Finally) pass a package of tax extensions approved by the U.S. House and Senate, and headed to the President’s desk for signature, includes important provisions that will help distressed homeowners and commercial property investors with transactions made during 2014. See original article here. 

The law will be extended through 2015. 

Why its important: 

Imagine losing a life savings in a underwater property....then you sell it and/or have it foreclosed...and get hit with a large tax bill from Uncle Sam. If it doesn't sound fair, its because it isn't. We applaud Congress for finally extending this law. 

For more information on your rights contact a Kirkland Real Estate Broker call us for a free consult. 

About us: 

Rylee Park Properties 

520 Kirkland Way, Ste 103

Kirkland, WA 98033

T: (206) 306-4034

Seattle Housing Continues to soften

NWMLS Report: 

Market continues to soften around Seattle according to recent stats put out by the NWMLS. 

We'll use the year over year since since those are typically better indicators than the monthly fluctuations (although the monthly indicators indicate similar issues). 

1. Listings are up 9.6% which creates a large supply of homes. 

2. Closed Sales are down 2.9% yoy. 

3. Months of supply are up 12.9%

4. Median price is up 5.9%, but we would expect that number to decrease as the items 1-3 will likely create a drag on the market in the coming months. 

....Time will tell. 

For more information on your rights contact a Kirkland Real Estate Broker, call us today at (206) 306-4034 or you can email us at scott@ryleepark.com 

Seattle Update: Mortgage Debt Forgivess Act

AP - A recent article on the status of the Mortgage Debt Relief Program.

Foreclosures have been dropping dramatically over the past year, but without help from Congress they could begin to rise again. In 2007, Congress passed a tax exemption for mortgage debt forgiveness. That exemption expired at the end of 2013 and has not been extended, as some predicted it would be.

The recent foreclosure crisis was one of the most dire episodes in U.S. housing history, but it could have been even worse had the banks not forgiven billions of dollars in mortgage debt. Much of that was mandated by legal settlements with the federal government and state attorneys general. Since 2007, banks have approved approximately 2.8 million short sales, according to Black Knight Financial Services. A short sale is when the home is sold for less than the amount of the mortgage.

There is support in Congress for an extension, as well as among state attorneys general and housing advocates. Several bills are being considered that could extend the tax relief through 2015 or 2016, but with the much broader move to overhaul the entire tax code, they appear to be getting lost in the shuffle.

It is difficult to put an exact number on principal reduction mortgage modifications, but they number in the millions as well. All together, billions of dollars were expunged on paper and not taxed as income, as they would have been prior to 2007. These foreclosure alternatives helped and continue to help bring down the number of homes being lost today.

Loans in the foreclosures process are down nearly 28 percent from a year ago, according to Black Knight, but the pipeline, while no longer growing, is still large. More than 3 million borrowers are behind on their mortgage payments, and 1.24 million are in the foreclosure process. Many of those delinquent borrowers could avoid foreclosure through a short sale or principal reduction loan modification.

Even banks and investors could get hurt if borrowers can no longer afford short sales. Short sales have helped to clear much of the distress from the housing market, especially in states where the foreclosure process requires a judge. Those states have huge backlogs of delinquent loans.

"With fewer short sales, you're going to see longer liquidation timelines, so you're going to see more full foreclosures and REOs [bank repossessions]," said Sean Nelson of Fitch Ratings. "With longer timelines, you have more costs associated with liquidation of the properties. More costs translates to lower recoveries for investors.

Weitz - this article is pretty self-explanatory, but we still continue to believe the law will be extended...someday. Without it, foreclosures and bankruptcies would increase dramatically and that is not good for anyone.


For more information, consider contacting a Kirkland Real Estate Broker.


Our Firm:

Rylee Park Properties
520 Kirkland Way, Ste 103
Kirkland, WA 98033


206.306.4034

Extension of the Mortgage Debt Relief Act

Weitz - A great piece in the Washington Post today. Rumor has it their is something in writing to extend the law, but Congress hasn't put it to a vote yet. We'll let you know as we hear anything.

There’s a tax break for struggling homeowners that Congress should not have let expire just before the new year. If it’s not extended, some people selling their homes could get big tax bills.

As the housing crisis in the middle of the last decade drove people into foreclosure, many borrowers were not aware that forgiven debt — including on mortgages — is considered income.

In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act to help people who were down on their luck financially because of the loss of their homes.

The concern was well placed. If people couldn’t afford to keep their homes, sending them a large tax bill just seemed cruel.

The tax exemption played an important role as borrowers who were unable to refinance their mortgages ended up selling them through so-called short sales, in which the lender allows the borrower to accept a price that is less than the amount owed. Often, borrowers trying to get out from under a mortgage can negotiate to have the remaining balance forgiven.

The tax break was supposed to end in 2009. But it was extended twice through Dec. 31, because many people still needed help. It was a decent thing to do. Up to $2 million of forgiven debt qualified for the exclusion ($1 million if married filing separately).

In addition to foreclosures or short sales, debt reduced because of a mortgage restructuring also qualified for relief.

It might not make sense to have to pay taxes on forgiven debt because it isn’t money that was earned. You aren’t taxed on borrowed money because you have an obligation to repay it. However, money you borrow that is then canceled as a result of a foreclosure or short sale counts as income.

If the debt is forgiven, the lender is required to report the amount because you no longer have an obligation to repay the money. Let’s say someone owes $200,000 on a home but can sell it for only $125,000. The difference, $75,000, would be considered taxable income.

Critics argue that it’s time to move on. Allowing the tax break means less revenue for the federal government. Additionally, some taxpayers may be able to still get around owing taxes on forgiven debt if they qualify under what’s called the insolvency exclusion. You may not have to include forgiven debts as income if you can show that your total liabilities exceed your total assets.

Weitz - an exception to the tax is either by filing bankruptcy or insolvency (debts exceed assets), or even foreclosure in some states (including Washington). The reality is that we will push many more clients toward bankruptcy or foreclosure (rather than short sale) which won't be good for the economy.

Yet let’s get real here, folks. This is a tax break that needs to be restored — and immediately.

Yes, things are a lot better than in the depths of the housing crisis. In many areas, as housing prices increase, fewer owners are underwater, meaning they owe more than the home it worth.

However, the housing market still hasn’t fully recovered. Things are better, but not great. In November, the number of properties that received a foreclosure filing was 37 percent lower than in the same month a year before, according to RealtyTrac. But there are still a lot of people who may lose their homes.

More than 1.2 million properties are in some stage of foreclosure, RealtyTrac reports. And some states hardest hit by the housing crisis are still seeing high foreclosure rates. RealtyTrac’s November foreclosure report found that five states posted year-over-year increases in bank repossessions: Delaware (179 percent), Maryland (41 percent), Connecticut (9 percent), Maine (6 percent), and Iowa (2 percent).

Weitz - more than 1.2 Million homes in foreclosure status...that is still staggering...and why we don't think this real estate rally will persist.

In a letter to congressional leaders in support of an extension, the National Association of Attorneys General pointed out that an estimated 7.1 million homes with mortgages, or 14.5 percent nationally, are still in negative equity.

“We continue to believe that this relief is crucial to both the homeowners struggling to regain their financial footing and to the battered housing market whose recovery is slow and still uncertain,” the attorneys general said.

As part of JPMorgan Chase’s $13 billion settlement with the Justice Department and other federal and state partners stemming from misrepresentations about mortgages that were sold, the bank agreed to include consumer aid in the form of forgiveness of portions of people’s principals. Certainly borrowers who might get some of their mortgage debt forgiven as part of that settlement or others because of misconduct by financial institutions shouldn’t face a tax bill.

Extending the mortgage forgiveness tax break is the right thing to do.

Weitz - Agreed! Wake up, Congress! Lets extend this law. We bailed out the banks with real government money. All you are doing is adding insult to injury for folks who lose their primary residence.  

For more information contact a Kirkland Real Estate Broker. 

Seattle Housing Market- Regulation's future

Three Factors That Could Shape the Fate of Housing Overhaul

 At last month’s annual mortgage-industry trade show, most political and industry analysts agreed that there aren’t great odds that Congress will pass a bill addressing the future of Fannie Mae and Freddie Mac before 2014, let alone 2016.

Weitz - Congress CAN'T end Fannie or Freddie because they provide lending or guarantees for a majority of loans these days. Abolishing Fannie and Freddie would destroy the housing market and Congress knows it.

Several developments unfolding right now could make the next five or six months among the more consequential periods for housing-finance policy since the companies were taken over by the government five years ago. Here are three reasons why:

First, Fannie and Freddie are now reporting large profits. This could make it easier for the company’s defenders—who were silent when the firms were hemorrhaging cash during the bust—to more forcefully lobby in favor of less dramatic changes. By next February, when both companies report their fourth quarter earnings, both firms should be able to say that they’ve sent more in dividends to the U.S. Treasury than the amounts they were forced to borrow over the previous five years.

Rising profits could also trigger an important but obscure change in federal budgeting, where congressional accountants “score” the firms as revenue-generating entities. If that happens, Congress would either have to raise revenue or cut spending elsewhere as part of any overhaul.

Second, the Obama administration is moving ahead with plans to install a permanent director to the independent agency that oversees Fannie and Freddie, the Federal Housing Finance Agency. The director of the FHFA is an incredibly powerful job because it can stand in the shoes of the shareholders and board of directors of both companies, plotting long-term strategy and making day-to-day management decisions.

Third, the Senate Banking Committee is working in a bipartisan fashion towards constructing a comprehensive housing-finance overhaul bill that will address the future of Fannie and Freddie.

Bipartisan agreement is far from assured. It involves threading a needle between three general groups: the centrist supporters of the Corker-Warner bill, liberal Democrats who want to see a larger government role (particularly in affordable housing), and conservative Republicans who are wary of continued, heavy federal involvement in the mortgage market.

Whatever the committee produces will essentially mark the starting point for what, if anything, Congress is able to pass in 2015 or 2017. In other words, even if this is only the first inning, a number of key decisions could get made here that define the boundaries for the rest of the game.

House Republicans have advanced their own bill with no Democratic support, which should serve as one end point for any overhaul. How far the more-conservative House Republicans are willing to bend to support a greater federal role in housing could determine how soon a bill arrives on the president’s desk.

Lawmakers further out on the left, meanwhile, are likely to insist that this new system provides sufficient credit access to low- and moderate-income households. They’re wary of any market in which government guarantees mostly serve the borrowers that arguably need them the least. Among the key questions to unfold: what does the White House do if liberals decide that the centrist Senate bill doesn’t go far enough?

The upshot is that the next few months could show whether there’s any reasonable chance of getting legislation passed while Mr. Obama is in office, or whether these decisions will get kicked down the road beyond 2017. For 

Weitz - It will be interesting to watch, but our guess is much of this is classic congressional rhetoric that will not effectuate any materials changes for the indefinite future. Fannie and Freddie were a major reason why the market has recovered as they stepped in to fill the lending void when bank lending dried up. We simply don't see how that can be taken away and not lead a significant fall for Real Estate.

For more information contact a Kirkland Real Estate Broker. 

Seattle Real Estate Update

Tuesday's jobs report showed that construction employment is up strongly, but in many other ways, the report was bad for housing, according to a report by Trulia Chief Economist Jed Kolko.

 The reason: Young adults aren’t getting jobs, a factor that weighs on household formation — the single most important factor to long-term housing demand.

 About 75 percent of 25-to-34-year-olds were employed in September, about the same as September 2012 and closer to the depths of the recession than before the housing bubble started forming. Young people who don’t have a job are more likely to live with their parents and become “missing households” that aren’t renting or buying their own place.

That’s bad for the broader economy in all sorts of ways, such as lower spending on things such as furniture. These missing households are part of the reason why first-time homebuyers have been lagging in the housing recovery.

Weitz - this is an issue that will continue to linger over the economy. Most young graduates are entering the work force to find a very difficult job environment. I think 'under employment' is a huge problem as kids with degrees from great schools are being forced to work in jobs that do not utilize their education.

This coupled, with the huge increase in student loan debt over the past 10 years will be  a drag on the economy for years to come.

 The jobs report is just the latest piece of economic data to pour some cold water on this year’s housing recovery. Existing-home sales were down 1.9 percent in September from a month earlier, in part because of higher interest rates. The month-earlier pace was revised downward.

To be sure, housing is far better off than it was a year ago. The July/August sales pace was the best since 2009, and inventories, while up, remain low by historical standards.

 Still, it’s fair to say that housing has cooled off from the torrid pace seen in spring and summer. Online real-estate brokerage Redfin reported that its gauge of home bidding wars fell for the sixth month in a row in September.

Weitz - It will be interesting to see where the market goes from here. Based on inventory increasing, we anticipate that prices will lower, but much of it is interest rate driven and that is an unknown at the current time.

Contact us at Kirkland Real Estate Broker

Rylee Park Properties 

520 Kirkland Way, Ste 103

Kirkland, WA 98033

(206) 306-4034

Fannie, Freddie ease lending crunch during shutdown

Fannie Mae and Freddie Mac have relaxed rules that would have kept banks from approving mortgages during the government shutdown.

Typically, Fannie and Freddie require lenders to verify a borrower's income with the Internal Revenue Service before closing on a mortgage. But last week, some lenders reported that they could not approve the mortgages because the shutdown had severely curtailed the IRS's operations.

The government-backed mortgage giants have since said lenders could continue to issue new loans even without the IRS's confirmation.

Borrowers who apply for mortgages will still need to sign an income verification request with the IRS. But verification can wait until after the government shutdown ends, and lenders can use other means to verify a borrower's income.

Wells Fargo, the nation's biggest mortgage lender, had originally said all mortgage applications would have to wait until the shutdown ends. But now it is telling underwriters they can move mortgage applications through the pipeline without the completed IRS verification, said Tom Goyda, a spokesman for the bank.

Some banks, however, may be more cautious, according to David Stevens, president and CEO of the Mortgage Bankers Association. Stung by a flood of defaults after the housing bubble burst, lenders are especially wary of borrowers who claim earnings from self-employment or who supplement their wages with freelance work, consulting or other less-thoroughly documented income sources.

In cases like those, said Stevens, lenders may seek to verify the information on a borrower's 1040 by asking for a copy of their bank statement from the month they deposited their 2012 tax refund or copies of the check they sent to the IRS to pay their taxes.

A small percentage of lenders -- perhaps 10% or fewer -- may decide that lending without the IRS income verification is too risky, said Stevens. If a mortgage defaults, Fannie or Freddie could force the lender to shoulder the losses.

"There's less appetite for risk, after the fiscal crisis," said Stevens. And that could be enough to scare some lenders into waiting until the shutdown ends.

For more information on your rights in Real Estate, consider contacting a Kirkland Real Estate Broker.

Our Firm:

Rylee Park Properties
520 Kirkland Way, Ste 103
Kirkland, WA 98033
T: 206.306.4034