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B428 Real EstateB428 Real Estate
Day 5Day 5Leases, Income Tax, 1031 Leases, Income Tax, 1031 Exchanges, Lending and Exchanges, Lending and
BorrowingBorrowing
Environmental WarningEnvironmental Warning
Responsible parties liable:Responsible parties liable:Parties who arranged disposalParties who arranged disposal
Parties who transportedParties who transported
Prior ownerPrior owner
Current ownerCurrent owner
LiabilityLiabilityAll costs of removal, restorationAll costs of removal, restoration
costs of private partiescosts of private parties
damagesdamages
health costs related to contamination health costs related to contamination
Income Tax IssuesIncome Tax Issues
Purchase and Sale of PropertyPurchase and Sale of Property• Capital asset?Capital asset?• Gain or loss?Gain or loss?
Income Tax continuedIncome Tax continued
OwnershipOwnership• DepreciationDepreciation• Passive incomePassive income• Passive lossPassive loss
Review of Income Tax AspectsReview of Income Tax Aspects
Real estate must qualify as a capital Real estate must qualify as a capital asset to get capital gains treatment.asset to get capital gains treatment.
Sales by dealers do not get capital Sales by dealers do not get capital gains treatment.gains treatment.• Inventory and real estate used in Inventory and real estate used in
taxpayer’s trade or business aren’t taxpayer’s trade or business aren’t capital assetcapital asset
• Possible tests: frequency of sales, Possible tests: frequency of sales, subdividing, promotional activitiessubdividing, promotional activities
Holding period is one year.Holding period is one year.
Intro to LeasesIntro to Leases
Lease Durations: How long do they Lease Durations: How long do they last?last?• Houses and apartments, month to month, Houses and apartments, month to month,
annualannual• Office space, 3 – 5 years (What about Office space, 3 – 5 years (What about
renewals)renewals)• Retail, small- 1-2 years, malls 10 to 20 Retail, small- 1-2 years, malls 10 to 20
yearsyears• Industrial, 3 -5 yearsIndustrial, 3 -5 years• Ground LeasesGround Leases
Income Tax MattersIncome Tax Matters
Taxable IncomeTaxable Income
NOI-Interest-DepreciationNOI-Interest-Depreciation
Cash Flow does not equal Taxable Cash Flow does not equal Taxable IncomeIncome
Sale of PropertySale of Property
Sales PriceSales Price
LESSLESS
Adjusted Basis =Adjusted Basis =
Taxable GainTaxable Gain
Passive Loss LimitationsPassive Loss Limitations
Taxpayer may not offset passive losses Taxpayer may not offset passive losses
against other income.against other income.
Exceptions for RE InvestorsExceptions for RE Investors
Individual rental property ownersIndividual rental property owners
RE professionals, material RE professionals, material involvementinvolvement
Material Involvement DefinedMaterial Involvement Defined
More than ½ of all personal services More than ½ of all personal services during the year are for real property during the year are for real property trades or businesses in which they trades or businesses in which they materially participate.materially participate.
ANDAND Perform more than 750 hours of Perform more than 750 hours of
service per year in those RE activitiesservice per year in those RE activities
Common Area ChargesCommon Area Charges
Charged for the use of space “in Charged for the use of space “in common” with otherscommon” with others
Examples: Hallways, parking, Examples: Hallways, parking, recreation, landscaping, reception recreation, landscaping, reception areasareas
Lease ProvisionsLease Provisions
Base RentBase Rent Step-up ProvisionsStep-up Provisions
• Increase in costs (management, Increase in costs (management, maintenance…)maintenance…)
• Specific IndexSpecific Index
Most commonly, the CPI (Consumer Price Most commonly, the CPI (Consumer Price Index)Index)
Lease Provisions Continued…Lease Provisions Continued…
Percentage RentsPercentage Rents Net LeaseNet Lease Limitations on Assignment and SublettingLimitations on Assignment and Subletting Destruction of PremisesDestruction of Premises Insurance of Premises and ContentsInsurance of Premises and Contents Options to renewOptions to renew Options to purchaseOptions to purchase
What Smart Landlords Put in Their What Smart Landlords Put in Their LeasesLeases
Require sufficient advance payment of rentRequire sufficient advance payment of rent Require adequate security depositRequire adequate security deposit Prohibit assignment or subletting without Prohibit assignment or subletting without
permissionpermission Retain permission to enter the premises for Retain permission to enter the premises for
inspection at reasonable timesinspection at reasonable times Secure permission to show the property to new Secure permission to show the property to new
tenants toward the end of the leasetenants toward the end of the lease Use rent escalation clausesUse rent escalation clauses Limit the number of persons permitted to use the Limit the number of persons permitted to use the
apartmentapartment
Smart Landlords continued…Smart Landlords continued…
• Use percentage leases on commercial Use percentage leases on commercial property to permit participation in profits property to permit participation in profits of the tenantof the tenant
• Require the tenant to make repairs and do Require the tenant to make repairs and do maintenancemaintenance
• Have regulations or rules for the benefit of Have regulations or rules for the benefit of all tenantsall tenants
• Avoid exclusion clauses which limit the L’s Avoid exclusion clauses which limit the L’s ability to lease remainder of the propertyability to lease remainder of the property
Termination of LeasesTermination of Leases
Expiration of LeaseExpiration of Lease Mutual AgreementMutual Agreement Breach of the Lease (Default)Breach of the Lease (Default) Eviction (Unlawful Detainer)Eviction (Unlawful Detainer) Constructive EvictionConstructive Eviction
• Is there a statute?Is there a statute?• Rent abatementRent abatement
Unlawful DetainerUnlawful Detainer
The BasicsThe Basics DefinitionDefinition ProcedureProcedure
• Three day noticeThree day notice• Service of noticeService of notice• Action for possessionAction for possession• EnforcementEnforcement
Tax Deferred ExchangeTax Deferred Exchange
Section 1031 IRCSection 1031 IRC• Both properties (relinquished and acquired) must be Both properties (relinquished and acquired) must be
held for business or investment purposes.held for business or investment purposes.• Must be like-kind.Must be like-kind.• Exchange must actually occur.Exchange must actually occur.• Basis in acquired property equal to basis in relinquished Basis in acquired property equal to basis in relinquished
property plus any “boot.”property plus any “boot.”
BOOTBOOT
Boot is a general term for property in Boot is a general term for property in an exchange which is not like-kind.an exchange which is not like-kind.
• Boot is taxableBoot is taxable
• Boot is not limited to cashBoot is not limited to cash
Two VariationsTwo Variations
Three Party ExchangesThree Party Exchanges
Delayed ExchangesDelayed Exchanges• Owner of relinquished property identifies replacement Owner of relinquished property identifies replacement
property within 45 days of transfer.property within 45 days of transfer.
• Exchange is completed using a third party specialist within Exchange is completed using a third party specialist within 180 days or due date of tax return, whichever sooner180 days or due date of tax return, whichever sooner
• Owner of relinquished property must not receive the Owner of relinquished property must not receive the proceeds from the relinquished property.proceeds from the relinquished property.