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coffee adAuthor: Staff

Real estate investment in California, as a matter of course, involves buying and selling real property. An investor may decide to sell a piece of real property as part of an investment plan, such as after purchasing a distressed residential property and rehabilitating it. A sale may also be a result of conditions that require an investor to get out of a bad investment.

Regardless of the reason for putting a property on the market, California law requires numerous disclosures about the property. Many of these disclosures required by law are ultimately the responsibility of the seller, whether or not they are assisted by a real estate broker. Real estate investors in California should be aware of these disclosures and their legal obligations.

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Author: Matthew Riley

PART 2 – The exchanger must intend to hold the replacement property (acquired property) for productive use in a trade or business or for investment purposes.

In Part 1 of this blog series about 1031 like-kind exchanges, we discussed a real estate investor’s relinquished property (the property an investor is selling), and the requirements such property must meet under Section 1031 to qualify for a like-kind exchange.

If an exchanger’s relinquished property meets Section 1031 requirements, then the next set of questions involve the replacement property, which we discuss, here, in Part 2.

One central inquiry is to investigate the exchanger’s intention in acquiring and using the replacement property.  For an exchange to receive tax-deferred treatment, the exchanger must intend to predominantly use the replacement property in furtherance of a trade or business, or as investment property.

Many of the same issues raised in Part 1 about relinquished properties are the same for replacement properties.  Therefore, our discussion about how requisite intent for relinquished property also applies for replacement property.

Here, in Part 2, I will focus attention on particular holding requirements for replacement properties, highlighting two things:

First, a safe-harbor provision for a specific and common type of replacement property––secondary and vacation homes; and secondly, specific requirements unique to replacement property, which the exchanger must meet when selecting such properties.

(a)      Safe Harbor for replacement properties the exchanger intends to use as a second residence or vacation home?

The safe-harbor requirements for secondary residences or vacation homes are the same as I articulated for relinquished secondary or vacation homes. See Part 1.1. For these types of property, Revenue Procedure 2008-16 provides that if the exchanger meets its requirements it has established the requisite intent for the replacement property.

Under the safe-harbor requirements, the exchanger must own the home for two years immediately after the exchange, and for each of those years, or 12-month periods, the Exchanger must both:

(1) Rent the unit at a fair market rate for 14 or more days; AND

(2) Restrict their personal use to the greater of 14 days – OR – 10% of the number of days it was rented at a fair market rate within that 12 month period.

An investor must follow these requirements to defer their taxes under Section 1031.

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luxury villaAuthor: Staff

California’s tourism industry is a source of pride across the state. For a savvy real estate investor, vacation rentals might seem like an obvious venture. Tourists need places to stay, after all, and why not offer them an alternative to hotels? Well, not so fast. The legal status of vacation rentals in California is not at all clear. Numerous restrictions may apply, including city ordinances and homeowners’ association (HOA) rules. The “sharing economy” has further complicated the legal landscape throughout the state. San Diego real estate investors should be extra diligent when considering going into the vacation rental business.

What Is a Vacation Rental?

homeAuthor: Staff

The financial commitments required in real estate investing can vary in size and scope, from purchasing a handful of shares in a real estate investment trust (REIT) or real estate syndicate to purchasing a house or office building. The latter type of real estate investment generally requires a substantial outlay of cash. Very few individual investors have that kind of money on hand, but a prudent investor should always explore ways to avoid putting their own money at risk. Numerous resources exist for financing real estate investment purchases and projects. Real estate investors should carefully review their options. Identifying the best type of financing depends on the property or project, the resources available to the investor, and the investor’s goals.

Types of Real Estate Investments

For rent signAuthor: Staff

Real estate investment can take many forms and offers many ways to obtain a return on one’s investment. Some investors purchase real property in order to make improvements and sell it, while others may purchase property with the goal of leasing it for rental income. Leases on real property can be broadly divided into two categories:  residential and commercial. While residential leases are subject to a wide range of legal restrictions aimed at protecting tenants, commercial leases allow far greater flexibility. Both types of leases involve their share of risks, from the hassle of collecting unpaid rent to the possibility of serious damage to the property. Commercial real estate investors in San Diego should be aware of the opportunities—and liabilities—that commercial leases have to offer.

How Are Commercial Leases Different from Residential Leases?

ForeclosureAuthor: Staff

Real estate ownership, both residential and commercial, frequently involves financing some portion of the purchase price with a mortgage loan. Should an owner stop making payments to a lender, the lender can attempt to recover the balance of the loan through foreclosure:  the forced sale of the property at auction, often at a below-market price. This presents opportunities, but also risks, for real estate investors. Understanding the foreclosure process and the potential liabilities involved is essential for California real estate investors who are interested in “distressed” properties.

What Is a Foreclosure?

house keysAuthor: Staff

Investing in real estate involves far more than just buying and selling land. A real estate investment can consist of a complicated web of assets, obligations, and contractual relationships. This latter category is crucially important for California real estate investors to understand, since the duties created by contracts can have far-reaching effects. Leases are a type of contract in which the owner of real estate (the “lessor”) allows someone (the “lessee”) to use that real estate as their home or for business purposes. A lessor has multiple duties under a typical lease agreement, and California law imposes numerous additional obligations on lessors in residential settings.

What Is a Lease?

A lease is a contract between a lessor and a lessee. According to the statute of frauds, a lease agreement must be in writing. It is possible—but generally not advisable—to have an enforceable oral agreement for a month-to-month lease.

The lessor provides the exclusive use of the leased property, and the lessee pays rent. If either party fails to fulfill their obligations, they may be liable to the other party for breach of the lease. California law makes a distinction between residential and commercial leases. It generally imposes more restrictions on lessors in residential lease agreements.
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La JollaAuthor: Staff

Real estate investments have generated income for investors for about as long as the concept of private ownership of real property has existed. The fundamental concepts of real estate investment have not changed much over the centuries, but relatively recent innovations allow investors to entrust their money to professionals, freeing them from direct responsibility for managing investment properties. Real estate syndication allows investors to contribute capital to a development project under the management of a syndicator. Real estate investment trusts (REITs) own and manage portfolios of real estate holdings. Syndicates and REITs differ from each other in several important ways. Potential investors should understand these differences before deciding where to put their money.

Syndicates versus REITs

The most fundamental difference between syndicates and REITs involves their relative size and scope. REITs are, essentially by definition, larger than syndicates. They have more investors, and they generally manage portfolios aimed at longer-term holdings. Guidelines for the structure and management of REITs are found in the federal Internal Revenue Code (IRC).

Syndicates tend to be less formal than REITS, with fewer specific legal guidelines or restrictions. They are usually limited to a small number of development projects and therefore tend to focus on holdings and revenues on a shorter time scale than REITs. You can read our many articles about real estate syndication here.

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CrowdfundingAuthor: Staff

The internet and social media have changed the way people communicate in a vast number of ways. They also offer numerous opportunities—and hazards—for investors. Securities laws and regulations have struggled to keep up with new technologies. A process known as “crowdfunding,” by which individuals and businesses solicit small donations from the general public for specific projects or causes, has become increasingly popular in the past few years. A bill enacted by the U.S. Congress in 2012 allows crowdfunding for investment purposes, subject to various rules. Real estate investors may also now invest in ventures, including real estate syndicates, through crowdfunding platforms.

What Is Crowdfunding?

A typical “crowdfunding” campaign seeks to raise money for a specific project through small contributions. Platforms offered by companies like Kickstarter and GoFundMe allow individuals to contribute via a website or a mobile app. Kickstarter is generally known for creative projects like films, while GoFundMe is known for more charitable causes, like raising money to help pay medical bills.

Contributions to crowdfunding campaigns on this type of platform are not “investments,” since the contributor does not receive equity in the project. Contributors to a Kickstarter project may receive a reward defined in the campaign. For example, people who contribute $20 might get a t-shirt, and people who contribute $50 might get a t-shirt and a poster. Investing through a crowdfunding platform requires compliance with securities laws.

One prominent example of a real estate crowdfunding company is RealtyShares.

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Author: Matthew Riley

 How do you characterize vacant and unproductive land that is not used for personal enjoyment nor in furtherance of any trade or business purpose?

As we described in a prior article, for property to qualify for a Like-Kind Exchange the real estate investor must hold it for productive use in a trade or business, or for investment purposes.  But what about property that is unproductive, meaning that it does not provide any profitable income to the owner, or that perhaps even creates losses for them?  What about acquired property that an owner has left untouched or unimproved?

You can read our summary of 1031 Exchanges here. You can read our articles about the tax advantages of real estate here.

Treasury Regulation 1.1031(a)-1(b) explains that “Like-Kind” refers to the “nature of character of the property and not to its grade or quality.”  The regulation further states that “[o]ne kind or class or property may not, under [Section 1031], be exchanged for property of a different kind or class.”

IRS Publication 544 outlines different kinds or classes of property eligible for like-kind exchanges.  Real estate is one kind or class of property, but other property classes exist. The IRS, for example, has created general asset classes for personal property– some of these include the following:

  1. Asset Class 00.12 – Information systems, such as computers and peripheral equipment.
  2. Asset Class 00.21 – Airplanes (airframes and engines), except planes used in commercial or contract carrying of passengers or friend, and all helicopters (airframes and engines).
  3. Asset Class 00.23 – Buses

What Treasury Regulation 1.1031(a)-1(b) does is restrict property exchanges between any two different and distinct classes– an office building considered to be in the real estate class cannot be exchange for a Learjet 85, considered to be in the airplane class or asset class 00.21; The IBM Sequoia supercomputer in the asset class 00.12 cannot be exchanged for a Justin Bieber Tour Bus in the asset class 00.23.

In other words, the IRS is talking about apples and oranges.  Apples can be exchanged for any other apple because they are the same kind of fruit.  But you cannot exchange an apple for an orange, because these are two different types or classes of fruit.  But again, any apple can be exchanged for any other apple.  A Red Delicious apple can be exchanged for a Granny Smith or Fiji; a rotten apple on the ground can be exchanged for one picked from the apple tree.  The reason this analogy works is because the exchange is occurring within the general class of apples, and the differences that exist are due to the variety of types and qualities existing between any two apples within that class.

Under the general and broad property class, “real estate”, there are countless types and qualities of real estate. The IRS is not concerned with the peculiar qualities of the properties being exchanged, whether the property is a warehouse or pasture, profitable or not to the owner, they are only looking to see whether the properties are both classified as real estate.  Whether the land is vacant or unproductive, therefore, is not material to whether the property is eligible for an exchange.

There are, however, two important caveats to this general rule:

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