B428 Real Estate

1
B428 Real Estate

• Day 5
• Leases, Income Tax, 1031 Exchanges, Lending and
  Borrowing

2
Environmental Warning

• Responsible parties liable
• Parties who arranged disposal
• Parties who transported
• Prior owner
• Current owner
• Liability
• All costs of removal, restoration
• costs of private parties
• damages
• health costs related to contamination
  
  

3
Mechanics Liens

• Who?
• How?
• Duration?

4
Income Tax Issues

• Purchase and Sale of Property
• Capital asset?
• Gain or loss?

5
Income Tax continued

• Ownership
• Depreciation
• Passive income
• Passive loss

6
Review of Income Tax Aspects

• Real estate must qualify as a capital asset to
  get capital gains treatment.
• Sales by dealers do not get capital gains
  treatment.
• Inventory and real estate used in taxpayers
  trade or business arent capital asset
• Possible tests frequency of sales, subdividing,
  promotional activities
• Holding period is one year.

7
Intro to Leases

• Lease Durations How long do they last?
• Houses and apartments, month to month, annual
• Office space, 3 5 years (What about renewals)
• Retail, small- 1-2 years, malls 10 to 20 years
• Industrial, 3 -5 years
• Ground Leases

8
Income Tax Matters

• Taxable Income
• NOI-Interest-Depreciation
• Cash Flow does not equal Taxable Income

9
Sale of Property

• Sales Price
• LESS
• Adjusted Basis
• Taxable Gain

10
Passive Loss Limitations

• Taxpayer may not offset passive losses
• against other income.
• Exceptions for RE Investors
• Individual rental property owners
• RE professionals, material involvement

11
Material Involvement Defined

• More than ½ of all personal services during the
  year are for real property trades or businesses
  in which they materially participate.
• AND
• Perform more than 750 hours of service per year
  in those RE activities

12
Tenant Deposits

• RENT
• OR
• SECURITY

13
Common Area Charges

• Charged for the use of space in common with
  others
• Examples Hallways, parking, recreation,
  landscaping, reception areas

14
Lease Provisions

• Base Rent
• Step-up Provisions
• Increase in costs (management, maintenance)
• Specific Index
• Most commonly, the CPI (Consumer Price Index)

15
Lease Provisions Continued

• Percentage Rents
• Net Lease
• Limitations on Assignment and Subletting
• Destruction of Premises
• Insurance of Premises and Contents
• Options to renew
• Options to purchase

16
What Smart Landlords Put in Their Leases

• Require sufficient advance payment of rent
• Require adequate security deposit
• Prohibit assignment or subletting without
  permission
• Retain permission to enter the premises for
  inspection at reasonable times
• Secure permission to show the property to new
  tenants toward the end of the lease
• Use rent escalation clauses
• Limit the number of persons permitted to use the
  apartment

17
Smart Landlords continued

• Use percentage leases on commercial property to
  permit participation in profits of the tenant
• Require the tenant to make repairs and do
  maintenance
• Have regulations or rules for the benefit of all
  tenants
• Avoid exclusion clauses which limit the Ls
  ability to lease remainder of the property

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Termination of Leases

• Expiration of Lease
• Mutual Agreement
• Breach of the Lease (Default)
• Eviction (Unlawful Detainer)
• Constructive Eviction
• Is there a statute?
• Rent abatement

19
Unlawful Detainer

• The Basics
• Definition
• Procedure
• Three day notice
• Service of notice
• Action for possession
• Enforcement

20
Tax Deferred Exchange

• Section 1031 IRC
• Both properties (relinquished and acquired) must
  be held for business or investment purposes.
• Must be like-kind.
• Exchange must actually occur.
• Basis in acquired property equal to basis in
  relinquished property plus any boot.

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BOOT

• Boot is a general term for property in an
  exchange which is not like-kind.
• Boot is taxable
• Boot is not limited to cash

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Two Variations

• Three Party Exchanges
• Delayed Exchanges
• Owner of relinquished property identifies
  replacement property within 45 days of transfer.
• Exchange is completed using a third party
  specialist within 180 days or due date of tax
  return, whichever sooner
• Owner of relinquished property must not receive
  the proceeds from the relinquished property.

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The Final Test

• Issue
• Rule
• Analysis
• Conclusion