Modern Real Estate Practice in Texas, 15th Edition

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Modern Real Estate Practice in Texas, 15th
Edition

• By Cheryl Peat Nance, Ed.D., DREI, CREI

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21 Leases

• Learning Objectives
• Discuss the requirements of laws related to
  leasing residential real estate
• Identify the characteristics of the four types of
  leasehold estates and the various types of leases
• Describe
• The requirements and general provisions of a
  valid lease
• How a lease may be discharged

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21 Leases

• Learning Objectives (cont.)
• Explain the key points of the Texas Landlord and
  Tenant Act
• Occupancy limits
• Rental applications
• Security deposits
• Maintenance of premises
• Smoke alarms
• Security devices
• Breach of lease

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21 Leases

• Lease, Overview
• A lease
• Is a contract between
• An owner (lessor) and a tenant (lessee)
• Transfers right to exclusive possession and use
• For a specified period of time
• Is conveyance of a leasehold estate
• Landlord retains
• rights for payment for use and
• reversionary right for possession after lease term

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21 Leases

• Related Laws
• Statute of Frauds
• Agency Disclosure - Information about Brokerage
  Services form
• Sex Offender Disclosure
• Lead-Based Paint Disclosure
• Americans with Disabilities Act (ADA)
• Fair Housing ? ? ?

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21 Leases

• Fair Housing
• Equal access to housing without differentiation
  in terms or conditions because of
• Race ?Color
• Religion ?National origin
• Sex ?Handicap
• Familial status

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21 Leases

• Fair Housing (cont.)
• Special focus on accessibility
• To allow full enjoyment of housing and related
  facilities for persons with a handicap
• Modification
• Permit a structural change to be made to premises
• Accommodation
• Make a change, exception, or adjustment to a
  rule, policy, practice, or service

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21 Leases

• Leasehold Estates
• Estate for Years
• Lease for a definite period of time
• Specific start/stop dates
• No automatic renewal
• No notice required to terminate
• Periodic Estate (Estate from Period to Period)
• Lease for an indefinite period of time
• Automatically renews with payment and acceptance
  of rent
• Notice required to terminate

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21 Leases

• Leasehold Estates (cont.)
• Tenancy at Will
• Lease for an indefinite term
• At the will of each party
• Notice required to terminate
• Terminates on death of either party
• Tenant enters rightfully and holds over rightfully

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21 Leases

• Leasehold Estates (cont.)
• Estate at Sufferance
• Previously lawful tenancy, continued without
  landlords consent
• Tenant suffered or permitted to remain
• May require eviction
• Tenant enters rightfully but holds over illegally

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21 Leases
Leasehold Estates
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21 Leases

• Requirements of a Valid Lease
• Offer and Acceptance
• Consideration
• Capacity to Contract
• Legal Objectives
• Legal Description Covenant of Quiet Possession
  (Implied)

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21 Leases

• Common Lease Provisions
• Term of Lease state start/end dates
• Possession of Leased Premises
• Use of Premises
• Improvements
• Neither party is required to make improvements
• Tenant improvements are with landlord consent and
  remain on lease termination
• Options and Right of First Refusal to renew
  lease or purchase property

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21 Leases

• Landlord and Tenant Act
• Occupancy Limits
• HUD 2/bedroom infant with parents
• Texas 3 adults/bedroom
• Owner needs a written occupancy policy

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21 Leases

• Landlord and Tenant Act (cont.)
• Rental Application
• Applicant must be given printed or online notice
  of tenant selection criteria
• Before completing the application
• Including grounds for which application may be
  denied
• Criminal history previous rental history
  current income
• Credit history inaccurate or incomplete
  application form
• Applicant must sign an acknowledgment of notice
  or acknowledge receipt online

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21 Leases

• Landlord and Tenant Act (cont.)
• Application deposit
• Similar to earnest money
• Given with rental application before lease signed
• Binds the applicant while application is
  reviewed, credit checked, etc.
• Refunded if applicant rejected
• Applied to other fees due when lease signed if
  applicant accepted

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21 Leases

• Landlord and Tenant Act (cont.)
• Application fee
• Charge to offset actual costs of screening
  applicant credit report, etc.
• Does NOT have to be returned if applicant
  rejected UNLESS
• Landlord does not have a copy of Tenant Selection
  Criteria signed by applicant

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21 Leases

• Landlord and Tenant Act (cont.)
• Security Deposits
• Safeguards against tenant destruction of premises
• Induces tenants to honor their agreement
• Encourages thorough cleaning on move-out
• Frequently 1 months rent

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21 Leases

• Landlord and Tenant Act (cont.)
• Security Deposits (cont.)
• Must be returned within
• 30 days of residential tenants surrender of
  property
• 60 days of commercial tenants surrender of
  property
• Return the money or
• An accounting for money withheld
• No obligation to return earnest money without
  tenants written notice of forwarding address
• Transferred to a new buyer not prorated upon
  sale of property

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21 Leases

• Landlord and Tenant Act (cont.)
• Late fees
• Must be specified in the lease
• Must be a reasonable estimate of damages to
  landlord for getting rent late
• May be charged after rent has been unpaid one
  full day after the initial due date rent due on
  the 1st late fees, on the 3rd

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21 Leases

• Landlord and Tenant Act (cont.)
• Assignment and Subleasing
• May not assign or sublease without landlords
  consent
• Maintenance of Premises
• Tenant Must return the property in same
  condition received, reasonable wear and tear
  excepted
• Landlord Units and common elements must be in
  habitable condition - Habitability Statute

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21 Leases

• Landlord and Tenant Act (cont.)
• Smoke Alarms
• Must be installed in all residential rental
  property
• Unless rented under 90 days through a sale
• Must be in each bedroom and a corridor that
  serves multiple bedrooms
• Must install for hearing-impaired, if asked
• Must be in good working order when tenant moves
  in
• Presumed to be working until tenant requests
  repair
• Tenant must replace batteries

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21 Leases

• Landlord and Tenant Act (cont.)
• Security Devices
• Specified by law
• Window latches doorknob locks
• Sliding door handle latches and pin locks
• Keyless deadbolts
• Door viewers on each exterior door
• 7 days to rekey locks after new tenant occupancy

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21 Leases

• Discharge of Leases
• Termination of Lease
• May be terminated by
• Expiration of lease term estate for years
• Notice from either party (written usually)
• Periodic estate and tenancy at will generally
  30 days notice
• Active military duty
• Victim of family violence or sexual assault,
  under certain circumstances

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21 Leases

• Discharge of Leases (cont.)
• Landlord termination of lease and eviction if
  tenant breaks the lease
• Mutual agreement
• Tenant abandonment
• Tenant liable for terms of leaseincluding rent
• Landlord duty to mitigate damages

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21 Leases

• Discharge of Leases (cont.)
• Foreclosure of property
• May 20, 2009 - December 31, 2014
• Protecting Tenants at Foreclosure Act
• Renter of foreclosed property may remain until
  the end of the lease
• Unless the tenant has no lease or
• The purchaser intends to use the property as a
  primary residence then a 90-day notice required

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21 Leases

• Discharge of Leases (cont.)
• Foreclosure of property
• January 1, 2015
• Return to Texas law
• Leases executed after the date of the mortgage
  require a 30-day notice to vacate before a lease
  can be terminated

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21 Leases

• Discharge of Leases (cont.)
• Termination Does Not Occur
• When the Owner or Tenant Dies
• Heirs are bound by the lease
• Landlord of deceased tenant has duty to mitigate
  damages
• When the Landlord Sells the Property
• Purchaser is bound by the lease

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21 Leases

• Discharge of Leases (cont.)
• Breach
• Landlords lockout remedy
• Suit for possessionactual eviction
• Tenants remedyconstructive eviction

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21 Leases

• Breach of Lease
• Landlords lockout remedy for nonpayment of rent
• Must give tenant 3-5 days notice that locks are
  going to be changed
• Include amount of rent due
• Designate where rent can be paid to avoid lockout
• Can use lockout remedy only once per payment
  period
• If locks are changed ? ? ?

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21 Leases

• Breach of Lease (cont.)
• Landlords Lockout Remedy (cont.)
• If locks are changed
• No legal resident can be inside
• Landlord must leave written notice on the door
• Amount of rent and other charges due
• 24-hour address or phone number for tenant to get
  a key
• If no on-site location for key pickup, owner must
  deliver a key within 2 hours after the tenant
  calls

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21 Leases

• Breach of Lease (cont.)
• Suit for PossessionActual Eviction
• For breach of any terms of the lease
• Owner must give a 3-day notice of suit
• Suit for possession or forcible detainer suit
• Must be heard in court within 10 days
• If court issues a judgment for possession to the
  owner,
• Tenant has 5 days to file an appeal

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21 Leases

• Actual Eviction (cont.)
• After 5 days or after appeal
• Court may issue a writ of possession to the owner
• Within 48 hours after receiving the writ, owner
  must deliver written notice to the tenant that
  the writ will be enforced
• Tenant must remove himself or herself and
  possessions

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21 Leases

• Actual Eviction (cont.)
• If tenant does not vacate
• Deputy sheriff or constable will oversee forcible
  removal of tenant and possessions
• During or after eviction suit
• Owner can file suit for damages, lost rent,
  attorneys fees

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21 Leases

• Breach of Lease (cont.)
• Tenants remedyconstructive eviction
• If certificate of occupancy is revoked, landlord
  must
• Return security deposit and prorated rent
• Reimburse tenant for expenses
• If landlord breaches lease, tenant can sue for
  damages
• If premises become uninhabitable, tenant may
  abandon them constructive eviction ? ? ?

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21 Leases

• Breach of Lease (cont.)
• Tenants Remedy (cont.)
• To claim constructive eviction, the tenant
• Must give written notice to landlord
• Must abandon the premises while uninhabitable
• Tenant entitled to prorata refund of rent paid or
• Seek court order requiring repairs (up to
  10,000) and awarding damages to tenant

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21 Leases

• Types of Leases
• Gross Lease
• Net Lease
• Percentage Lease
• Variable Lease
• Ground Lease
• Oil and Gas Lease

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22 Property Management

• Learning Objectives
• Describe
• A property managers functions
• The basic elements of a management agreement
• Explain the property managers role in
• Budgeting
• Renting
• Maintaining property

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22 Property Management

• Learning Objectives (cont.)
• Identify
• Techniques a manager may use to attract, select,
  and retain quality tenants
• The characteristics of an effective rental
  collection policy
• A property managers primary responsibilities
  regarding compliance with consumer protection and
  privacy laws
• Distinguish the property managers
  responsibilities for handling environmental and
  risk management concerns

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22 Property Management

• Property Management Overview
• Leasing, managing, marketing, and maintenance of
  real estate owned by others
• Real estate license required unless on-site
  apartment manager or employee of owner

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22 Property Management

• Property Management Overview (cont.)
• Property manager Someone who preserves the
  value of an investment property while generating
  income as an agent for the owners may be
• A general agent for the owner
• Sharing operational liabilities with the owner
• An independent contractor
• Bearing almost all operational liabilities

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22 Property Management

• Elements of a Management Agreement
• Description of property
• Time period
• Definition of managers responsibilities
• Statement of owners goals
• Extent of managers authority
• Reporting requirements
• Compensation
• Allocation of costs

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22 Property Management

• Activities of the Property Manager
• Administration
• Marketing
• Physical Management

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22 Property Management

• Management Functions
• Hiring and supervising employees
• Budgeting expenses
• Controlling expenses
• Keeping detailed records
• Making periodic reports

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22 Property Management

• Marketing Functions
• Setting rental rates
• Selecting tenants
• Tenant Selection Criteria printed notice
• Identity Theft and Privacy Laws
• Fair Credit Reporting Act
• Fair and Accurate Credit Transactions Act of 2003
• Red Flag Rules

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22 Property Management

• Marketing Selecting Tenants (cont.)
• Identity Theft and Privacy Laws (cont.)
• FTC privacy rule best practices
• Get permission from rental to give out info.
• Get request in writing from third parties
• Texas privacy laws
• Owners privacy policy if SSN required on
  application
• Identity Theft Enforcement and Protection Act
• U.S. Patriot Act

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22 Property Management

• Marketing Selecting Tenants (cont.)
• Telemarketing
• Federal Do-Not-Call Registry
• State No Call List
• Junk Fax Prevention Act
• CAN-SPAM and Texas Anti-Spam
• Collecting Rents
• Resident Retention

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22 Property Management

• Physical Management Functions
• Maintaining the Property
• Preventive
• Repair or Corrective
• Routine
• Construction
• Handling Environmental Issues

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22 Property Management

• Risk Management
• Avoid it
• Control it
• Transfer it share it
• Retain it

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22 Property Management

• Risk Management (cont.)
• Common Insurance Coverage
• Fire and extended coverage
• Business interruption
• Liability
• Workers compensation
• Casualty
• Surety bonds
• Flood and hurricane

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22 Property Management

• Risk Management (cont.)
• Specialty Insurance Coverage
• Errors and omissions
• Lead liability
• Employment practices liability
• Liquor liability
• Employee benefits liability
• On-site pollution liability
• Tenant discrimination legal expense
• Terrorism coverage

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22 Property Management

• Professional Management Organizations
• Institute of Real Estate Management
• Building Owners and Managers Association
  International
• International Council of Shopping Centers
• National Apartment Association
• Texas Apartment Association

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23 Control of Land Use

• Learning Objectives
• Identify the various types of
• Public and private land-use controls
• Subdivision regulations
• Distinguish the function and characteristics of
• Building codes
• Zoning ordinances

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23 Control of Land Use

• Learning Objectives
• Describe the environmental issues an agent must
  understand to protect his clients interests
• Basic hazards
• Discovery methods
• Disclosure responsibilities
• Liability issues
• Explain
• Major real estate industry green initiatives
• Their goals for reducing the overall impact on
  human health and the environment

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23 Control of Land Use

• Public ControlsComprehensive Plan
• Expresses community goals
• Designates areas for residential, commercial and
  industrial development
• Indicates location for community facilities and
  utilities
• Proposes means for transportation
• Recommends procedures for historic preservation,
  downtown renewals, flood control, and
  environmental concerns
• Lists actions to carry out the plan

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23 Control of Land Use

• Public Controls - Zoning
• Police Powerto regulate use of private land
• Prevents incompatible adjacent use
• Restricts height/size of buildings
• Provides setbacks
• Controls density
• Promotes aesthetic values
• Enforced through requirements for building permits

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23 Control of Land Use

• Public Controls - Zoning (cont.)
• Use Classifications
• Residentialsingle family
• Residentialmulti-family
• Commercial
• Industrial
• Agricultural
• Planned Unit Development Buffer
  zonesTransition between uses

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23 Control of Land Use

• Adoption of Zoning Ordinances
• Planning and Zoning Commission (PZ) recommends
  zoning ordinances to City Council for approval
• Validity of ordinances require that
• Power be exercised in reasonable manner
• Provisions be clear and specific
• Ordinances not discriminate
• Ordinances promote public health, safety . . .
• Ordinances apply to all property similarly

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23 Control of Land Use

• Zoning Issues
• Zoning Map Amendment
• Notification of property owners within 200'
• Newspaper notice of public hearing
• Public hearing and governing body vote
• Spot zoning
• Amendment differing significantly from area plan
• Not permitted by courts if only one owner
  benefited

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23 Control of Land Use

• Zoning Issues (cont.)
• Conditional use permit
• Allow a property use if stipulated conditions are
  met
• Benefit a neighborhood
• Nonconforming use
• Building or use no longer conforms to zoning
  classification
• Usually permitted to remain until use or
  ownership changes

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23 Control of Land Use

• Zoning Issues (cont.)
• Variance
• Exception to a zoning ordinance a waiver from
  compliance
• Granted when an ordinance would cause undue
  hardship to the owner
• Usually for height of building, setback, etc.
• Benefits one parcel only
• Requests for a variance Heard by the Zoning
  Board of Adjustment (ZBA)

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23 Control of Land Use

• Zoning Board of Adjustment (ZBA)
• Hears complaints about effects of zoning
  ordinances on a specific property
• Board members must be free of personal or
  political influence
• ZBA decisions appealed to court

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23 Control of Land Use

• Extraterritorial Jurisdiction (ETJ)
• Subdivision of land within ½ to 5 miles of a town
  must be approved
• Purchasers of property outside a city limits must
  be given a disclosure that the property might be
  annexed in the future
• City must give 3 years notice prior to
  annexation (in most cases)
• City may unilaterally annex without permission of
  persons living in that area

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23 Control of Land Use

• Process of Land Development
• Initial Planning Stage
• Developer finds land
• Subdivision plat drawn up by licensed surveyor
• Subdivision regulations
• Initiated by city planning staff
• Streets lot dimensions
• Sewers water mains utility easements
• Areas reserved for public use

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23 Control of Land Use

• Process of Land Development (cont.)
• Final Planning Stage
• Approval of final plans and plat
• By PZ and/or City Council
• Plat recorded with county clerk
• City issues a permit to developer
• Developer obtains permanent financing
• Final budgets are prepared
• Marketing programs are designed

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23 Control of Land Use

• Process of Land Development (cont.)
• Disposition or Start-Up Stage
• Streets, curbs, gutters, utilities are installed
• Open areas are landscaped
• Marketing programs are initiated
• Individual lots are sold to builders for home
  construction

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23 Control of Land Use

• Building Codes
• Ordinances that specify construction standards
• Must be met when repairing or erecting buildings
• Set requirements for
• Kinds of materials sanitary equipment
• Electrical wiring fire prevention standards

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23 Control of Land Use

• Building Codes (cont.)
• Building permit required before construction or
  alteration begins
• To verify compliance with building codes and
  zoning ordinances
• Does not verify compliance with deed restrictions
• Structures built without permits may have to be
  dismantled
• After structure is completed
• City inspector issues a certificate of occupancy,
  if found satisfactory

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23 Control of Land Use

• Private Land Use Controls
• Deed Restrictions or Restrictive Covenants
• Placed on property by a developer
• In a deed or separate recorded declaration
• Restrict use
• Type of building type of construction
• Height, setbacks, size, cost
• May NOT restrict owners rights to sell,
  mortgage, or convey

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23 Control of Land Use

• Deed Restrictions (cont.)
• Private transfer fees
• Fee paid to developer on sale of property
• Not permitted after June 15, 2011
• Existing transfer fees must be filed and renewed
  with county clerk
• If not, void
• Written disclosure must be given to a purchaser

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23 Control of Land Use

• Deed Restrictions (cont.)
• Limited effective term, such as 25 years
• May be extended by majority of owners
• Validity of a deed is not affected if a
  restriction found void by a court
• Enforced by JP court injunction

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23 Control of Land Use

• Deed Restrictions (cont.)
• Altering deed restrictions or restrictive
  covenants 2 methods
• ? By waiver
• All owners, mortgage lenders, and original
  developer must agree
• ? By judicial process filing a lawsuit

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23 Control of Land Use

• Private Land-Use Controls (cont.)
• Conditions
• Deed can be subject to conditions whereby title
  may revert to the seller
• Determinable fee estate
• Fee simple subject to a condition subsequent

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23 Control of Land Use

• Land Use Control Issues
• Public ownership
• State ownership 1 of Texas land
• Federal ownership 4 of Texas land
• Floodplains
• Interstate Land Sales Full Disclosure Act

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23 Control of Land Use

• Environmental Protection
• Texas Environmental Concerns
• Ozone nonattainment
• Impaired water bodies
• Water supplies
• Toxics Release Inventory
• Superfund sites
• Wetlands
• Endangered and threatened species

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23 Control of Land Use

• Environmental Protection (cont.)
• Disclosure and Discovery of Hazards
• Sellers Disclosure of Property Condition
• Lead-Based Paint
• Conditions under the Surface
• Environmental assessment addendum
• Certified/licensed inspectors, consultants, and
  remediators
• Environmental auditors
• Phase I site assessment

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23 Control of Land Use

• Environmental Protection (cont.)
• Environmental Responsibility and Liability
• CERCLA Identify responsible parties and order
  cleanup action
• Landowner may be liable for cleanup regardless of
  who created the contamination
• Innocent landowner immunity ? ? ?

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23 Control of Land Use

• Environmental Protection (cont.)
• Environmental Responsibility and Liability
  (cont.)
• Innocent landowner immunity
• A landowner who was completely innocent should
  not be held liable
• Must have no actual or constructive knowledge of
  the damage
• Must have had a Phase I site assessment before
  purchase
• Must not be environmentally damaged

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23 Control of Land Use

• Environmental Protection (cont.)
• Environmental Responsibility and Liability
  (cont.)
• Real estate professionals
• Responsible for discovery and disclosure
• Appraisers
• Lenders
• Property and mortgage insurance companies

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23 Control of Land Use
Environmental Hazards
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23 Control of Land Use

• Green Initiatives
• Going Green
• A philosophical and social movement centered on
  a concern for the conservation and improvement of
  our natural resources.
• HUDs definition

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23 Control of Land Use

• Green Initiatives (cont.)
• Green Building Programs
• Designed to reduce the impact of buildings on
  human health and the environment
• Efficiently using energy, water, and other
  resources
• Protecting occupant health and improving employee
  productivity
• Reducing waste, pollution, and environmental
  degradation

The City of Dallas adopted a city-wide green
building ordinance for new construction in 2008
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23 Control of Land Use

• Green Initiatives (cont.)
• Green Building Certifications
• Energy Star EPA and Department of Energy
• LEED U.S. Green Building Council
• National Green Building Standard (NGBS) National
  Association of Home Builders and the
  International Code Council

84
23 Control of Land Use

• Green Initiatives (cont.)
• Green Mortgages
• Energy Efficient Mortgage (EEM)
• New home built to Energy Star or similar energy
  efficient standards typically
• Energy Improvement Mortgages (EIM)
• Include funds for energy-efficient improvements
  to an existing home

85
23 Control of Land Use

• Green Initiatives (cont.)
• Tax Incentives
• Texas
• Ad valorem property tax exemption for the value
  of renewable energy improvements
• Incentive programs for improving energy
  efficiency such as Austin Energys Green
  Building Program

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23 Control of Land Use

• Green Initiatives (cont.)
• Tax Incentives
• Federal
• Residential Energy Efficiency Tax Credit
• Available periodically for energy efficient water
  heaters, doors, windows, insulation . . .
• Residential Renewable Energy Tax Credit
• Up to 30 of qualified expenditures for a system
  serving a residence
• Through December 31, 2016

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23 Control of Land Use

• Green Initiatives (cont.)
• Remediation Programs
• Texas
• Reduction of greenhouse gas emissions
• Clean energy
• Off-shore carbon dioxide storage
• U.S. Government
• Waste disposal
• Zero net energy buildings
• Green building certification with Energy Star

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23 Control of Land Use

• Green Initiatives (cont.)
• Everyday Green Living
• Suggestions? Ideas?
• The Real Estate Professional
• NAR Green Designation
• Becoming an expert in your community

89
24 Real Estate Investment

• Learning Objectives
• Explain the advantages and disadvantages of
  investing in real estate
• Describe major components of the investment
  decision
• Property appreciation
• Income potential
• Use of leverage and pyramiding

90
24 Real Estate Investment

• Learning Objectives (cont.)
• Identify the key tax benefits of investing in
  real estate
• Distinguish the types of real estate investment
  syndicates and/or trusts

91
24 Real Estate Investment

• Investing in Real Estate
• Real Estate Assets
• Real Estate Securities

92
24 Real Estate Investment

• Considerations for Prospective Investors
• Pros
• Above-average rate of return (usually)
• Tax benefits
• Hedge against inflation
• Leverage of funds
• Equity buildup

93
24 Real Estate Investment

• Considerations for Prospective Investors (cont.)
• Cons
• Illiquidity
• Risk
• Change in laws
• Possibility of negative cash flow
• Requires personal attention of investor
• Expert advice needed

94
24 Real Estate Investment

• Investment Purposes
• Appreciation
• Inflation
• Intrinsic value
• Income
• Cash flow and cash flow management
• Tax Shelter
• Deductibility of interest and other expenses
• Depreciation

95
24 Real Estate Investment

• Leverage
• Use of Borrowed funds
• Make a small down payment
• Get the lowest interest rate
• Obtain the longest mortgage term
• Equity Buildup
• Repayment of principal
• Appreciation in property value
• Equity can decrease

96
24 Real Estate Investment

• Leverage (cont.)
• Pyramiding through Refinancing
• Refinance one property
• Released equity used to buy more property

97
24 Real Estate Investment

• Tax Benefits
• Capital gains tax
• Basis Initial cost
• Adjusted Basis Cost improvements
  depreciation taken as a tax deduction
• Capital Gain Selling price Selling expenses
  Adjusted basis Capital Gain
• Depreciation
• Income tax deduction
• Recover cost of investment

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24 Real Estate Investment

• Tax Benefits (cont.)
• Installment sales
• Receive payment in installments over 2 or more
  years
• Pay income tax each year based on amount received
  in that year
• Tax Credits
• Direct reduction in tax due
• Generally low-income housing projects and
  historic properties

99
24 Real Estate Investment

• Tax Benefits (cont.)
• 1031 Exchanges
• Taxes deferred not eliminated
• Like-kind properties
• Boot
• Net debt relief
• Old property Relinquished property
• New property Replacement property

100
24 Real Estate Investment

• 1031 Exchanges (cont.)
• 3 Methods
• Direct, Simultaneous Exchange ? ?
• ? Delayed Exchange ? ?
• ? Reverse Exchange ? ?

101
24 Real Estate Investment

• 1031 Exchanges (cont.)
• ? Direct, Simultaneous Exchange
• Two people trade properties in one transaction
• Cannot occur if old and new properties are not
  both identified at the same time

102
24 Real Estate Investment

• 1031 Exchanges (cont.)
• ? Delayed Exchange
• Old property is sold then new property is found
• The Identification Rule 45 days to find
  possible replacement properties
• Three-Property Rule
• 200 Rule
• 95 Rule
• The 180-Day Rule Time limit to close on new
• All funds must pass through a third-party
  qualified intermediary

103
24 Real Estate Investment

• 1031 Exchanges (cont.)
• ? Delayed Exchange (cont.)
• Requires
• Title Names on title on new property must match
  names on old property
• Reinvestment To avoid capital gains taxes
• New property must have equal or higher value than
  old and
• All equity must be reinvested in new property and
• New property must have equal or more debt than old

104
24 Real Estate Investment

• 1031 Exchanges (cont.)
• ? Reverse Exchange
• New property is found then old property is sold
• Exchange Accommodation Titleholder required
• Rules are more complicated than for Delayed
  Exchange!!!
• Careful planning is crucial in a 1031 exchange!
• Enter into it only with professional assistance!

105
24 Real Estate Investment

• The Tax Reform Act of 1986
• Limits deductibility of losses from rental
  property
• 2 categories of investor
• Active
• Personally manages the day-to-day or
• Makes management decisions, hiring others to
  provide services
• Passive
• Contributes investment money
• Has no voice in management operations

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• The Tax Reform Act of 1986 (cont.)
• Active Investor may deduct
• Up to 25,000 of loss to offset income from any
  source
• 100,000 maximum taxable income (before rental
  loss deduction is taken) to be eligible for full
  deduction
• Passive investor
• Offset investment losses only against investment
  income

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• The Tax Reform Act of 1986 (cont.)
• Real estate professionals not subject to passive
  loss limitations if
• Materially participates in activities
• Spends at least 750 hours in real property
  businesses
• Performs more than 50 percent of personal
  services in real property businesses

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• Investment Syndicates
• Pool resources to own property
• Tenancy in common, partnership, corporation,
  trust
• Private syndication versus Public syndication
• Blue-sky laws
• Securities laws

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• Real Estate Investment Trust (REIT)
• No corporate income tax if
• 90 percent of income distributed
• 100 or more investors
• 75 of assets in real estate or related assets
• 3 investment vehicles ? ? ?

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• Real Estate Investment Trust (REIT)
• 3 Investment Vehicles
• Equity REIT Buys/sells large scale investment
  properties
• Mortgage REIT Buys/sells mortgages
• Combination REIT Invests in properties and
  mortgages

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• Real Estate Mortgage Investment Conduits (REMIC)
• Tax device allowing cash flows from a block of
  commercial mortgages to be passed directly to
  investors