Part 2 of Susie Leivas on The Norris Group Real Estate Radio Show
Bruce Norris is joined once again by Chief Financial Officer with Leivas and Associates, Susie Leivas.
Bruce starts by asking about 1031 exchanges. Many California real estate investors took money out of California to dodge the price declines and are now bringing it back into California. Bruce asks Susie to expand on the 1031 exchange concept. They start by talking on what like-for-like means.
Susie says like-for-like means you can buy any real estate. However, it can’t be personal property. You can switch from investment single family residence for land, as an example, as long as it is an investment property. Boot can happen if money is not spent in an exchange. So when a replacement property is not of higher value and there’s extra left over in the exchange, if it doesn’t get reinvested in like-kind, that left over portion can be taxable. When you close escrow on the property you sold, you only have 45 days to find a replacement property and 180 days to close. If an agent suggests backdating the paper work, DON’T DO IT. Backdating can cause you tax penalties and jail time. The IRS takes this fraud seriously.
Out-of-state ownership of property could require investors to file for that state tax. Depending on the filing status and age of applicant, the Federal Government has an amount cap and after that is hit, the gross amount must be filed. Many states are the same. Check with your tax professional. In California, investors must report their world-wide income which goes on the Federal and California State return. If there is an additional state, they can give you a credit for filing in an additional state which is dollar for dollar.
Worldwide income is required and Bruce asks if investors can deduct world wide losses. Susie says she’s never had a client do that so she’s not sure.
Bruce and Susie talk about precious metal sales and if they are on the honor system. The process doesn’t have an escrow and it’s hard to track. Susie does not know if the IRS has a way of tracking. If the IRS was tracking, they would be looking for deposits that seem odd.
Bruce asks about refinancing properties and 1031 exchanges. Susie says there will be deductible interest issues and there could be a tracing problem.
Bruce talks about credit lines and investors. Many investors in California don’t realize rules about limits on deductible interest. Only $100,000 is allowed. Beyond that, if it can’t be proven that the dollars aren’t spent on home improvements, it’s not deductible. There’s a one million dollar cap on mortgages.
For rentals, it’s a different category. The money just has to be traced and used for that property. You can take out money of one and invest in another but it has to be traceable.
To be declared a real estate professional, there are several categories. 50% or more of everything you do must be real estate related and 750 hours are required. Susie gives an example of a teacher couple who has a rental and how the IRS might look at their situation.
Bruce asks about the forgiveness of debt for an investor versus a regular consumer. A 1099C will be given for the amount of forgiveness. As an investor, the only way out of debt completely is to declare bankruptcy or file for insolvency. The test for insolvency is when you put together all the assets and liabilities. If liabilities exceed the assets, you can claim insolvency. At that moment, the debt is permanently wiped out.
In the past, if a consumer submitted a fraudulent return to a lender and the IRS got a hold of it, the IRS will use that for taxes. For stated income loans, she is unsure of how that is being handled by the IRS.
Bruce asks about an investment rental property that receives repairs and how that is handled in taxes. Susie says the repairs would be capitalized and made part of the purchase of the property. Residential real estate is a 27.5-year asset and it would be deducted over time. Points and financing costs have to be amortized as well.
Dealer status means you are in the business of buying and selling real estate. Intent is key here. Did you mean to buy a property as an investment or was it to buy, fix and sell? This matters for self employment taxes.
Bruce talks about entities. There are S and C Corporations. In C Corps, there are no capital gains. As a dealer in C Corp, it might be a good entity. Before year end, the investor needs to make sure all profit is out of the business by way of bonus and payroll. Social security and Medicare will be paid on that. Things might change soon because of this administration’s intent of foxing social security. Check with your professional tax advisor.
Bruce asks if people can write off home price declines and Susie says no.
Bruce says many investors went into many states that had different recourse rules. People need to understand the difference between recourse and non recourse states.
Bruce and Susie talk about the difference between tax credits and write offs.
Thanks so much Susie for the interview. You can find Susie and her team at leivasassoc.com. Next week join Bruce and Chief Economist of the California Association of Realtors, Leslie Appleton-Young.
Bruce starts by asking about 1031 exchanges. Many California real estate investors took money out of California to dodge the price declines and are now bringing it back into California. Bruce asks Susie to expand on the 1031 exchange concept. They start by talking on what like-for-like means.
4 Ways to Listen
- Click HERE on the player launch below to stream our shows as you surf the web.
- Visit our Radio Archives to download shows in mp3 format.
- TNG Real Estate Radio Show is now on iTunes! If you have iTunes installed click HERE or simply do a search for "The Norris Group" while in iTunes.
- If you use an RSS Reader: Click Here
*******************************************************************************************************
Susie says like-for-like means you can buy any real estate. However, it can’t be personal property. You can switch from investment single family residence for land, as an example, as long as it is an investment property. Boot can happen if money is not spent in an exchange. So when a replacement property is not of higher value and there’s extra left over in the exchange, if it doesn’t get reinvested in like-kind, that left over portion can be taxable. When you close escrow on the property you sold, you only have 45 days to find a replacement property and 180 days to close. If an agent suggests backdating the paper work, DON’T DO IT. Backdating can cause you tax penalties and jail time. The IRS takes this fraud seriously.
Out-of-state ownership of property could require investors to file for that state tax. Depending on the filing status and age of applicant, the Federal Government has an amount cap and after that is hit, the gross amount must be filed. Many states are the same. Check with your tax professional. In California, investors must report their world-wide income which goes on the Federal and California State return. If there is an additional state, they can give you a credit for filing in an additional state which is dollar for dollar.
Worldwide income is required and Bruce asks if investors can deduct world wide losses. Susie says she’s never had a client do that so she’s not sure.
Bruce and Susie talk about precious metal sales and if they are on the honor system. The process doesn’t have an escrow and it’s hard to track. Susie does not know if the IRS has a way of tracking. If the IRS was tracking, they would be looking for deposits that seem odd.
Bruce asks about refinancing properties and 1031 exchanges. Susie says there will be deductible interest issues and there could be a tracing problem.
Bruce talks about credit lines and investors. Many investors in California don’t realize rules about limits on deductible interest. Only $100,000 is allowed. Beyond that, if it can’t be proven that the dollars aren’t spent on home improvements, it’s not deductible. There’s a one million dollar cap on mortgages.
For rentals, it’s a different category. The money just has to be traced and used for that property. You can take out money of one and invest in another but it has to be traceable.
To be declared a real estate professional, there are several categories. 50% or more of everything you do must be real estate related and 750 hours are required. Susie gives an example of a teacher couple who has a rental and how the IRS might look at their situation.
Bruce asks about the forgiveness of debt for an investor versus a regular consumer. A 1099C will be given for the amount of forgiveness. As an investor, the only way out of debt completely is to declare bankruptcy or file for insolvency. The test for insolvency is when you put together all the assets and liabilities. If liabilities exceed the assets, you can claim insolvency. At that moment, the debt is permanently wiped out.
In the past, if a consumer submitted a fraudulent return to a lender and the IRS got a hold of it, the IRS will use that for taxes. For stated income loans, she is unsure of how that is being handled by the IRS.
Bruce asks about an investment rental property that receives repairs and how that is handled in taxes. Susie says the repairs would be capitalized and made part of the purchase of the property. Residential real estate is a 27.5-year asset and it would be deducted over time. Points and financing costs have to be amortized as well.
Dealer status means you are in the business of buying and selling real estate. Intent is key here. Did you mean to buy a property as an investment or was it to buy, fix and sell? This matters for self employment taxes.
Bruce talks about entities. There are S and C Corporations. In C Corps, there are no capital gains. As a dealer in C Corp, it might be a good entity. Before year end, the investor needs to make sure all profit is out of the business by way of bonus and payroll. Social security and Medicare will be paid on that. Things might change soon because of this administration’s intent of foxing social security. Check with your professional tax advisor.
Bruce asks if people can write off home price declines and Susie says no.
Bruce says many investors went into many states that had different recourse rules. People need to understand the difference between recourse and non recourse states.
Bruce and Susie talk about the difference between tax credits and write offs.
Thanks so much Susie for the interview. You can find Susie and her team at leivasassoc.com. Next week join Bruce and Chief Economist of the California Association of Realtors, Leslie Appleton-Young.
Comments