All Forum Posts by: Lynn Leigh

So, @Benjamin Pekarek, what happened here? I'm getting ready to make a purchase with funds from CIVIC and I was not happy to see their name and the word foreclosure together in the same post. It seems like your issue was really with BSI, and others below confirm they've also had customer service problems with BSI. I'm curious to know how things worked out for you and if your BSI experience would keep you from using CIVIC again or recommending them? 

We need creative financing ideas! We’ve been mostly focused on just selling our property, but a property we’ve been interested in for the past year has just come back on the market after falling out of escrow for the third time, and we really want to make an offer, asap. We know we can get hard money, but that’s just going to cost a lot, so we’d love an alternative that makes sense and works with all of our complicating factors. Bonus points for an option that let’s us maximize the potential in our current property.

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We have a $2-$2.1M 2-unit in SF with $800k in debt/$1M+ in equity. We want to put a $1.5M offer on a $1.77M 3-unit in Honolulu.

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We’ve got a couple of options (and are wondering if there are others):
Secure the Honolulu prop now with hard money and a Reverse 1031, then sell the SF prop and apply half the gains (one unit is our primary residence) to the Honolulu hard money loan. We'd still hold the HML until we could refi into a conventional.

Acquire a cash-out refi or a bridge loan that would allow us to tap equity in the SF prop to fund a condo conversion, which would be complete in 6-12 months and would take the total vale up to at least $3M. We’d still need to fund the Honolulu purchase somehow.

Acquire a blanket mortgage for both SF and Honolulu, use our own cash to complete the SF condo conversion, sell 1 or both SF condos within 12 months (if rental potential does not justify keeping the SF units.)

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The SF property has one unit that can be placed on the short-term AirBnB rental market within a month.
OR
The SF property has one unit that can secure a $6k/mo sublease (avoiding rent-control tenant permanency issues to avoid impacts on future sale) within a week.

The Honolulu property has two units (one 2bedroom, one 3 bedroom) that could be placed into the short-term rental market as soon as a bit of cleaning, refreshing, and furnishing is completed. The third unit would be occupied by a property manager paying a discounted rental rate.

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My partner holds the mortgage on the SF property. He is an advertising writer/creative director who works on contract assignments, but not 1099s. (All of his clients pay W-2 wages via a payroll processor.)
He has been in the biz for 27 years but has gaps in between contract gigs.
HIs current gig started 5/17.
Prior to that he took a 9 month break from paid work to work with me on setting up a new business, but a family situation forced us to put the business launch into hiatus after having accrued ~$35k in cc debt for the new business. This has depressed his credit score and is proving difficult for conventional lenders to get around. Plus, conventional lenders don't offer blanket loans.

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My partner has not filed 2015/2016 tax returns because my mom became a tenant in 2015. We did not know if we would pursue a condo conversion or a sale and 1031. Condo conversion would require 100% owner occupancy but a 1031 would require a reflection of that tenancy. Consequently, the type of loan and forward path we choose will affect how we file those taxes, but of course, many loans will require filed returns prior to approval.

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My mom is in the mix and is willing to co-sign or even be the primary borrower if possible/needed. She does not make as much as my partner, but her employment is a standard, full-time, W-2 position, since ’07, her credit score is outstanding, and she has over $300k in cash/retirement reserves.

Thanks again @Dave Foster, I just spoke with my accountant and we agreed that trying to move the SF prop into an LLC prior to selling is not necessary for the results I'm trying to realize. I appreciate your thoughts as they helped me work through some of my own and come up with some alternatives.

Again, thanks Dave for the quick and thoughtful reply. I have a couple of thoughts and would like to see if I can get some clarity around them. 

Regarding your last point, we have been assured by a CA CPA who specializes in real estate that the 121 is available to us. I am not concerned about that.

Regarding your other points:
• The preference was always to take advantage of the dual opportunities via bifurcation. I am only considering this LLC question in consideration of the 121 potentially going away right now when we need it.

If we lose the 121 option and are forced to wait until June to sell our SF prop, we will forgo the option if it means losing the Hawaii property. If that looks likely, we'd want to get as much of a tax advantage as possible from placing the prop into an LLC and if the tax bill is going to drop the tax rate to 15% for LLCs, well, that's an advantage over being taxed on the sale gains at my and my partner's personal rate.

(There is also the benefit of privacy afforded by using two DE LLCs to hold property (one holds property, the other is the manager of the property-holding LLC.) We had already set up two DE LLCs earlier this year in order to do this for a business we were starting but didn't.)

• All that said, we did want to do a Reverse 1031, so we would be securing the Hawaii prop before selling our SF prop. If we closed on Hawaii in January, June would be six months away. If we could make holding the SF prop work financially, then taking both the 121 and the 1031 would still be an option, in June when we've hit 5 years of occupancy.

But it seems dangerous to try to time that perfectly so that we get the full 5 years by waiting until June, but then also having to sell in June in order to be within the 180-day 1031 clock. Which is why, not trying to hold out for the 121 to work seems the safer bet if it looks like Congress is seriously going to change the occupancy criteria.

As to your point here: "It is risky to sell a property right after changing entity and 1031 it. There are issues of intent of the entity if it obtains and immediately sells and then 1031s" How long after placing the prop into an LLC would a 1031 not be risky? Would it matter if we placed the prop into the DE LLC we set up earlier this year to hold the building? Would waiting 6 months from the day it's placed be long enough? Since we are doing a reverse 1031, we could place it into the LLC this week, likely not close on Hawaii until mid-January (maybe later if the sellers are amenable), and then hold off on selling SF until several months had passed, up to that 180 day mark.

The reason I was asking about my partner being the sole taxpayer and the LLC either being single owner or he and I getting married and filing jointly was because of what i read below yesterday, which gave me the impression those things would work in our favor. I read this: "One last ownership issue I should mention: certain entities that are owned by a single person are disregarded—they don’t file a tax return and the income and expenses from the property are reported in the tax return of that sole owner. For example, if Sue Jones holds title to her investment property in Jones Investments, LLC, and Sue is the sole owner of Jones Investments. Jones Investments does not file a tax return; Sue reports the income and expenses in her IRS Form 1040. That means Sue herself is the taxpayer that owns the old property and she could sell it, do an exchange, and buy the replacement property in her own name (because it’s her tax return)." here: (https://www.expert1031.com/articles/2014/04/16/look-ownership-issues-1031-exchange)

*Thanks for bearing with me on this. My accountant was not available to talk until tomorrow morn. Writing this all out and thinking it through in response to your points will help me make sure I'm asking the right questions when I do speak to him. In fact, maybe I'll just send him the link to this thread, lol. 

Thanks Dave, that's good to know. Is there a reason though that you would not suggest placing the currently owned prop into an LLC prior to the sale? If we lose the ability to take the $500k of gain sans cap gains tax, wouldn't having it in an LLC afford some assist with lessening the tax liability on the gain we are not allowed to 1031, since half the prop has been our primary residence?

My partner and I have owned a 2-unit in SF, as joint tenants, since 6/13 (we were tenants from 1999.) We began renting our second unit 11/15, to a family member, but legit—with actual monthly checks paid to my partner and deposited in his rental account. Only he earns income and files taxes, so he is the only taxpayer that’s ever been associated with the property. We have not yet filed for 2015/2016. (We did not know if we wanted to condo convert the building and if we had, we would have wanted the prop to reflect 100% owner occupancy, thus no filing until we decided which path to pursue.)

We have been interested in a 3-unit in Hawaii since 1/17. We flew out to see it out in January and were ready to make an offer when we got news of a family situation that took precedence. The Hawaii prop went into escrow with another buyer. We became ready to make an offer again after the Hawaii seller's first offer fell out of escrow. The day before that offer was going to be submitted, I was served with a summons for a lawsuit related to comments made on Facebook about an alleged sexual predator in my community. Once again, we were forced to table our offer on the Hawaii prop and, once again, it went into escrow with another buyer. My lawyer has now assured me the case should be dismissed but says, even if it isn’t, I need to proceed with living my life. So, we began looking at other Hawaii props, but then the one we’ve been dancing with for a year was relisted earlier this week—after having fallen out of escrow for the third time since January. So, we are now looking at options for proceeding and trying to guess at how the tax bill may impact our options and choices.

• We'd previously discussed with an accountant the ability to bifurcate SF's gains to utilize both Sec 121 cap gains exemption and a 1031 exchange. But we were told placing the prop into an LLC would eliminate the Sec 121 option for us, so we have not done that.

• I’m seeing the tax bill may take away our Sec 121 eligibility unless we stay in the prop until 6/18 (five years ownership & occupancy), but I’m wondering if occupancy as a renter prior to ownership would qualify us if we sold prior to 6/18? Or, does the occupancy clock only start when ownership begins?

          – If it is going away, then there is no reason (that I can think of) not to put the SF prop into an LLC
             prior to selling, correct?

• The SF 2-unit is held as joint tenants and we are not married. We want to do a 1031 exchange. We would like to hold the Hawaii prop in an LLC, but we know ownership on both props must be the same.

          – Is there a way to do that if my partner has been/will be on the 15/16/17 yet-to-be-filed taxes the
            sole tax=payer/entity? We can get married. Or I can quit claim to him. Are there other options? 

The urgency around all of this; the Hawaii prop unexpectedly coming back on the market and being told other offers are expected on Saturday, trying to guess at what the tax bill may or may not change, and trying to figure out things like placing the SF prop into an LLC prior to the year's end, all before submitting an offer, never mind ensuring we have access to the funding we'll need for the reverse 1031, is definitely weighing on me. We are not investors with years of experience under our belts. We got very, very lucky four years ago when when the opportunity to purchase our long-time rental apartment presented itself. So, we are doing our best to maximize our opportunity and turn that grand luck into something bigger and better, but there is certainly a bit of terror around knowing there is plenty we do not know and likely even more we do not know we do not know. ;) Any insight, clarity, advice, assistance you can offer, will be greatly appreciated.

Check out eMinutes for your LLCs. I've used them and recommend their affordable and attentive service. Even if you do not use them, check out the articles on their site to see what they have to say about not doing Nevada LLCs. 

And, though I've not been a paying customer of Anderson, I've spoken with them a few times and have read reviews from paying customers...my advice would be to stay away and not waste your money there.

Now that my overactive mind has had a chance to relax after getting all of that ^^ out after a couple of intense days of twisting and turning ideas and insomnia, I'm realizing that while the whole TIC + 121 + 1031 exercise was helpful in that it brought us to a spot where we came up with the idea for how to take the $500k cap gains exclusion from the sale of just the upper, I see now that the whole 1031 motivation that inspired all of this thinking isn't actually necessary/beneficial. If we TIC the building and sell the upper to our new LLP, we can take the $500k gain there and then just keep the lower as-is without all the hubub involved with the LLCs, the bridge loan, and the exchanges. Just keeping the lower with existing debt in place -- $390k on a $1M+ unit, gives us a good chunk of equity we can then pull out to make improvements, increase the unit's value, and add income-producing-ADUs. And we can get ahold of that cheap money much more easily than carrying out the 1031 plan outlined above—which I think may be completely void of benefits. Gah, you can sure get your brain into a twist with all this stuff when it's so new and novel. :)

It doesn't appear that BP has a provision for deleting or editing posts. As a newb, I'll remember that next time—before I post a long convoluted idea that I'm still not completely clear on myself. ;) 

Thanks @J. Martin! That Thursday meetup sounds great, unfortunately, I can't see your profile since it's hidden. I'd love to go though and meet a bunch of new folks working on this kind of stuff. 

And thanks for the tip re: @Bill Exeter. I just posted a description of what we're mulling in the 1031 forum. As I said there, I'm not sure it's a thing that can actually be done, but if not, maybe my explanation of what we're trying to do will spark some ideas in other community members with more experience and know-how and maybe we'll be lead to another method of achieving similar results. 

Hello, I've written out a lengthier more detailed explanation about my ideas, but I wonder if I can just cut to the chase and get the answer without all the details. I'm going to try. ;)

Background:
I own a 2-unit property with someone I am not married to—joint tenancy, w/rights of survivorship. We have lived in one unit for all 3 years of ownership. We rehabbed 2nd unit for first 2 years and began renting (to my mom) in Jan. 2016. She now wants to retire someplace tropical and we don't want her to go alone so we are heading out too. We need to use the value in our building to make the move and new business launch possible.

Below are some rough ideas I've cobbled together after days of reading about things that are not new as far as concepts (I've herd of 1031s for years), but in actual practice, they are totally foreign. I expect to be told this is not possible and that I have missed crucial rules about pulling something like this off. I do know that my partner and I do not qualify as a related party—we are unrelated and unmarried. And, if need be, we have additional family members we can use to help pull something creative off—this plan or any other workable one.

(*Right now my goal is to find out if this can be done. If we determine it can be, then I'll worry about looking at real numbers that include all costs. These are basic numbers simply for painting a picture of the concept.)

To Start:
— First, we want to TIC the building and sell the upper unit to an LLP we set up with 14 family members (nieces, nephews, cousins—3 sibs to one partner, and 1 parent to the other partner) as minority shareholders and the two of us as majority, though not 50%, shareholders.
  - This involves putting tenants in the upper which we currently occupy. Ideally, market rate rents will cover debt service and cash flow.
  - We'd likely use hard money to buy and then refi after guarantee is paid
  - If we sell for $900k and the existing loan split between the two units is $390k each, we'd net ~$510k on the upper and take $500k as Section 121 Cap Gains Exclusion

To Finish:
— Second, we'd sell the lower unit...to each other (if we can, that is the question)
    - We'll set up two Single Member LLCs—one for each of us
    - We'd each "offer" our half of the lower unit for sale for $600k ($1.2M list)
    - Our new LLCs each offer to buy the other's 50% share of the lower
    - We get a $240k bridge loan for a down payment on the lower (or we each make loans to our LLCs from proceeds of the upper sale)
   - The LLCs get a $1.2M loan to purchase the lower as 50% partners
   - **Before I read here last night that equity was also a factor in relinquished and replacement properties, I thought this (very literal) exchange of our interests in the lower unit would satisfy our obligation to 1031 exchange into a prop with the same or greater value, thereby saving us the trouble of identifying new, good, financially sound props to acquire w/in 45 days—while we are also trying to move a retiring senior and 2 cats to another state. 
- BUT then I read the value **and equity** have to be the same or better in the replacement property
- SO, that means if the lower appraises for $1.2 with $390k in debt, our pre-sale equity is $810k
   - We'd be obligated per the 1031 to buy something with at least $1.2M in value and at least
      $810k in equity
   - We sell for $1.2M, we pay $390k in existing debt, we have $810k  
   - We use 1031 to pay off $240k down payment loan (if we can?)
   - We each have $285k (570k total) in our 1031s
   - The remaining $570k goes to the loan on the lower thereby bringing the equity up to $810k and again meeting our 1031 obligations in terms of the replacement properties value and making timing deadlines exceedingly easy for us to accommodate—even while moving.

The point of all of this:
— In considering selling, we began wondering if there were any ways to use/sell/hold the unit(s) to help friends/family. The idea to sell the upper to a family LLP as a tenant-occupied, cash-flowing investment achieves that goal by making it possible to pay out a yearly sum from the unit's proceeds to each LLP member.
— In considering selling, we knew we wanted to go to our new state, asap, but we don't know what we want to take from here until we find a place to live there and we don't really want to give up this property we've lived in for 21 years and worked on rehabbing for 3. We'd love to turn it into a short-term rental and add value by adding 1-2 ADU units. We know even if we sell to ourselves at $1.5M, we'd still have room to add value and given the prop is in a great location in SF, we believe it will continue to climb in value as it has the past three years. Being able to use equity to further enhance the property and get its value up over $2M would be an awesome project that we would thoroughly enjoy. (If we can use the prop's equity to improve?)
— So, if this is not possible, I wonder if there are any other creative means by which we could access the benefits of Section 121, and 1031 exchanges, or something else I'm not even aware of yet, to realize the existing value in the building and turn it into an opportunity to create even more value in an asset we have no good reason to offload as it can continue to work and work for us for some time to come?

If you've read this far, you are my hero! Feel free to share your thoughts, even if they're just "Nope! Can't be done!" No matter what, we realize we're in a pretty good spot and we're extremely grateful for that. We are very keen to learn about ways to build on what we were lucky enough to be able to acquire a few years back. If we can use some of our gains to help others, all the better! :D