All Forum Posts by: Matyas Sustik

I believe I understand the base calculation for the replacement property in general. However, I am not clear on whether paying broker fees outside of closing could make a difference or be (tax) advantageous in certain situations.

Assume a sale price of 200k on the relinquished property. The adjusted base is 100k (includes the depreciation taken in years prior). The loan balance is 50k. The replacement property is bought for 150k (assume it is a DST for simplicity and say there is a 150k minimum for 1031 exchange investors). Assume that the LTV on the new property is 50% (way above what is it for old property). Assume that transaction fees are 10k (it will be more in real life, but this is an example). I can think of this being structured two ways:

A. Transaction fees are paid from sale proceeds and QI receives 140k. Need to wire extra 10k to QI to reach 150k. New property FMV is 300k. Capital gains to be deferred: 200k - 50k - 10k - 100k = 40k. Base in new property is computed as: 300k - 40k = 260k.

B. Transaction cost is paid outside of closing, that is 10k is paid directly to broker etc. QI receives 150k since closing shows no expense. Capital gains to be deferred: 200k - 50k - 100k = 50k. Base in new property is computed as 300k - 50k = 250k. However, there is a 10k expense in this year that counts against profits.

So basically, the choice is between taking an immediate 10k expense versus taking depreciation on 10k larger base. It seems the immediate option is better. What am I missing? This would imply to try to pay all costs outside of closing if possible. Am I correct?

Thanks all for the responses! Probably I am worrying about it too much. I think a threat of a lawsuit could entice the landlord to fulfill the contract and get a hotel of their own if needed.

To @Mike McCarthy who wrote:

"Most/all leases will probably be worded similarly. As a landlord, I don’t want to have to pay for your hotel if the prior tenant doesn’t move out for whatever reason."

I understand that as a landlord you do want to minimize your liability and risk. However, if your prior tenant does not move out, the cost of that and the risk must be carried by you. You took on that when you entered the landlord business. At least that is the mindset I am following as a landlord. That is why you have a security deposit and a contract. It is not right to expect profit without risk.

To @Nathan Gesner who wrote (I read your entire post :-)

"If either of you fails to follow through, there's no penalty and you both walk away. This sounds like a pretty level playing field to me. "

A level playing field in your scenario would mean that a tenant could cancel the lease 2 days before move-in date due to changing their mind and expect the deposit and first month rent back. I suspect most landlords would not go along with that. I would certainly not.

Thanks for your response. Unfortunately, it is quite difficult to find a good place. As I mentioned we spent 2 months (every weekend) visiting houses.

The issue of Landlord's non performance could come up even if the lease starts sooner. The issue is we give notice and if after that we find out that our new contract is not honored, we would have damage. Someone should offer insurance for this! 

[We have been landlords for 8+ years in TX, and for the last 5 we were also renters in CA. Where we live, it is more economical to rent than to own. So we know both sides of the transaction.]

We are about to sign a new lease that is scheduled to start 3 months from now. The future landlords are inexperienced. They own the house and plan to move to a new city due to a job change. Instead of using official forms (from a realtor or ezlandlordforms.com) they made up a contract that they based on other contracts they have seen. (I actually brought ezlandlordforms.com to their attention, but in vain.)

There is a section in the contract that says this:

"POSSESSION: Tenant(s) has examined the condition of the Premises and by taking possession

acknowledges that they have accepted the Premises in good order and in its current condition except

as herein otherwise stated. Failure of the Landlord to deliver possession of the Premises at the start

of the Lease Term to the Tenant(s) shall terminate this Agreement at the option of the Tenant(s).

Furthermore, under such failure to deliver possession by the Landlord, and if the Tenant(s) cancels

this Agreement, the Security Deposit (if any) shall be returned to the Tenant(s) along with any other

pre-paid rent, fees, including if the Tenant(s) paid a fee during the application process before the

execution of this Agreement."

Note that there is no stipulation regarding damages to Tenant or indemnifying Landlord from damages in

case Landlord does not deliver possession. This makes me assume that should the Landlord not deliver

possession (you know 3 months is a long time, something can happen with the job or else) then legal action

can be brought for damages.

We would suffer monetary damages: we would have to move into a hotel (assuming we already gave our 30

day notice) and then move again to another house. The cost of the second move is clearly damage. We may

also pay more staying in a hotel while suffering from lower living standards. In reality this would be a major

problem way beyond the monetary issue. We spent 2 months finding a new place. My wife is expecting our

second child, so you can imagine.

Since the contract does not mention damages, can I assume that we could seek those in teh unlikely event of Landlord

not performing?

I also considered that the equitable solution would be to explicitly state in the contract that if Landlord does not deliver

possession, then Tenant is entitled to damages not exceeding the amount of security deposit. This would show that

this is a two way street as far as risk and trust goes. However, I am worried that if I bring this up, then the issue will

come to light and the Landlord will insert instead wording so that Landlord is not responsible for damages in case Landlord

cannot deliver possession. There is exactly such a clause in our present lease contract. In our contracts as landlords we do not

use such language.

So I am included to stay silent about the issue and if the unlikely situation occurs and Landlord cannot deliver possession,

I intend to not cancel the contract, but sue for non-performance and damages (if negotiations do not get us the result we want.)

I wonder what chances would you give to such legal action?

Thanks!

This question regards properties only in San Francisco. I am aware that it is a special market with the rent control etc. Still, insight would be appreciated.

This came up during discussion with friends in connection with various transactions (past and in process). But I am not the one in trouble, just trying to be informed and prepared.

If buying a single family home which have tenants living in it, the law seems to allow owner move-in evictions. Even for protected tenants (10+ years, disabled, over 60, etc.). The only really biting restriction is when there is a school aged minor in which case the eviction can occur only in the summer break! I note that the fact that the property is a single family home is very important. If there are more than 1 units in the building, there are draconian restrictions.

Now, the question is what happens if the single family home in question is rented to two tenants who are on separate leases? Probably the previous owner used to live there and rented out 1 or two rooms (maybe a floor) and when moved out rented the rest as well separately. The question in this case, whether this transformed the building into a multi-family or multi-unit rental property? Can the new owner evict both tenants and move in to occupy all the rooms? (The new owner may have a bigger family after all.)

Thanks.

Our tenants are on month to month (after the initial 1 year contract turned into it). The contract says the lease termination notice is terminating the lease at the end of the month following the month it is given.

One of the tenants sent an email on Aug 1 that they will terminate the contract and their last day is Aug 31. We emailed back asking them to send a dated, and signed (by both of them) termination notice as an attachment and include their new address as well.

They did so on Aug 4. Again specifying Aug 31 as their last day.

We believe that (per contract) they should have given written notice before Aug 1 if they wanted to leave on Aug 31. However, we do not want to "get them" for this mistake and charge an extra month of rent. We will be very happy to see them leave, since the relationship has deteriorated completely since they moved in.

However, we are a bit worried that if they cannot move out by Aug 31 (they are building a house and the builder is supposed to be done by Aug 15, but deadlines are not met sometimes in construction...) then they will say that the Aug 31 was a typo and per the contract the notice should be effective by end of September. If we get someone else to move in before end of September, we will have a serious problem.

So the question is: if the notice as mentioned above by the tenant has a wrong date per the contract, then does this still count as a firm move-out date? Do we need to do something to make sure that this date is solid and holds up later?

Actually, we are at the point with these tenants that we just wait until they clear out before we advertise the place. They already indicated that they will not cooperate nicely with showings. They insist to be present and only on two days of the week (no weekends). That is also contrary to the contract, but in all likelihood we would not want to bring a new tenant into the place, if we cannot be sure that we can get in and that the place is in showable condition.

Some further info. The tenants turned on the prewired and monitored security system (they signed up themselves) without our consent or knowledge. We cannot get in without tripping the alarm. They also have a dog which, if not in a cage, would prevent showings.

The tenants are ex-military and they show signs of bipolar disorder (nice one day and explode at you the next). Family advice is to avoid any confrontation. (They know where we live, they own guns and know how to use them. Capiche?) That would only leave the option of waiting until they actually move out and then list the place, effectively giving up a month's rent. I hoped someone here have something smart to say that could help and decide what we should do.