Your Questions Part 1
Posted on August 30, 2006 - Filed Under Housing |
Thanks to those of you who took time to submit some questions. I’m grateful for the fact that I said that I would select a few questions to answer. Some of those submitted by Engineer X scared the poop out of me.
I’ve broken this article into two days. Some of my responses became quite lengthy. The first of the questions will be answered today and the rest will be answered tomorrow.
Ladies first.
Paty asks: When you financed this property, was it treated as a primary residence or as an investment property? Clifford: I financed the property as a primary residence. In the loan world,
there are a lot more financing options for a primary residence versus
an investment property. Investment property requires a 20% down
payment which I did not have at the time. So "Owner Occupied" was the
avenue I pursued.
Paty: Do you know how long it takes for a closed account to drop off of your credit report? Clifford: There’s this fable floating around that items typically fall off your
credit report after 7 years. I don’t understand this because I have
closed accounts from 10 years ago that still appear on mine. Truth is, I don’t know.
Mr. Ken: Cliff, mind posting your total costs for the home remodel? Clifford: Not at all. The total cost of the home remodel was $38,000.
Mr. Ken: How is the
housing market where you live? Clifford: I’ll discuss more about the housing market tomorrow.
Mr. Ken: Do you think your home will sell fast
when you list it? Clifford: Mentally, I’m prepared for 6 months. While my agent, and all my
friends, are convinced that the houses will sell quickly I am not. As far as the housing data is concerned, inventory of houses on the market is quite large. Property is still moving but it’s not moving very quickly. Average time is 46 days for Southern
California.
Mr. Ken: What are you going to do when it goes under contract? Clifford: Drink champagne. As far as my living arrangements go, I’ll probably be renting for a few months. As a growing and learning investor, I’ll be learning something I think will be really cool: the 1031 exchange program.
Mr. Ken: Are you going to start looking for a new home? Clifford: Yes. I have 45 days, under the 1031 exchange, to put an offer down on my
next project before Uncle Sam nails me for taxes. My next project will
probably be almost identical to the first project. The only difference
is that I now have capital to get better financing on the loan.
To be continued . . .
If you liked that post, then try these...
Kitchen Progress on April 5th, 2006
It's photo time!
The first set of photos show the original entrance to the "kitchen".
Color Change on January 9th, 2006
I got some photos up.
Comments
11 Responses to “Your Questions Part 1”
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Cliff,
I’m not sure if you can 1031 this property because you have lived in it. I’m pretty familiar with 1031 exchanges but I haven’t come across this yet.
Mr. Ken, I asked my Real Estate Agent again and he assures me that I’ll be eligible for the 1031 exchange.
I found this online as well. Of course I have zero faith in commercials but it sounds alright to me.
http://www.1031exchangeadvantage.com/articles/1031_article2.html
Thanks for the info! That link to the 1031 exchange info, also helpful.
I’m sure you can 1031 the portion of this property that is used for business. I am very interested to hear of your 1031 experience: Was it difficult to find an Intermediary? Was it costly?
John, I’m handling the 1031 through the Real Estate Agent. He has done this many times before and has all of the people lined up. For the moment, my knowledge on the 1031 is limited. And I will definitely share what I learn here.
Cliff,
I did some research and you can indeed do a 1031 exchange. If my memory serves me correctly, you bought a 2-unit property. You are living in one and renting the other. Therefore, 1/2 of your property would qualify for a 1031 exchange and you would have to pay capital gains taxes on the half that you’ve lived in. I don’t think you’ve been living there for 2 years correct?
You’re right Ken, I haven’t lived there for two years. But I know where you’re going with that. If I lived there for two years, I could keep $250k tax free.
I hope you don’t take this the wrong way but I’m hope you’re wrong about the capital gains. I’d like to keep every penny. But then again, wouldn’t we all!
The good news is that I have a lot of write-offs. If what you say is true, then I should be able to write off all of the upgrades I did on the house. So all may not be lost . . . I’ll just pay less in taxes.
I would like to be wrong about the capital gains but I am 100% sure that you cannot 1031 exchange your primary residence. Because you bought a 2 unit, you can only live in one, therefore 1/2 of the property is considered investment and the other half is your primary.
Consider this case. If you did live in this property for 2 years, you can only sell and get 1/2 of the profit tax free. You cannot get all of the profit tax free either.
If you bought a 4 plex, you could sell for 1/4 tax free after 2 years or 1031 exchange 3/4 of it.
Just so you know, I recently got some quotes for 1031 Exchanges. Our new attorneys said the 1031 service they use starts at $750, but increases according to the number of properties in the 1031. The title company I like here locally says their 1031 service costs $2000 plus $200 for each additional property.
Trisha, thanks for the info! I tried looking this up on-line. They all want me to contact them for a quote. I just wanted a general idea. And how I have one!
I’ve been quoted between $500-$1000 for a straight forward 1031 exchange, 1 to 1. If you are doing more than exchanging 1 for 1 the price goes up probably $100-$200 per additional property.
A reverse 1031 exchange is the only one that should cost over $2,000.