3 Real Estate Tax Shelters Used by Wealthy Investors

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3 Real Estate Tax Shelters Used by Wealthy Investors

1. Tax-Deferred Exchanges

Real estate investors can offset real estate capital gains or losses with a tax-deferred exchange. Section 1031 of the Internal Revenue Code allows real estate investors to sell property, take a profit, and defer capital gains or losses, as long as the proceeds are reinvested in real estate. Most real estate investors use 1031s to build long-term tax-deferred (or even tax-free) wealth. There is no limit on the number of 1031 exchanges you can do. For example, Susan buys Building 1 for $200,000, and re-sells it for $400,000, with a profit of $200,000. At the time of the sale, she will owe taxes on this profit; unless she does a 1031 exchange, in which case she can take the entire $400,000, and invest it in a more expensive Building 2, without paying any tax. She can then repeat this process for the purchase of Buildings 3, 4, 5, and so forth, generating a multi-million dollar fortune in non-taxed wealth. Essentially, the taxes can be avoided forever, because when Susan dies her heirs will get an automatic step-up in basis as of the date of her death, under Internal Revenue Code § 1014, for purposes of calculating their gain upon sale.

2. Investments in Rural Land

All except 1 of the 50 states have a “use-value assessment,” which allows land-buyers to purchase land and sell it at its assessed “use-value” rather than the “fair market value,” as with other types of real estate. This tax credit was originally intended to help farmers retain their land, but wealthy investors now use it as a tax shelter. In 2011, billionaire Michael Dell reportedly qualified his $71.4 million 1,757-acre ranch in Austin, Texas for this tax shelter (because family and friends occasionally use it to hunt deer) — reducing its assessed value to $290,000 (and saving him well over $1 million per year). Steve Forbes reportedly reduced the assessment of his multi-million dollar estate in New Jersey by approximately 90%, by putting a few cows on it. Former Presidents George W. Bush and Ronald Reagan have taken full advantage of these credits as well. Of course, this loss of property tax revenues can severely impacts schools, public services, and less wealthy taxpayers.

3. Dynasty Trusts

Dynasty Trusts are a form of irrevocable trust used by wealthy families to create generational wealth, by allowing descendants to remain exempt from estate, gift, and generation-skipping transfer tax for the life of the trust. The trust can be funded while you’re alive, or upon your death. In either case, your assets, like real estate, are placed within the trust. The biggest advantage of a dynasty trust is that it can save your descendants a significant amount of money in estate taxes. The assets you put in the trust (plus any increase in their value over the years) are subject to the federal gift/estate tax just once, when you transfer them to the trust. They are not taxed again, even though multiple generations benefit from them. By contrast, if you simply left a very large amount of money to your children (without a trust), it would be subject to the estate tax. And whatever they left to their children would be taxed again. For example, if you and your spouse leave $10 million to your daughter, and that inheritance grew, over 20 years, to $30 million, it would be subject to estate tax at her death—and if federal estate tax rates and exemptions in effect then were about what they are in 2015 ($5.43 million exemption, 40% top rate), more than $9 million would go to pay the daughter’s estate tax. That $9 million tax would not be owed if the money were in a dynasty trust.

[This post is not intended to provide tax advice.]Tax Loophole

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Legalized Pot = Industrial Real Estate Boon

As California nears legalizing marijuana for medical use, expect to see significant impacts on the industrial real estate sector.  In Colorado, where marijuana has already been legalized, 1 in 11 of Denver’s industrial buildings is used for marijuana.  The cannabis industry occupies over 3.7 million square feet of industrial space in Denver, mostly in areas with older warehouses, according to a recent study by a commercial real estate firm.  In the 5-year period between 2009 and 2014, marijuana cultivators absorbed almost 36% of all industrial space leased in Denver, leading to near-record-high rents and low vacancy rates.  This demand will likely increase if Denver lifts a moratorium that allows only medical marijuana businesses existing prior to October 2013, to apply for recreational marijuana licenses. Still, many property owners refuse to lease to marijuana growers due to lender restrictions and conflicting federal laws, as well as the often high cost of the electrical and HVAC upgrades required for growers.  As for those owners willing and able to lease to growers, they can typically charge 2-3 times the average rent of other businesses, according to the study.

Pot

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ALDI Opening Grocery Stores in California

Discount grocer ALDI plans to open 25 new stores in California by next July, and have 45 stores serving Southern California by the end of 2016.  The company currently operates 1,400 stores across 32 states.  ALDI is hailed as a nationally-recognized low-price grocer committed to value and innovation-focused private brand development.  In 2014, ALDI was recognized as the nation’s low-price grocery leader for the fourth year in a row in a consumer survey, ahead of Costco, Sam’s Club, Walmart and Trader Joe’s.

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California Legislates Equal Opportunity to Use and Enjoy Home

Most real estate owners and operators are familiar with the Americans with Disabilities Act of 1990 (the “ADA”) (42 U.S.C. §§ 1211, et seq.). The ADA prohibits discrimination, and is intended to ensure equal access for the disabled in public places. The ADA’s proactive companion legislation, the Federal Fair Housing Act (“FHA”) is a remedial statue, intended to provide fair housing, free from discrimination, in residential properties throughout the United States. (42 U.S.C. §§ 3601, et seq.)

California’s counterpart to the FHA, the Fair Employment and Housing Act (“FEHA”) (California Government Code § 12900, et. seq.) goes even further than the FHA, requiring Homeowner Associations (“HOAs”) and landlords to provide “reasonable accommodations” to ensure that the disabled are not prevented from enjoying the full use of their homes and apartments.

In California, every landlord, HOA and property manager should be familiar with FEHA, a sweeping legislative scheme liberally construed to achieve the objective of allowing all persons to: “Seek, obtain and hold housing without discrimination.” (Cal. Gov’t. Code § 12933.) FEHA specifies it is discriminatory to refuse “to make reasonable accommodations in rules, policies, practices, or services, when these accommodations may be necessary to afford a disabled person equal opportunity to use and enjoy a dwelling.” (Cal. Gov’t Code § 12927(c)(1).) Additionally, it is unlawful for “the owner of any housing accommodation to discriminate against or harass any person because of the race, color, religion, sex, sexual orientation, marital status, national origin, ancestry, familial status, source of income, or disability of that person.” (Gov. Code, § 12955(a).)

In order to require a “reasonable accommodation,” the disabled must demonstrate:
1. a disability, within the meaning of FEHA;
2. the landlord, HOA or property management company, know or reasonably should know of the disability;
3. the requested “accommodation” appears to be necessary to afford “an equal opportunity to use and enjoy the dwelling,” and
4. the accommodation is “reasonable.”

Discrimination ImageFor example, refusing to provide a designated parking space as an accommodation might be found to be discriminatory, because it affects the disabled person’s use and enjoyment of the dwelling. Similarly, refusing to allow a service animal based on a “no pets” policy might constitute a failure to provide a “reasonable accommodation.” Because FEHA must be liberally construed in favor of the protected classes, it would be prudent to err on the side of caution before denying a disabled resident’s request for an accommodation. Violations of FEHA can be costly to landlords, HOAs and property managers, because remedies may include awards of money damages, injunctive relief, punitive damages, and attorney fees.

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Commercial Real Estate Will Continue Upward Trend Through 2016

Economic indicators should continue their upward swing through 2016, which is good news for property owners, according to the Commercial Real Estate Outlook Report recently released by the National Association of Realtors.  All signs point to strong results over the next 19 months, the report suggests.  “Net absorption rose across the property types, driving rents higher,” according to the report. “As employment gains are expected to continue into 2015, demand for commercial space is expected to advance.”

 

NAR

 

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Regal Properties Sells 2 Triplexes

Regal Properties just closed escrow on the sale of 2 residential triplexes it had listed for sale in the trendy North Park community of San Diego, California, on Utah Street and Howard Avenue.  The first property sold as an owner-user/investment rental with new financing.  The second could not be financed by conventional means, due to deferred maintenance, but Regal Properties procured a cash buyer with substantial development and rehabilitation experience.  As part of our commitment for “Investing in People & Property,” Regal Properties is donating a total of 10% of its fees and commissions on these transactions to nonprofit organizations such as Omo Child Foundation (http://omochild.org/), Hogar Infantil (http://www.hogarinfantil.org/), and the Alpha Project (http://www.alphaproject.org/).

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New Loan Disclosure Forms Effective August 1, 2015

The Dodd-Frank Wall Street Reform and Consumer Protection Act, among other things, introduced a new independent Federal agency, the Consumer Financial Protection Bureau (“CFPB”), to protect consumers and the U. S. economy from dangerous financial products. The CFPB has since formulated new mortgage rules, including the TILA-RESPA disclosure rules.  Effective for mortgage applications received on or after August 1, 2015, the CFPB will replace four existing forms used for decades: the Good Faith Estimate, the Initial-Truth-in-Lending Disclosure, the HUD-1 Settlement Statement and the Final Truth-in-Lending disclosure; and is requiring lenders give two new disclosures to consumers: the Loan Estimate – given to a mortgage applicant three business days after receipt of the application, and the Closing Disclosure – given three business days before closing.  The Loan Estimate provides disclosures to help consumers understand key features, costs and risks of the mortgage loan for which they are applying. The Closing Disclosure helps consumers understand all costs in the transaction. These new forms, in a few pages, should help borrowers understand the key features of their mortgage.  An example of the new Loan Estimate can be seen at http://files.consumerfinance.gov/f/201311_cfpb_kbyo_loan-estimate.pdf.  An example new Closing Disclosure can be seen at http://files.consumerfinance.gov/f/201311_cfpb_kbyo_closing-disclosure.pdf.

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Shipping Containers As Versatile Retail Shops

As online retailers continue to chip away at the market share of brick-and-mortar shops, smaller, mobile, shipping containers are providing consumers with an innovative means to examine, touch, feel and buy the goods they most desire at festivals, concerts and sporting events.  The business of customizing old shipping containers into versatile and mobile retail shops has boomed.  Seasonal and event retailers can take their products when and where they’re in demand, without being anchored to a single location with year-round rent. The containers also provide an economical means of testing out markets before committing to a location, and have proven a valuable solution for disaster recovery areas.  Retailers, consumers and even municipalities like them because they are cool, innovative, affordable, mobile, flexible and durable.  In San Francisco, a shipping container village named The Yard at Mission Rock recently opened in the parking lot of ballpark for the San Francisco Giants. It uses 15 decommissioned containers from the nearby port, and is the first phase of a larger brick-and-mortar development in the area.
Containr 4 Container 3 Container 2

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24/7 Clean & Renewable Energy for Home & Office — No Utility Bills

CEO of Tesla Motors, Elon Musk, landed an official message unveiling the Powerwall, a battery designed to power your home.  The message came at a convention center powered completely by renewable battery power.  The battery unit itself contains the same batteries present in the Tesla electric cars.  The 7kWh unit will ship for $3,000, while the 10kWh unit will go for $3,500. They will store electricity from the grid or from solar and wind generators on site and if the grid goes down, they will continue to power your home indefinitely  This feature makes them ideal for developing nations that are leap-frogging power grids completely.

“Powerwall is a home battery that charges using electricity generated from solar panels, or when utility rates are low, and powers your home in the evening. It also fortifies your home against power outages by providing a backup electricity supply. Automated, compact and simple to install, Powerwall offers independence from the utility grid and the security of an emergency backup.  Powerwall comes in 10 kWh weekly cycle and 7 kWh daily cycle models. Both are guaranteed for ten years and are sufficient to power most homes during peak evening hours.  Multiple batteries may be installed together for homes with greater energy need, up to 90 kWh total for the 10 kWh battery and 63 kWh total for the 7 kWh battery.”Tesla

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3 Facts About America’s Tax System

  1. A new Citizens for Tax Justice (“CTJ”) analysis based on 2015 tax rates reveals that when federal, state and local taxes are tallied, the share of taxes paid by Americans across the economic spectrum is roughly equivalent to their total share of income – meaning our tax system is not really progressive. Although the federal income tax is somewhat progressive, state and local tax systems are highly regressive. A recent report from the Institute on Taxation and Economic Policy (ITEP) found that the poorest 20 percent of Americans on average pay 10.9 percent of their income in state and local taxes, while the top 1 percent pay half as much, only 5.4 percent. Also, one of the more regressive features of the nation’s tax code is the preferential tax rate on income derived from capital gains and dividends that allows many wealthy investors to pay a lower rate on their income than most middle class Americans.
  2. The United States has substantially lower overall taxes than the vast majority of developed countries. The United States had the fourth lowest level of taxes among the 34 OECD countries in 2013, the latest year for which data are available. Only Mexico, Chile and Korea collected fewer taxes as a percent of GDP. The level of taxation in the United States, 25.1 percent of GDP, is well below the 33.8 percent average for developed countries.
  3. The United States is among the very lowest of all developed countries for corporate taxes. In fact, many highly profitable corporations, including CBS, Jetblue, Xerox and Time Warner, paid nothing in taxes in 2014.  Over the five year period from 2010 to 2014, General Electric paid an effective rate of negative 11.1 percent and received a refund of $1.4 billion on $33.5 billion in profits. Dozens of corporations, including Apple, Nike and Microsoft, have publicly disclosed avoiding billions in taxes by holding their profits offshore in tax havens. A new CTJ report estimates that Fortune 500 companies are avoiding up to $600 billion in federal income taxes by holding profits offshore.  tax
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