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Changes to 1031 Exchange Deadlines

July 15, 2020 by chorton Leave a Comment

From the pre-coronavirus world 15 was a significant date, representing the deadline to U.S. citizens and taxpayers to file federal income taxation. Nonetheless, in the present environment, that deadline has been pushed to July 15, 2020.

The deadline is Also important for people using section 1031 of the U.S. Internal Revenue Code, which permits capital gains tax deferrals on investment property sales. The IRC section entitled “Exchange of real property held for productive use or investment” enables traders to “trade” their original assets into “property of like kind.”

Prior investors, to the outbreak Involved in this exchange could have 45 days from when the land was sold to come across a substitute house. Investors will be asked to pay taxes to the capital gains in the initial sale if this replacement property was not discovered.

Together with the Effects of Covid-19, the IRS Extended that 45-day deadline for “in-flight” investors at the center of the exchange process whose first home sales dates dropped between April 1, 2020 and July 14, 2020. These investors must discover that replacement house.

So, before, an investor that offered Their advantage during the first week of April as a part of a 1031 exchange could have been required to find a replacement flat complex or duplex with mid-May. More than two weeks in the current environment that investor has experienced.

While this extension might seem Beneficial for 1031 exchangers, the position is a double-edged sword.

So, Most Investors, So Few Properties

1 issue faced by and Other 1031 exchange investors entails demand and supply.

Our company has Determined that there’s approximately $10 million worth of 1031 exchange equity seeking out replacement properties. This equity originates from a few sources. The first entails investors that may have closed on their properties in late May starting the timer to find a replacement advantage. The source includes investors whose deadlines are in mid-July, although whose first properties sold in April. These things have found their replacement possessions. What this means is investors competing for the identical supply.

Speaking of supply, the available Property assets for exchange or sale has not changed much. Due to the outbreak, availability has decreased. In 1 scenario, the source of duplexes and rental homes has diminished by 20%. Much like lack is evident amongst net-lease and other real estate properties.

Nevertheless, sellers, are worried to dispose of their real estate due to the recession. They are holding on to their own possessions, awaiting the sidelines for the economy. Out of the market, sellers are pulling their properties in different instances.

Investors fortunate Enough to locate replacement properties are currently discovering enormous ranges between their offerings and what vendors are willing to accept. When creating their offerings, leading to lower bids whereas buyers have been eyeing current financial uncertainties sellers are requesting for pricing. This disconnect is leading to deals and sales that is stalled.

Bank Blockages

We’ve found that approximately 80% of 1031 exchange trades need a mortgage to meet the essential requirements for a thing. The good news is that banks have been currently sitting on solid capital reserves. The terrible news is that accessing that capital is growing more challenging.

Now’s banks and financing Associations are up for their own elbows that are figurative at a glut of loan forbearance jobs and refinancing software. These associations are also working for businesses and individuals together with Covid-19-related applications, such as cash and the Payback Protection Program and credit aid methods. This means less time is available for lending employees to underwrite and issue mortgages that are original, leading to longer time frames for blessings. If the deadline is bypassed by those time frames, the creditors might be on the hook for further taxes.

Furthermore, strict lending requirements imply Investors need leading credit scores (with a FICO score of 700 for several lenders) to qualify for the mortgages. Lower agreements also have been a problem, meaning equity demands. Adding to the uncertainty is that creditors can retrade, or pull, up financing until closure.

Getting To The July 15 End Line

Having introduced several the Problems exchange investors are facing, here are a couple of solutions.

First, in case it has not happened Now’s the opportunity to start an in-depth search for this replacement property. Investors must also be realistic regarding making offers. It is a seller’s market, and now is not necessarily time for discussions in efforts to lower the asking price if a bidding does need to pen out to make sense.

Second, it is important that investors Open a dialogue with their creditors to ascertain their funding eligibility, and to understand the approximate time frame for loan application and approval.

Even though the 1031 exchange extension has Provided some breathing room, it’s important that investors never waste any additional time in discovering that replacement property or trimming down a loan to finance it. The final clock is ticking. Attempting to waive this timer may indicate a hefty tax bill as soon as the July 15 deadline rolls up.

Complete disclosure. The Information provided here is not financial or investment, tax advice. You Should consult a certified professional for advice concerning your specific situation.

Thinking about Investing You May Need to Consider Forming a Company

July 11, 2020 by chorton Leave a Comment

The quickest type of thing is a sole proprietorship. A sole proprietorship is not separate from its owner. This means that the owner of a sole proprietorship has the decision-making authority all, but they also carry risk. Since this type of entity is not separate from the owner, the owner has liability if the business is the subject of a litigation. The proprietor’s personal assets (home, car, private bank accounts, etc.) may also be subject to the lawsuit.
Basically all publicly traded firms are C-Corporations, while not all corporations are publicly traded. Because corporations are separate”people,” they have multiple ways to increase capital. Take out a loan or the two most common ways would be to issue stock. The Corporation may be the signer on the debt Since the Corporation is a separate person. A corporation’s shareholders are protected from personal liability for the financials and actions of your company. When there are lots of benefits of forming a Corporation, it may be expensive and cumbersome. Corporations follow regulations and need to make filings.

In deciding on the best arrangement for your farming business, each citizen needs to answer a few queries:
While a sole proprietorship is not different from its owner, a Limited Liability Company (LLC) is a separate legal entity. The biggest advantage of an LLC is that the members (owners) have limited liability if a problem arise. The members of the LLC aren’t personally liable if the company be sued, drop to bankruptcy, etc for the extent of their initial contribution to the enterprise.
LLC:

– What are the sources of funding?

– Do you want to need to pay taxes personally?

This guide should not be construed as, and should not be relied upon as tax or legal advice.

The Best Structure
– How big does this business expect to be?
– Exactly how many partners/members would you expect to have?

– How much money are you willing to invest to establish the business entity/
C-Corporation:
The advantages of a partnership arrangement are similar to the ones of an LLC. In a partnership arrangement, there are. General partnerships are typical when the spouses are involved with the company operations. They also have liability for the debts of the organization, because each spouse is concerned. A partner, on the other hand, is generally not involved in the day to day business and their accountability is restricted. The taxation of a partner & a limited partner is exactly the same: the business itself does not pay income tax. The venture will file Form 1065 and provide a Form K-1 to each partner.

Each circumstance is uniquely different, making it impossible to definitively say which thing is the”best.” We commonly see entities that have a member(s) involved in the business operations day to day setup as an LLC but taxed as an S-Corp to conserve on self-employment taxes. It’s also very common for farming operations to be considered a C-Corporation to possess numerous alternatives and limited customer liability. A C-Corporation can also present numerous different possible exit strategies and disposition options. Taxpayers who are beginning a farming business should consult to ensure they are choosing the company entity type which is most suitable for his or her requirements.

Partnership:

A C-Corporation is a separate legal entity from its shareholders (owners). One way is that it is a person that is separate . Owners of the corporation are called own stocks which establish their ownership interest, and shareholders. Businesses have an unlimited life, meaning that when the founder, CEO, or shareholder dies, the business does not dissolve. The Corporation continues. This is because stocks can be passed down to heirs.

One of the most frequent questions I receive as a tax pro is”What type of business entity should I choose?” Many business owners have been overwhelmed by this choice and don’t completely understand the differences between types of entities. This article will explain rules, filing requirements, and benefits of the chief type of company entities: C-Corporation, LLC, Partnership, S-Corporation, and sole proprietorship. Each decision is dependent upon the facts & circumstances of the proprietor (s), however a thorough understanding of each business type is critical in creating the suitable entity decision.

S-Corporations are a standalone small business entity which functions similarly to a C-Corporation. S-Corporations are a tax entity, not a legal thing. Taxpayers make their legal thing to be treated by elections as an S-Corporation for tax purposes. An S-Corporation issues investors with stock and includes a board of officers and directors. It provides the exact same protection. They aren’t personally liable for your S-Corporation’s actions. Contrary to C-Corporations, S-Corps could have up to 100 shareholders and one type of stock. Foreign shareholders aren’t permitted to own stock of an S-Corporation. While S-Corporations and C-Corporations differ in many ways, they’re taxed similarly to partnerships & LLC’s. Form 1120S with the IRS files. Form 1120S comprises a Schedule K-1 for every shareholder. The S-Corp doesn’t pay tax, which is another difference between a C-Corp along with an S-Corp. Instead, this S-Corporation’s shareholders pick up their part of the S-Corp’s income and pay the tax on their tax return, just like LLC or a partnership.

Sole Proprietorships:

Sole proprietors are required to pay self-employment tax on their earnings. For sole proprietors, there is not an employer paying a portion of these payroll taxes (Medicare, social security) on their behalf. While a sole proprietorship is easy to set up, the downsides are personal liability and extra employment taxes.

S-Corporation:

– liability do you want ?
LLC’s will also be allowed to elect to be taxed as either an S-Corporation or even a C-Corporation. See the section that follows regarding the advantages of an S-Corporation election.

LLCs are flexible in the way they allocate income to spouses and in how they pay and report income taxes. It follows that the LLC will file Form 1065 on or before March 15. Form 1065 will comprise a Schedule K-1 for all the LLC’s members. The members will report their share of the LLC’s income & deductions from Program K-1 on their tax returns. The LLC inside this scenario does not pay the tax upon the profits of the entity. Rather, the LLC’s members are responsible for paying their share of this entity’s taxes. In the majority of situations, members of the LLC are taxed on their proportionate share of the profits of their company to the quantity of money, not for a given calendar year. Both of these amounts can be different. By way of example, let’s say an LLC accounts $100,000 of taxable income on Form 1065 for 2019. Let us also assume Tom received $40,000 of distributions during 2019 by the business and is a 25% member of the LLC. Tom would pay tax on $25,000 of profits for 2019 and generally not. As mentioned, LLCs with a number of members are taxed as a partnership by default. This means there is not a individually required tax filing for your LLC and the income/deductions of the LLC are reported on the member Form 1040 Schedule C.

Another drawback to C-Corporations is they are subject to double taxation. C-Corporations create a separate tax filing due April 15 for calendar-year entities. The C-Corporation is liable for paying taxes because the Corporation is a separate individual. Unlike the other entity types, the business’ proprietors are not responsible for taxation on earnings that are annual. For a Corporation to cover shareholders, dividends must be issued by the C-Corporation. These dividends are not. Additionally, the shareholders will pay tax on the dividends they receive. This creates tax on earnings that are C-Corporation: that the C-Corporation pays tax on earnings, subsequently pays dividends that they can not deduct for tax, and then the investors pay tax.

A unique aspect of an S-Corporation is an LLC can elect to be taxed as an S-Corporation. This signifies is that instead of filing Form 1065 as a partnership, the LLC may file Form 2553 with the IRS to choose to be taxed within an S-Corp (and file Form 1120-S instead). Why would a LLC make this election? The advantage of an S-Corporation is that self-employment taxes can be saved on by employee-owners. Normal LLC members need to pay a 15.3percent self-employment taxation (which covers Medicare & Social Security) on their full share of the venture’s net income. By switching an LLC and paying an employee-owner a reasonable salary, the S-Corp can deduct the company portion of Medicare & Social Security taxes. The surplus money earned by the is not subject to self-employment taxes. Because of this the self-employment tax advantages, S-Corp’s are very common tax arrangements.

SEE PREFERRED PROPERTIES OF TEXAS FEATURED LISTINGS

Raw Land Investing With Confidence: Everything You Need To Know

November 15, 2019 by chorton Leave a Comment

Raw Land Investing With Confidence: Everything You Need To Know

With the right knowledge and experience at their disposal, raw land investing can be highly lucrative for real estate investors. At the very least, those interested in buying land are only limited by their imagination and zoning regulations. The key to successful raw land investing is a unique combination of due diligence, hard work and attractive profit margins. Continue reading if you are interested in investing in land with more confidence.

What Is Raw Land?

Raw land is a plot of land that has not been developed or prepared for construction; it’s completely untouched terrain. Despite an inherent lack of grading and subdividing for construction, however, raw land investing is becoming increasingly popular among real estate investors. This begs the question: Is buying land a good investment for everyone? Not surprisingly, the answer is completely dependent on what an investor may want out of a respective deal.

For some, raw land investing may sound counterintuitive. Likewise, investing in land should be reserved for those with more patience and a penchant for long-term strategies. Consequently, there are also several reasons someone may want to buy raw land. Specifically, investing in land represents a blank canvas for those with the foresight to do so properly—raw land may be developed into whatever the investor sees fit. Perhaps even more importantly, investing in raw land has become synonymous with persistent cash flow and appreciation.

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investing in land

Does Land Appreciate?

Raw land is categorically and objectively an appreciating asset for two simple reasons: limited supply and increasing demand. There is a finite amount of available land that has yet to be built upon, making it a very attractive commodity in a world where the population is increasing exponentially. Therefore, in accordance with the most basic economic principle (supply and demand), raw land will inherently increase in value as demand grows for the limited asset. It is no longer a question of whether or not land appreciates, but rather how much it will appreciate.

How Many Years Can You Finance Land?

The amount of time a traditional lender will allow borrowers to finance a land investment will vary. There are several variables that will determine the loan duration one may expect to receive for raw land, not the least of which includes the plot’s location and its use. For example, lenders are more willing to extend their loan durations for plots of land that exhibit a degree of intrinsic value. If for nothing else, a promising plot of land represents a less-risky investment on the bank’s behalf. That said, those investing in land shouldn’t expect considerably long loan terms. Buying raw land typically coincides with short, restrictive payment terms. While some raw land investors may be able to increase the length of their loan, most terms will be limited to about 10 years or less.

What State Has The Cheapest Land Per Acre?

Not unlike every real estate exit strategy know to today’s investors, investing in land coincides with an inherent degree of risk. Raw land investing for future gains is far from a guarantee, but that doesn’t mean it’s impossible. The trick is to find relatively inexpensive plots of land with plenty of potential for future prospects. For those of you thinking about buying raw land with the intentions of making a profit in the future, here’s a list of five states where raw land prices remain affordable compared to their future potential:

Tennessee
Arkansas
West Virginia
New Mexico
Arizona

6 Benefits Of Raw Land Investing

It goes without saying, but there are always risks and rewards associated with any type of investment deal, whether it involves raw land or not. The key, however, is understanding your exit strategy, weighing your options, and making the appropriate decision based on your desired results. That said, research will ultimately define your success with a raw land investment. The current conditions of the market, demand for housing, mortgage rates, the local economy, and new housing construction will all play a critical role in how you benefit from your raw land investment.

For investors, the advantages associated with a raw land investment include:

Easy to acquire
Little-to-no competition
Low cost to own and maintain
Potential for quick profit
Flexibility to build or hold
Potential for passive income

Although the benefits of raw land investing are far and wide, they won’t be achieved without due diligence on the investor’s behalf. As part of your due diligence, running the numbers will serve to not only determine if you can afford the land, but if it’s actually financially viable. The numbers never lie, and in this case, they will almost always forecast whether your raw land investment is worth it or not.

Land Investment Tips: How To Invest In Land And Profit

Now that we understand the potential benefits of a raw land investment, it’s time to take a look at the various ways investors can make money by investing in land:

Investors can divide a single plot into several plots to increase its value.
Investors can develop on raw land to increase its use and value.
Investors can simply buy and hold raw land, as it has historically appreciated more often than not.
Investors can lease the land, long or short-term, for a number of reasons to collect rent.

Subdivide For Land Sales

The first way investors can make money off their raw land investment is by subdividing it for land sales. Investors have the potential to increase the total value of their investment by separating it into smaller lots and selling them individually to buyers. In many cases, the subdivided land can be more valuable than the whole. This is due to marketability, and the fact it might be easier to find a buyer for a smaller, more affordable parcel of land, as opposed to one large lot.

The subdivision process of raw land consist of two parts: mapping and legal documentation. The mapping aspect refers to the proposed subdivision area and how it should be defined, while the legal documentation involves submitting the proposed subdivision, which generally includes an application and fee, to the local county. If the application is approved, the subdivision mapping is recorded in the county records.

Develop It

As cities expand, the flexibility of raw land investing continues to be its biggest strength. For many investors, one of the more popular ways of making money with raw land is by developing it into something more.

Depending on the location and zoning regulations, a raw land investment can be developed into a plethora of things, including a residential, multifamily, or even commercial property. In fact, a raw land investment can sometimes be developed into multiple entities, which can ultimately produce a multitude of revenue sources for investors. In addition, this land can become very valuable over time as home and rental prices go up.

Buy And Hold

Thanks to inflation, one of the primary sources for a return on investment with raw land is through appreciation. Because the price of land today has the potential to become more valuable in coming years, buying and holding onto undeveloped land has the potential to earn viable returns for investors, especially in the long-term.

In addition, there are various options for investors to purchase raw land below market value. From auctions to county tax sales, investors have numerous options to obtain land at discounted rates, which will only enhance their ability to earn a positive return. Additionally, investors are recommended to conduct their due diligence when purchasing land through the auction process. In many cases, these deals can be full of risk with little-to-no upside.

Lease It

There are many businesses looking to lease land on a monthly and yearly basis. Generally speaking, these operations need undeveloped land to conduct their operations. A land lease, which is also known as a ground lease, allows individuals and/or companies to rent a parcel of land rather than purchase it. In addition, a raw land investment can be leased for other purposes, including billboard rentals, cell towers, ranchers, and utility companies. This method of earning a profit is very similar to other types of leasing programs, which aims to earn a monthly return on the property through a lease agreement.

How To Evaluate Your Raw Land Investment

The strategy you choose will ultimately guide your search for the perfect piece of raw land. The reason for this is that each investment type will require slightly different characteristics when it comes to the land. For example, the optimal buy and hold plot will likely be in an entirely different area than one intended for billboard rentals. Buy and hold plots tend to appreciate faster in up and coming markets, while land for advertising can be in smaller markets, as long as they are high-traffic areas. Location is not the only thing to consider when evaluating a raw land investment. There are a number of other factors that should come into play before you agree to sign on the dotted line. Review the following questions next time you consider a potential raw land investment:

Where is the plot located? While location is not the only thing investors should evaluate, it is the most important. The location of a raw land investment determines the viability of the deal. The plot could be spacious and affordable, but if it’s truly off the grid it may not make the most sense as an investment. Determine your strategy, and narrow down different market areas with options to choose from. For example, if you are hoping to complete a new construction project research expanding neighborhoods in your market area. Once you have an area in mind, then begin searching for the right piece of land.
How is the property zoned? A property zone essentially designates what it can be used for, like commercial or residential space. Land can be rezoned, in fact it happens all the time, however this process can greatly impact the timeline of a given investment deal. According to Legal Match, the rezoning process can take around 180 days to be completed. Depending on your exit strategy this can increase holding costs and significantly delay potential profits. Always be aware of a property’s zone before investing to avoid being blindsided by any regulations.
Are any utilities available? When most people think of raw land, the first thing that comes to mind is typically a plot of land out in the middle of no where. Although this is not always the case, some land can be located in rural or completely undeveloped areas. That’s why it is crucial to learn what type of resources are available at the property before closing. Are there water lines or electricity? What about internet? These factors can influence not only the overall cost of the deal but also the potential timeline of the project—as you may find yourself waiting for utility companies.
What is the history of the land? Similar to the purchase of a residential or commercial property, it is always necessary to complete a title search. Look at the title history of the land and determine whether there are any ownership disputes. Pay special attention to how long the current owner has had the property. If they are trying to sell quickly after owning it, it could signal there is an issue with the property (though they could just be ready to get rid of the investment).
Are there any other issues with the area? Before making an offer on a raw land investment, it is a great idea to hire a land surveyor to check out the property. A land survey will confirm the boundaries of the plot and identify any potential restrictions. For example, the land may be in a designated flood zone. Depending on your plans for the land this could greatly affect the potential profitability of the deal. Take precautions when purchasing raw land by doing your homework and hiring a professional land surveyor.

Is Investing In Raw Land Right For You?

In order to be absolutely sure whether or not raw land investing is right for you, ask yourself the following questions, and answer them sincerely:

Can You Manage Risk? Although raw land investing tends to be predictable, as with any type of investment, there is always some risk involved. If you are the type of person who is easily overwhelmed by the unknown or you are someone who jumps into things hastily, raw land investing is not a niche you should pursue. When you invest in a plot of land, you are essentially predicting the future. The moment you put money down on the table, you are saying, “I believe that what I am buying into will increase in value overtime.” While, in theory, you are probably right, there are some things that are out of your control.
Are You Financially Organized? When it comes to raw land investing, more than likely, you will not realize a profit as fast as you would if you were rehabbing or wholesaling properties. Because of this, it is crucial that you are vigilant about organizing your finances. This should not, however, deter you from undeveloped real estate. Because raw land is a buy and hold investment by nature, it can be a while before your land appreciates enough to produce cash flow. If you are a novice investor, you must perform an honest evaluation of where you stand financially. If you are a seasoned investor, you must assess the state of your finances in terms of your current investments and how you want your business to grow. If you are inherently frugal and make money saving a hobby, it is likely that you will realize success as a raw land investor.
Will You Prioritize Research & Due Diligence? Raw land investing is all about asking the right questions, and if you’ve never purchased vacant land before, you are probably not up-to-date on the jargon and terminology. Before investing in any land, it is vital to first research the market. Has there been recent development in the area? Is your plot of land in the path of future growth? If the answer is yes to either of the above question, your property already meets some crucial criteria. Next, you should talk to your lawyer, the seller, and you inspector’s about the zoning on the property. Are there clear boundaries drawn on the plot? Is it zoned for commercial, residential, industrial, mixed-use, or agricultural development? What was the land used for previously? Asking and getting specific answers to all these types of questions is an absolute must. Also be sure to ask questions about the land’s topography, required annual taxes, available public utilities, usage restrictions, and road access. Minding due diligence and researching the right questions are what sets apart the successful raw land investors from the not-so-successful raw land investors.
Do You Have Support? Unfortunately, raw land investing is not a “get rich quick” plan. It takes a lot of hard work and perseverance to realize success in the real estate investing world, which is why a solid support system is crucial to have. While it is important to rely on yourself as an entrepreneur, your own personal cheerleader is nice to have when times get tough. Whether this be a business partner, fellow investor, or family member, you are more likely to be successful compared to someone going into raw land investing alone. If you are having trouble finding your support system, consider joining a local REI group or even create your own Meetup.com group. Isolate yourself from the naysayers in your life and find people who are there to help you stay motivated.

Summary

Raw land investing is not a strategy without fault. Not unlike every other exit strategy in the real estate industry, raw land investing coincides with an inherent degree of risk. However, educating yourself on the topic will not only give you the confidence you need to commit, but also increase your chances of realizing success.