Investors Pages
Investors pages
1031
A Tax haven for promoting wealth
The 1031 tax deferred treatment of capital gains is one of
the best real estate investor vehicles for preserving and
building real estate wealth. This provision of the Internal
Revenue Code allows property owners to exchange their property
for other like-kind property without recognition or payment
of capital gains at the time of exchange. In some instances
it is possible to defer the payment of capital gains tax
indefinitely.
The deferred exchange is different than a swap
Exchanging properties is not new. The "your property" for "my
property" type of direct exchange (i.e., a swap) has
been in practice for a long time - it's called a two-party
exchange. The difficulty lies in finding two owners who each
want the other's property. Normally, one owner wants to sell.
This presents a problem if you want to dispose of property
to finance the acquisition of new property and avoid taxable
gains that would substantially reduce your equity.
To solve the dilemma the IRS issued the deferred exchange
regulation-Reg 1.1031(k)-1. It permits you to "sell" your
Relinquished Property now and use the proceeds to buy a Replacement
Property later. As long as it's done following the rules
and using the services of a Qualified Intermediary, you get
tax deferred 1031 treatment.
Qualified Intermediary
The Deferred Exchange Regulation is a taxpayer's dream come
true. The Regulation's secret weapon is the creation of
a legal entity called the Qualified Intermediary or QI.
This new entity is permitted to serve as your agent and
facilitate the exchange for you without getting you involved
in a taxable sale of your old property. By using a Qualified
Intermediary to handle your exchange transaction, you can
now turn the sale of your property, and subsequent purchase
of another "like-kind" property, into a §1031
exchange.
The selection of a QI is one of the most important decisions
you will make in a §1031 Exchange since the QI will, at some
point in the transaction, be holding your money in their
account. The industry is largely un-regulated so the burden
falls on you, the consumer, to be diligent in your search
for a reputable QI. A real estate agent with experience in
§1031 Exchanges will be able to point you in the direction
of a good QI.
How It Works
There are some basic rules you must follow in any §1031 Exchange:
Both old and new properties must qualify as investment or
business use. Once you close on the property you are selling,
you have 45 days to list any properties you may want to buy.
You then have 180 days from the close of your old property
to close on the new property or properties from the list.
The proceeds from the initial sale must be held by the QI
so that you do not have access to the money.
This is only a brief explanation of a §1031 Exchange. The
actual mechanics of the exchange, while simple, require strict
adherence to the regulations at every stage or the tax deferral
could be disallowed. It is imperative that you consult with
an experienced Qualified Intermediary prior closing any sale
that you may wish to qualify for §1031 treatment.
Using a home as a rental
Renting your home out as a seasonal(vacation rental)or long
term.
Long term renters are easy to find as there is a shortage
of homes for rent. So, if you want to buy something for retirement
or a vacation home and rent it out to help your payments-this
is typically the easiest way. (Long term rentals are considered
to be anything over 6 months, as the tenants don't pay the
11.5% Florida tax)
• Generally long term rentals should be unfurnished.
• Initially we do a credit check before submitting a lease
to you, then with your approval of the lease, we collect
the first and last months rent plus a security deposit which
is typically a months rental amount. We are very proactive
in this area and I assure you the home is handled professionally.
• As to utilities- The tenants take the lease to the water,
electric, phone and cable people and have the utilities put
in their name and of course they pay their own deposits.
Garbage down here is included in your tax bill-so there is
no garbage bill.
• Seasonal rentals. Currently we can only rent monthly or
28 days, meaning the owner can only rent the home out 12
times per year. This means about 5 months of income-Jan-Feb-Mar
and July-August. There are some April and June monthlies.
• As to finding people to rent for the rest of the time!
I deal a lot with navy transfers÷they generally need something
for 2-3 months while they sell their home and buy another.
So if it is the off season, I try to fill your home up this
way. Another way to fill in the gaps is to Companies that
come down here. Most of the major government and private
building projects are done by outside firms. Their management
people will generally want a nicer situation so they will
generally rent homes at better than average rates.
• As to what is the best rental situation , that is size,
which areas, views, pools, how water and boating accessibility
affects rental amounts and the typical rental amounts for
both long and short term, plus the fees involved, please
contact me. As to extra costs and what is necessary to have
a Home as a Rental.
• When you rent your home out you need to license it through
the County. This costs $25.00 and we handle the paperwork
for you. The County and the Tax people want the home licensed
so they know where there may be tax dollars coming in. When
your home is used as a rental, in effect you are operating
the same as a hotel or motel and so come under their safety
guidelines.
• Every bedroom and the main living area must have a hardwired
smoke detector and there must also be an escape light. This
light comes on in case of a power outage-this also must be
hardwired. (About $350.00 installed smoke detectors and escape
light for a 2/2)
• There also needs to be a professional quality refillable
fire extinguisher that is approved by the fire department
(about $55.00). This would be the same as you'd find in a
restaurant or hotel room. There needs to be a dead bolt on
the door that works from the inside and is a different key
than the main door. All of these issues help protect your
liability in cases of fire/break in.
• When the home complies with all of the above and we have
the signed contract, then it can go into the rental pool.SPECIFICS
OF THE AGREEMENT
1 Coldwell Banker agrees to manage the home for a period
of one year with the contract automatically renewing unless
either side gives 90 day notice.
2 Our fee for vacation rentals is 20%---what is really important
here are the following points.
• There are no hidden fees-such as credit card charges etc.
• We typically send you the money within 2 weeks of receiving
it÷we do NOT hold it until the first of each month or split
it out each month. We always collect cashiers checks from
the renters so when the money is received, it is quickly
processed through our main office and sent to you.
• There are no charges for going up on our Web sites÷5 in
all.
• There are no charges for the pictures that are taken.
• There are no charges for any specific flyers, brochures
or ads that we run on our rental properties.
• Please go to www.rentalsfloridakeys.com
• We actively and aggressively manage your home. Meaning
we get the best customers (qualified) We play by the 2 people
per bedroom limit, and we work to keep it filled other than
your personal usage
• All of the computers in the 6 engel & völkers offices
throughout the Keys are linked. If a customer inquires about
a home, it will show up on the rental agents computers.
• We have Handymen, Electrical, Plumbing, Landscaping, Pest
control and appliance people that respond when there is an
emergency.BOOKING THE HOME FOR THE OWNER.
This is very simple. You would call the rental manager and
have him block out the home when you want to use it. We don't
charge a fee for any of that. Generally you would have us
arrange for the home to be cleaned after you leave.FLORIDA
BED TAX Florida charges a 11.5% tax on all hotel, motel,
home rentals. We collect the money from the tenant and disperse
it to the tax agency.CLEANING SERVICE The tenants pay this
fee which varies based on the size of the home. On average
a 2/2 is $100 and a 3/2 is $125.00.PETS AND SMOKING If the
home is no smoking, that is put in the rental file and the
tenants are informed before they book the home. If the home
allows pets, we collect a pet deposit which is added to the
standard security deposit of $500
How are emergency repairs handled?
• We have handymen available that can take care of small
emergencies or updates, as the owner requires. Since our
company manages over 300 rentals, we also have a good working
relationship with Plumbing, Electrical, Appliance and Carpet,
Tile people.What about Hurricane preparation?
• In the event of an impending Hurricane, the handyman or
someone else can be hired to put up the storm shutters, bring
in the lawn and patio furniture, etc for a fee-as we have
too many homes for us to do them individually. This agreement
should be set up in advance by the homeowner and the handyman.
We will help you find someone to do this.What makes a good
Vacation Rental
• A clean, well-maintained home on a canal or open water.
• Typically one of the bedrooms should have a set of twin
beds if the renters are bringing children.
• Good linens and towels and a backup set. This is especially
important for monthly renters.
• The washer, dryer and refrigerator should be newer if possible.
• A good Television hooked up to cable (about $35.00 per
month) and a CD or tape stereo system.
• The kitchen must be completely outfitted. A microwave is
also very important for renters.
• Patio and/or Lawn-Deck furniture. If there is an upper
deck, a table and chairs plus loungers.
• On the water side, below a set of loungers and chairs.We
get a lot of repeat renters÷if the renters have a good experience,
they will come back. We see this especially with people that
book two to three months a year.Where do we get the renters
• If you're reading this on my web site you have the answer.
If not most of our renters come through the Internet and
one of our 4 sites.
• www.dennishanda.com www.floridakeysrealestate.com www.rentalsfloridakeys.com
www.fkren.com
• All of our sites are linked to Key West or www.flakeys.com
which averages over 500,000 views per month. Basically if
anyone looks at Key West they find our sites.
• The balance come through National Advertising placed in
magazines such as Island Living, Florida Sportsmen, Salt
Water fishing and Dive magazines as well as regional publications
and our own buyers guide.
• Also all of our computers are networked meaning if someone
is looking for a specific situation such as open water it
will show up on the computer immediately as to area, availability
and price plus all other details.Who handles the renters?
• All of our offices have a dedicated rental manager whose
job is to rent the homes. In conclusion, there is a lot to
discuss on rentals and this is used to just get you information
regarding the main issues.BUYING RENTAL UNITS-DUPLEX-OR MORE
UNITS
• There are Duplexes throughout the lower Keys and a few
3-4 unit complexes. The 3 to 4 units are generally in Key
West or Marathon.In looking at the return, generally it runs
around 10% in the Keys÷this includes the large guesthouses.
When a return of 14% or more comes up they generally go very
quickly.
DUPLEXOn the water generally start at $600,000. Nicer ones
(maintained-updated appliances-tile) go for $775,000 and
up. A dry lot duplex can start at about $550,000. These generally
have the best return percentage.3 TO 4 UNITSGenerally in
Key West or Marathon.
• In Key West, these can be good, especially if it's located
in Old Town and one or more of the units has a transient
license, meaning it can legally rent weekly.
• These type of situations run from about $850,000 and up.
In Marathon from about $750,000 and up.MOTELS-MULTIPLE UNITS
• These are generally found in upper keys, Marathon and of
course Key West. The more affordable ones ( one to two Million
dollars) are generally from Marathon north to Key Largo.
See Commercial section of my site. If there is a specific
situation you want please let me know.
We only spend a small percentage of our lifetimes outdoors, why not make the most of it.