Time Limits: The Internal Revenue Code (IRC) requires that the exchanging taxpayer (the investor) identify like-kind replacement properties within 45 days of the sale of the relinquished property. The identification must be in writing, signed by the taxpayer, and sent to the qualified intermediary (QI) holding the exchange proceeds. The properties must be unambiguously identified. For example “a multi-family house to rent to tenants” would not be specific enough to meet the requirements.

The Identification Rules: The IRC provides three different rules for determining how many properties can be identified to the QI. Take time to identify, as the rules only permit a successful exchange when the replacement property or properties ultimately acquired are on the identified list signed within the first 45 day period. Investors can select only one rule from the following:

• The Three Property Rule: This is the simplest, and most commonly used. This limits the total number of like-kind replacement properties to 3, without regard to valuation. If the investor plans to diversify into multiple properties, however, this option is not the best. But a one for one exchange is easily facilitated by the investor selecting 3 appropriate properties, and ultimately closing on one of them in the allowable period.
• 200% of Fair Market Value Rule: This permits an unlimited number of properties to be identified as like-kind, provided the total market value of all those identified does not exceed 200% of the net sales value of the relinquished property. For example, suppose an investor sells an apartment complex for $5,000,000. Using this rule, the exchanging investor can identify an unlimited number of like-kind properties provided that their aggregate value does not exceed $10,000,000.
• The 95% Acquisition Rule: This rule provides no limit on the number of identified properties, nor the value of the identified property, provided that the investor actually acquires identified property from the list totaling 95% of the aggregate value of all property on the list. So, for example, an investor selling one apartment building for $5,000,000 could identify 20 properties valued at $50,000,000, provided that he actually acquired properties on that list that total at least 95% of the total value of all properties on the list ($47,500,000 in value). This rule should only be used where the investor plans to step up significantly with multiple properties, and when the other two rules above are inadequate. Remember, failing to actually acquire property having aggregate value of 95% of the total value on the list will cause the entire transaction to be disallowed.

• Have you refinanced? If you have not called every client you have ever worked with and asked them if they have refinanced recently, then you’re missing a great opportunity. Very few homeowners who have not refinanced in the last 180 days would not benefit from doing so again now, even with the added closing costs of doing it again, given the historic and unprecedented interest rates we are seeing. This “gentle reminder” is also a way to introduce your client to a preferred financing expert to ensure that your client is in capable hands during the refinance. It’s also a nice excuse to make a call to your prior clients and catch up.
• iHow are things going? A buyer I represented 3 years ago called me recently and asked me to help him again now that he was selling. There was a deal on the table and he wanted to forward his broker my contact information. “Of course,” I responded, happy to help, but was curious about why he was using a different broker than the one who had assisted him in the purchase 3 years ago, and who had originally referred him to me. So I asked. “Oh, I liked her very much,” he responded, “but I hadn’t heard from her in a while and wasn’t sure if she was still in the business, so I asked a friend at work who they used and got a referral.” Sometimes, we just need to keep reminding clients that we’re still in the business and still there to help them.
• Control the referral. Last year I represented a seller who decided to rent, rather than buy, for a year or so. The broker who had represented them successfully on the sale – and who they liked very much – didn’t do rentals and instead referred the seller to a colleague to handle the rental. The referring broker moved on to another deal, and simply didn’t stay involved in rental part. Now, aAfter a year of renting, the buyer is back in the market, looking for a new apartment and calling me for counsel. But this time they are using that “rental broker” for the purchase. Be careful about handing your valued clients over to another agent, and if you must because they need an expertise that is not yours, be sure to stay involved, insisting to go along on rental showings even if you’re not taking a commission. This is “your client” and you need to stake your claim.
• Attend the closing. When you’re not there, clients always ask me, “where is the broker?” I know, it’s not really necessary, and someone can pick up your check, but for clients this is a huge day, and the culmination of a sometimes long and exhausting transaction. Clients are let down when the broker doesn’t show. And it’s an easy way to show up and bring a nice gift for the client and wish them well on their next chapter. Hopefully, they’ll do it all again in a couple years and call you when they do!
• Understand your business. I know closing costs aren’t the sexiest part of real estate, but buyers need to know and sellers always ask. So learn them, and learn them cold. It will set you apart from the pack and make you a valuable part of the transaction from the outset. Here’s a guide I’ve written that can help you figure them out.

But a short sale is different than a typical sale. Here are some tips for success if you or your client has decided to pursue this route:

• Use an experienced lawyer: It’s important that the lawyer be involved from the beginning of the marketing process and choosing someone with experience and a good track record is imperative. Our office has closed many short sales and can effectively guide the seller and broker through the process. Typically the fee for a short sale is paid by the seller’s bank, so no upfront fees are required.
• Get your materials together: Submitting a complete package with a compelling financial hardship letter is a key to success. The short sale lawyer must assemble the package and submit it to the proper bank department. Omitting documents or completing the forms incorrectly will slow down the process, and might cost you the deal.
• Let buyers know: The short sale buyer must be notified of the seller’s intent to sell short, and must cooperate. Often the payoff bank will require proof of buyer’s funds to close, or evidence of financing, and without these documents the short sale won’t be approved. Moreover, the process can take longer than a typical sale, so the buyer must agree to the timeline.
• Don’t stop paying your mortgage if you can afford it. The impact on your credit score will be less if you remain current on your mortgage payments throughout the short sale process. Of course, many sellers with financial hardship cannot afford to do so, but if you have the cash flow to make the payments then keep making them, as it will help the recovery of your credit score.
• Be patient. Banks are quicker than they used to be in processing short sales, but the process can be frustrating while the bank makes decisions.

• You Can’t Have Too Much Information: When clients ask questions these are barriers to entering into the deal. Allowing the questions to linger creates uncertainty, and can derail an otherwise interested buyer. Work quickly to provide complete and accurate answers, it will move buyers from the sidelines to the contract signing much quicker.
• Don’t Chase The Market: Pricing is more important than ever. Prior methodologies of pricing high in hopes of getting a palatable offer have given way to pricing at the market. Property that moves quickly in this market is priced right, not overly aggressively, and sellers should not be afraid to accept an early and full price offer – it might not come back so soon so be careful to counsel your sellers that early offers can be best.
• Give Buyers Time To Get Financing: The days of fast and quick financing are over. The documentation required for a traditional, institutional loan is significant, and bank underwriting is far more stringent than it used to be. Some sellers think it’s an advantage to give a “short loan commitment period” in the contract, but in fact such a tactic effectively gives the buyer an option to terminate if they change their mind. A 20 day loan commitment period? It will never happen, and a buyer who after 20 days changes their mind can simply terminate for failure to get financing.
• Interest rates: Hard to imagine that they will stay this low for too much longer, so be sure to explain to buyers that the cost of money is as important as price in valuation. Home affordability will never be where we are now, so remember to educate buyers that it’s not just price, it’s the monthly cost of ownership that is the key.
• Remember The Principal Of Trading Up: It’s easy for sellers to focus on the fact that their home is not selling for as much as it would have a few years ago, but it’s not always obvious to clients that when the sell is timed with a step-up buy, the homeowner comes out ahead. Selling your $500,000 apartment for 20% off peak? If you time the transactions together, the $1,000,000 buy is also likely 20% off peak, and thus you’re getting that much more for your money, and dollars ahead.
• Poor Credit Is Expensive: Most buyers start the home buying process by looking for an apartment. But smart buyers start with a mortgage banker, and pull their credit report to see where the numbers are. If you are on a borderline, get a credit coach to “repair” your report and bring the numbers up 30 or 40 points. That difference can be 50 basis points on a loan, or thousands of dollars in savings over the lifetime of the mortgage.
• Don’t Negotiate To Win: Negotiation is back, and there are plenty of “experts” out there and each one seems to have a different theory. Here’s the report from the trenches, based on successfully negotiating over 10 deals a week over the last year: don’t focus on winning, focus on getting the deal done. I’ve seen deals go south over a light fixture, when the truth is the light fixture was merely a symbol over which the seller wanted to get a “win” in the negotiation, having felt “beat up” by an aggressive buyer. It’s a light fixture, get over it, buy another one, get the deal done.

Here are the basics of the new added sales tax.

Rule 1: The tax only applies to income from interest, dividends, rents (less expenses) and taxable capital gains (less capital losses).

Rule 2: The tax only applies to individuals with an adjusted gross income (AGI) above $200,000 in the tax year, and for couples filing jointly with more than $250,000 AGI, before adding the taxable gain.

Rule 3: The formula for calculating the tax applies if Rules 1 and 2 are met, and is the lesser of the (a) investment income amount, or (b) the excess of the AGI over the $200K/$250K threshold.

A few examples might help.

Example 1: A married couple sells their home in 2013 for $1,200,000, and realizes a gain of $575,000. In tax year 2013, the couple (who file jointly) have an AGI of $350,000 before adding the gain.

Analysis: Rule 1 applies, as this is income from a capital gain. Assuming no capital losses, the gain of $575,000 is subject to the remaining rules. Rule 2 applies because the couple has AGI exceeding $250K (they file jointly). But their total gain of $575,000 on the home is still subject to the exclusion of gains on the sale of a principal residence, so the couple is exempt from the first $500,000 of gain, and thus must deal with $75,000 of gain after the $500K exemption. That taxable gain is added to the AGI ($350,000) to get $425,000. Now, the couple pays tax on the lesser of the investment income amount and the excess (see Rule 3 above). The investment income amount is $75,000 (total gain of $575,000, less the $500,000 principal residence exclusion). The excess over the threshold is $175,000 ($425,000 less $250,000). So the sales tax must be paid on the lesser investment income amount, or $75,000. The rate of 0.038 on $75,000 is $2,850, which is the additional tax to be paid.

Example 2: John, a single person, sells his home in 2013 for $1,000,000, and realizes a total gain of $375,000. It was his principal residence for the last 7 years, and his AGI is $125,000.

Analysis: Rule 1 applies (this is income from a capital gain) but Rule 2 does not, his AGI is below the threshold. You can stop there, the sale tax will not apply.

Example 3: Pam, a single person, sells her home in 2013 for $3,500,000, and realizes a gain of $700,000. It was her principal residence for the last 5 years, and her AGI is $425,000 before the gain.

Analysis: Rule 1 applies, this is a capital gain. Rule 2 applies, as the individual has an AGI before the gain of $425,000, which is higher than the $200,000 individual threshold. Rule 3 requires that that the tax applies to the lesser of (a) and (b) above in Rule 3. Since it was a principal residence, the taxable gain is reduced by $250,000, to make it $450,000. That number is added to the AGI, to get a new AGI of $875,000. The excess of AGI over threshold is $675,000. So the tax is paid on the lesser number, which is $450,000. The additional tax owed is 3.8% of this amount, or $17,100.

Most transactions will simply not be covered by this additional tax. The principal residence exclusion handles many gains, and the adjusted gross income thresholds will exclude many sellers. Those who are not excluded will in fact have to pay the 3.8% tax, but only on the lesser amount of the investment income or the excess over the threshold.

Talk To The Tenant: This seems obvious, but it is amazing how many times a landlord commences an action for non-payment before picking up the phone and having a discussion with the tenant about what is going on. Just like a credit card company who calls their customer many times before suing on an outstanding and unpaid credit card bill, a landlord should try direct contact first. Once you sue a tenant, and they get a lawyer, that direct communication is going to be more difficult as the tenant uses the lawyer for communication. Sometimes the tenant is not paying because of an unresolved repair, or a loud neighbor. Moreover, if the tenant is having financial issues, set up a plan to get them current. This solves two problems. First, it gets them to admit that there are no issues other than their inability to pay. And second, it can sometimes get the tenant back on track to current rent without having to go through the courts.

Negotiate With Your Head, Not Your Heart: If your reason for not accepting a deal with your tenant is that you feel it is not fair, think again. The analysis is financial, not emotional. Take for example a tenant who loses his job, has no resources, and cannot continue to pay rent. You call the tenant and they explain that they can move in with their mother in New Jersey, but they cannot afford the cost of a mover. The tenant explains that if you, the landlord, will pay for the mover, they will move out next week and go live with their mother. It’s the 20th of the month, the rent is $1,200 per month, and a mover costs $1,000. Your first reaction might be outrage. But let’s be cold and calculating. If the tenant stays past the 1st of the following month, another $1,200 of rent is lost, and you continue with the same problem you had before (a tenant with no ability to pay). But if you cough up the $1,000 for the mover, the tenant is out, you get the place cleaned, and perhaps rented with a cash flow, before the next month begins.

Provide Customer Service: Many landlord/tenant relationships start out on a bad note. With the landlord looking at the tenant immediately as an adversary, rather than a client for whom they are providing a service. If a tenant has 10 creditors to pay, and one of them provides outstanding customer service, who do you think gets paid first? It’s easy to justify not paying someone you don’t like, so don’t be that landlord. Check in by email or a call every couple of months with the tenant to be sure things are acceptable. Kill them with service, and they will less likely to walk away without paying or stiff you on the last month’s rent.