The Improvement Tax Exchange in a Nutshell

Can I do an improvement tax exchange with a property I’m building? What must the home’s value be? I’ll cover that and more in today’s overview of this type of tax exchange.  

Some of you have expressed interest in or have had questions about improvement exchanges in
the way of taxes. In light of this fact, today I’ll help you gain a richer understanding of how this
process works.

One such question I’ve received is, “Can I do an exchange while I build a new home?” As
a matter of fact, that’s precisely what these types of exchanges are for. For example, say you
sold a home for $600,000, and you subsequently bought a new home for $450,000. Then, during
the 45-day identification period, you decide that, because you have additional land you can build
on, you’d like to do so. Further, let’s say the additional unit will cost another $100,000, bringing your
purchase total to $550,000.

Unfortunately, you’d still be short of the requirement for an improvement tax exchange. If you’re
selling a home and would like to make this exchange, the replacement property that you
purchase must be of equal or greater value to the one you’re selling. One thing of
note, though: Having two units will amount to $900,000 as long as you close exchange escrow
(not to be confused with traditional escrow) in 180 days.  

As you make your way through the process, the exchange accommodation titleholder will hold
the title while you’re conducting construction improvement on the property and, after that 180-day
window is up, it will close. There doesn’t need to be a certificate of occupancy on the property
nor does it have to be completed; the only stipulation is that its value has risen.

The magic number for the home’s value is $600,000 or more—if you can meet or exceed
this, you can bank on your ability to carry out an improvement tax exchange. Although there’s
a little more intricacy and finesse involved than with a 1031 exchange, this is a totally feasible option
for a range of buyer types, such as someone looking to convert a commercial office building into a
medical office building.

If the prospect of making an improvement tax exchange on property intrigues you or you have further questions related to this, I welcome you to give me a call at 626-643-7090 or email me at ReoAgent@ShawnLuong.com. I’d be happy to sit down and speak with you!

Get Better Cash Flow With a 1031 Exchange

If you want to increase your monthly cash flow, it’s time to take advantage

of the 1031 Tax Exchange.

Did you know you can get up to 20% more monthly cash flow without spending a penny?
It’s true, and it’s as simple as implementing the 1031 Tax Exchange.

You’ve probably heard of the 1031 Tax Exchange in the past, but now’s the time to truly take to
heart what this strategy can do for you.

Through the 1031 Delayed Tax Exchange, you have 45 days after closing escrow to secure a
replacement property. You’ll also need to close escrow on the replacement property within 180 days
after closing on your home sale.

1031 Tax Exchanges allow you to avoid Capital Gains Tax upon the sale of your property assuming
you meet certain requirements. If you don’t pursue this strategy, there are three tax-related
concerns you’ll need to consider:

1. The State Tax. Depending on how much you make from your home sale, the amount you owe in
State property taxes may increase if you don’t use a 1031 Tax Exchange. To learn more about
what your taxes would look like without a 1031 Exchange, check out this calculator.

2. The Capital Gains Tax. When your sale is subjected to Capital Gains Tax, this means you could
lose a significant percentage of what you earn from your sale.
To learn more, check out this Capital Gains calculator.

3. The depreciation recapture rate. This is the federal tax rate that will be levied on the year that you file the tax return on a property sale without a 1031 exchange. The depreciation recapture amount is based on the cumulative depreciation that you have taken each year that you have owned the property and the rate is at 25%  on the total depreciation that you have expended on your tax returns.  For residential income property including apartment buildings over 5 units, the depreciation is taken over 27.5 years on the improvement value, not on the land.  For commercial properties such as retail, office, and industrial buildings, the depreciation is taken over 39 years. Check out this step-by-step guide to learn how to calculate a recapture rate for a given property.

If you have any other questions or would like more information, feel free to give me a call or send

me an email. I look forward to hearing from you soon.

How Should You Use the Equity in Your Home?

If you have a lot of equity in your home, keep reading. I’ve got some great tips for how you can use it to create even more wealth.

If you have equity in your home and you’re looking for different ways to use it, I’ve got a few
recommendations for you today.

First, you can get a line of credit. Depending on the institution you’re working with, you could
use that line to take out money via arbitrage. You could also invest in stocks, such as the S&P
500 Index, which returns about 9.7% per year historically.

One of the best ways to use your current equity to create more wealth is by investing in
real estate. Nowadays, you can get a great return cash on cash and with appreciation. Since 1980, we’ve
seen roughly 6% appreciation every year. A $500,000 home appreciating conservatively at 5% will gain you
$25,000 a year in value. That return is pretty spectacular on paper.

Finally, for those preparing for retirement, you can use your equity to get a reverse
mortgage. This will allow you to make one large down payment and not have to make a
mortgage payment. You will have to cover yearly property taxes and insurance, but there will be
no monthly payment.

As you can see, there are a ton of different ways to use your equity. If you have any questions for
me about this topic or about anything else related to real estate, don’t hesitate to give me a call
or send me an email. I look forward to hearing from you soon.

How to Take Advantage of Your Self-Directed Individual Retirement Account

I recently had the chance to meet with some old colleagues and friends of mine. During our
get-together, I was asked what I do with my individual retirement account (IRA) money.
I shared with them what I do.

I took my IRA money out and, combined with my wife’s IRA, we now have a self-directed

IRA. We've turned this into a checkbook controlled self-directed IRA LLC, and with our IRAs,
we are the owners and managers of the LLC. We’ve been using this fund since 2007 and
invested in a rental while most of the money goes toward flipping homes.

By using our own IRA money for the last 10 years, we’ve been able to grow our nest egg

by 300%. We just filed our tax returns and we can see the assets between 2007 and
2017, which showed about a 30% increase each year. My friends were definitely excited
after hearing what we were able to turn our IRAs into.

If you’re looking to leverage your IRA into a good income, I’d love to speak with you and go over your options. We can talk about getting a return by investing some of your retirement money. I look forward to hearing from you.

How to Prepare For Proposition 10 Rent-Control Changes

In our latest message, I’ll be discussing the potential changes of Proposition 10 and why you should consider increasing rent.

With votes being cast next month, Proposition 10 could potentially change the way rent control works
in Southern California. As the balloting comes closer, I’m being asked more and more about what
should be done in preparation for these changes.

The simplest solution? Raise rent periodically to reflect economic and market trends.

Employees receive wage increases for cost of living and inflation, and utility companies
increase price based on growing infrastructure costs. It’s no different in real estate—costs rise
over time.

Let me provide some examples:

The median price for a West Covina home in 2014 was $435,000 with an average price per square
foot of $278. In September 2018, the median price had risen to $568,000 with an average price per
square foot of $361.

To get a return of 5%, account for 6.5% to cover your costs of tax, insurance, and maintenance. In
2014, rent was around $1.50 per square foot per month, and for 2018 it’s up to $1.95 per square foot
per month.

In a recent survey, the median rent for a 3-bedroom house is $2,325 with a square footage of 1,400
square feet (about $1.65 per square foot per month). You can see the price increase from $1.50 in
2014 to $1.65 now.

If you’re a new buyer and are wishing you were at the $1.95 point, don’t worry! Over the past 35
years, home value has seen a roughly 6% appreciation. For the average owner who puts down 20%
on a new home, that appreciation of 6% amplified over 5 years is a substantial 30% return. On top of
this, a $60 monthly rental increase becomes $720 annually, adding even more value to your
investment.

If you’re looking for guidance in raising your rental prices, have questions, or need information,
contact me by email or phone and I’ll be more than happy to help. I look forward to hearing from you.

What I Learned About Our Market at a Recent Conference

I attended the largest default servicing conference in the country. Here are three things that I learned

I recently spent three days in Dallas attending the largest default servicing conference in the country.
Here are three specific takeaways from this conference that I want to share with you:

1. Fannie Mae has reported a very healthy gain. They have returned $193 billion to the treasury of
the $119 billion that they took out as a loan. At the height of the great recession in 2010, they had
a 170,000 home inventory. Right now, they only have an inventory of 22,000 homes.

2. Future trends. As you might recall, from 2012 to 2014 we saw the initial rate cast down to 2.5% for

five years. Now, those have been recast back up to 5% or 6%. Will homeowners be able to afford this?
We should know about a year from now, however, this won’t affect the market much aside from an
increase in distressed properties.

3. Demographics. This has a very important impact on our marketing and the economy. There are 75

a million millennials out there aged 19 to 34 and peer research has shown that over 50% of them are
still living with their parents. This explains why the home building industry hasn’t recovered like it has
in the past after past recessions.

Currently, the housing market is healthy overall, but there are definitely things to keep an eye out for

in the future. If you have any questions for me about the market or any of these takeaways that I’ve
discussed, don’t hesitate to give me a call or send me an email. I look forward to hearing from you
soon.

How Can You Sell for Top Dollar in Southern California?

You can't hope to sell your home for a lot of money simply by pricing it high. In fact, when you price your home higher, you're more likely to get less money for it - if your home even sells at all.

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When you go to sell your home, you cannot hope to put a large price tag on it and for it to sell well. Buyers simply do not respond to overpriced homes, and you need a much more complex strategy that will price your home at an attractive and fair market value. 

In the last seven years that I've been doing business, my list price to sale price ratio has been 103%, which means that I get people 3% more money for their homes, and this can add up to thousands of extra dollars in their pocket. 

One way that we accomplish this is by doing a comparative market analysis on your home to find what similar properties are selling for. We take into account many different aspects of your home, and we then decide what an appropriate price may be for your home.

The sweet spot when pricing is to price just below the market value, and then to have that attractive price bring buyers in and have them fight over your property. The end result is a bidding war where hopefully your home sells for much more than the original asking price. 

Pricing a home attractively takes a deep knowledge of a local market, and I have been in Southern California for quite some time now. I know the ins and outs of this market.

You can count on me to price your home so that it sells for top dollar! If you have any questions about how this can be accomplished, then please don't hesitate to ask me.