Income and Investment Property Buying Tips

The Crested Butte and Gunnison area offers many possibilities for Income and/or Investment Property. I have extensive experience assisting clients looking for Income Property, I would welcome the opportunity to assist you with your purchase.

This page is intended to provide useful information about real estate held for investment. There are tax and expense considerations, so check with your tax advisor.

Considerations

Income Property -or- Second Home – what are your objectives? Do you want a retreat for you and your family in the mountains, purely income property or a combination of both. There are limitations on personal use of real estate held for investments.

Cash Flow – if you choose to rent your unit out, don’t expect the income to exceed the expenses with a typical 80% mortgage, this rarely happens, but the cost of ownership can be reduced significantly by renting the unit out when you are not using it. And, if you increase the down payment to reduce debt service you can reach a positive cash flow. A good "estimate" of the income can be derived from a thorough analysis of the rental history for the property you are considering as well as the area it is in. The costs will be easy to identify. The major cost possibilities are: debt service with your new mortgage (principal and interest), taxes and insurance, home owners association dues and maintenance fees, homeowner assessments for planned improvements, property management fees and rentals commissions.

Rental History – a good "estimate" of the income and expenses can be derived from a thorough analysis of the rental history for the property you are considering as well as the area it is in. The costs will be easy to identify. The major cost possibilities are: debt service with your new mortgage (principal and interest), taxes and insurance, home owners association dues and maintenance fees, homeowner assessments for planned improvements, property management fees and rentals commissions.

Location – a good location will improve the chances of your unit being rented. The better the location the more costly you can expect a unit to be. Some good locations are: ski-in/ski-out, on the free bus routes and close to the entrance of Beaver Creek.

Purchase Price – will predominently be a function of size, location, ammenities and condition.

Earnest Money – should you submit an offer to purchase a property you will be expected to extend "earnest money" to show your "good faith" in the transaction. If your offer is accepted the earnest money will be applied toward the purchase at closing time.

Transfer Tax – many of the communities in Crested Butte have a Transfer Tax that is paid at the time of closing. This tax varies from about 1-2% and who pays the tax is negotiable.

Up Front Costs – when you submit a contract to buy an available unit your earnest money will later be used to offset the purchase price or down payment. These will be costs associated with title insurance and with any new mortgage; your mortgage company will give you a best estimate of their charges and your title insurance company will give you a preliminary settlement sheet that outlines all costs.

Tax Implications – consult your tax advisor on your situation. If you are selling an investment property and purchasing another investment property, consider the advantages of a 1031 Exchange; if you are eligible, you will defer capital gains taxes and apply all your equity to the purchase of the new property.

Financing and Loan Qualification – I recommend that you talk to a mortgage company first and obtain pre-qualification for the maximum amount possible. This does not obligate you to purchase at that level, but if you find something priced above your initial parameters you do not have to obtain re-approval.

Furnished Units – some units listed for sale are furnished and the sales price reflects these assets.

Personal Use – consult your tax advisor on personal use of income property. There are rules that you must follow to keep your investment qualified for tax purposes.

Appreciation – no one can predict what will happen in the future, we can only report on the past. Most properties in Crested Butte have been appreciating quite nicely for the past 4-5 years. Most of the 1990s’s saw property values remain fairly flat. You can view recent sales activity by visiting my Market Data Reports page at my web site.
http://www.crested-butte-real-estate.com/crested_butte_real_estate_market_data.html

Posted in Ski Country USA | Comments Off on Income and Investment Property Buying Tips

How to Accelerate Your Mortgage Application

The best way to deal with so much uncertainty in the mortgage market is the fast way. The faster you get your loan approved, the better shot you’ll have at the home you want. Here are some ways to speed up the approval process for your home loan.

Be smart. Financial planners, your REALTOR®, mortgage brokers and lenders are all available to assist you to give you insight on what is likely to be your largest financial transaction ever. The more you know, the faster you can make decisions about how much you can afford, what loan is best for you, and how to shop for the best deal.

Be creditworthy. Pull your credit report to determine if there are any black marks that could stall your application or get it rejected. You are entitled to one free credit report each year from each of the three major credit reporting agencies — Experian, Equifax and TransUnion — which means you can get three different credit reports each year at no cost.

Be frugal. Certainly stretch to afford the most home you can buy, if you want to avoid the cost of adding on or moving up later, but stretch only within the scope of what you can truly afford. Determine how your mortgage payment will fit your current budget and, to some extent, your future obligations. Don’t let the lender make this decision for you.

When calculating what you can afford, don’t forget related insurance, taxes, homeowner association dues and any other expenses that come with the cost of owning a home in addition to the mortgage payment. Likewise, calculate the financial benefits of home ownership, including tax breaks and equity growth.

Be a comparison shopper. Shop mortgage lenders, brokers and online mortgage outlets to compare the best of all worlds. To the extent that it’s possible, compare all major loan costs, rates, points, broker fees and other costs to make the best comparison.

Be prepared. When it’s time to complete your mortgage application, have all your "docs" in a row. The application will ask for information about your job tenure, employment stability, income, your assets and your liabilities. Have pay stubs, tax returns, rental agreements, divorce decrees, proof of insurance and any other documentation you’ll need to back up statements on your application. The sooner they are available, the faster your application will proceed.

Be focused. You’ve done your homework. Settle on one loan. Complete one application and see it through. Don’t "double dip." Online applications make it easy to fire off several quick applications, but each one could trigger a credit check. That could send the wrong signal to a lender who could reject an application that yields a credit report with numerous credit checks in a short period.

Be available. Don’t complete an online mortgage application, say at work, if you don’t have Internet access at home or you’ll defeat the purpose of the automated online mortgage process. Online brokers use e-mail to keep you abreast of your application’s progress and some offer online application tracking. Brick and mortar operations may do likewise. Don’t plan a vacation, roadtrip or getaway during the application process. If there are questions about your application, you’ll need to be available to address them quickly.

Be about locking down that rate. During the loan application, get a rate lock, in writing. A rate lock guarantees you a certain interest rate and terms. The lock is in effect for a given period of time, which should be stated in the lock contract. The lock cuts down on haggling time for the best rate.

Be committed. Don’t behave like a retail shopper who fills out a credit application in the checkout line. Most housing consumers, 92 percent of those want to buy a home, have no idea if they can really qualify for a mortgage, according to Wisconsin-based mortgage banker and broker Majestic Mortgage Corp.

Getting prequalified, even preapproved for a loan have been superseded by getting a real loan commitment. As rock solid as the rate lock, a loan commitment guarantees you’ve got a loan. All you need to do is sign on the dotted line. When you go shopping for a home, the commitment tells the seller your offer is indeed worth a whole lot more than the paper it’s printed on.

Posted in Western Resorts | Comments Off on How to Accelerate Your Mortgage Application

Crested Butte Home in Your Future? Read this first.

Can a Crested Butte home or condo be rented out by the owners, when the owners are not using it, to reduce the cost of ownership?

You bet!, vacation rentals are very popular and rentals do offset the cost of ownership. A history of rentals is usually available to show you this potential. Also the less that the owners use the property and make it available for rentals the greater this potential. However, it is rare to get a rental to cash flow completely without putting a significant amount down.

If I were to purchase a second home in Crested Butte, how could it be managed in my absence?

There are several companies in the Crested Butte area that offer property management services. Mountain Home Management http://www.mhmcb.com is one of them. Sometimes the property manager is immediately on site; sometimes they are just a phone call away. Property management and its cost are always an important consideration when buying a second home.

What is a 1031 Exchange?

A 1031 Exchange is an IRS tax rule for deferring taxes on income and/or investment property. It is not necessarily an "exchange", but you must "sell" one property and "buy" another "like kind" property within IRS guidelines. This is considered a very handy vehicle and there are time and value considerations, so check with your tax advisor.

What are the requirements for up-front funds for the purchase of a second home in a resort area?

Typically a Mortgage Company asks for 20% down, there are closing costs associated with the Title Company and the Mortgage Company of approximately 2-3% of the property value and you would want to have your intended purchase inspected by an engineer which would cost about $250-500.

What is a Transaction-Broker?

A transaction-broker assists the buyer or seller or both throughout a real estate transaction with communication, advice, negotiation, contracting and closing without being an agent or advocate for any of the parties. The parties to a transaction are not legally responsible for the actions of a transaction-broker and a transaction-broker does not owe those parties the duties of an agent. However, a transaction-broker does owe the parties a number of statutory obligations and responsibilities, including using reasonable skill and care in the performance of any oral or written agreement. A transaction-broker must also make the same disclosures as agents about adverse material facts concerning a property or a buyer’s financial ability to perform the terms of a transaction and whether the buyer intends to occupy the property. No written agreement is required.

What is a Seller’s Agent?

A seller’s agent works solely on behalf of the seller and owes duties to the seller which include the utmost good faith, loyalty and fidelity. The agent will negotiate on behalf of and act as an advocate for the seller. The seller is legally responsible for the actions of the agent when that agent is acting within the scope of the agency. The agent must disclose to potential buyers or tenants all adverse material facts about the property actually known by the broker. A separate written listing agreement is required which sets forth the duties and obligations of the parties.

What is a Buyer’s Agent?

A buyer’s agent works solely on behalf of the buyer and owes duties to the buyer which include the utmost good faith, loyalty and fidelity. The agent will negotiate on behalf of and act as an advocate for the buyer. The buyer is legally responsible for the actions of the agent when the agent is acting within the scope of the agency. The agent must disclose to potential sellers all adverse material facts concerning the buyer’s financial ability to perform the terms of the transaction and whether the buyer intends to occupy the property. A separate written buyer listing agreement is requierd which set forth the duties and obligations of the parties.

What is Title Insurance?

An insurance policy that agrees to indemnify the owner for defects in title caused by specific risks.

What are the hazards of lead-based paint?

For all homes built before 1978, all buyers and sellers are required by law to receive and read a pamphlet outlining the hazards of lead-based paint. Be sure to ask your real estate agent for a copy.

What are the income tax implications on real estate transactions involving Non-Colorado residents?

Refer to State of Colorado Tax Information.

What are closing costs?

Closing costs are an accumulation of charges paid to different entities associated with the buying and selling of real estate. Some of the closing costs a buyer might encounter are: discount points, escrow fee, documentation fee, inspection fees and appraisal; for a seller real estate commission and title insurance premium are typically the largest fees. Check here for additional information.

What is the difference between "pre-qualified" and "pre-approved"?

If a buyer is "pre-qualified" it has been determined, with a loan officer, what price the buyer can afford based on the down payment, debts and the amount the mortgage company will approve for the mortgage. Being "pre-qualified" is only a determination of probable credit. If "pre-approved", credit, employment and funds have been approved by the lender.

Where can I find Definitions of Real Estate Terms?

Visit the Land Title Guarantee Company Real Estate Dictionary.
http://www.ltgc.com/dictionary.html

Posted in Crested Butte Market | Comments Off on Crested Butte Home in Your Future? Read this first.

Tips on Selling Real Estate in Crested Butte

Seller Resources

Market Conditions and Home Pricing

An important aspect of selling your home is making sure that it is priced appropriately to meet your goals. Your REALTOR will listen to your objectives, will examine the current market conditions and help you arrive at a pricing strategy that will best achieve these goals.

Choosing a REALTOR

Be sure to pick a professional, full-time REALTOR and not just a Real Estate Sales Agent. A REALTOR has access to the historical records of the Multiple Listing Service and can therefore provide you with a comparative market analysis of your home vs the sales and current listings in your neighborhood. Interview 2-3 REALTORS, preferably in person, but at least by mail/email. Determine their experience, education and marketing/service philosophy.

Do they know the entire area? What kind of support staff do they have? Does the REALTOR have a large customer base? This shows the past performance of the sales person and is another source of potential buyers. Then get a listing presentation from at least 2 REALTORS. Ask these REALTORS what the home should be priced at and what it should sell for. This will tell you if they did their homework. Compare the profiles or resumes of these REALTORs and also see if client testimonials are available. Ask your REALTOR about the Colorado Real Estate Commission’s requirement to disclose Agency relationships with potential sellers.

Choosing a Real Estate Company

Be sure to pick a company that been established in the Gunnison County for numerous years, that has a great reputation and multiple agents. Look for a company that uses aggressive advertising and marketing techniques that include a large presence on the web and an extensive direct mail programs. Go with a professional and motivated staff that provides the very best for both purchasers and sellers.

The resources available to your REALTOR will help to insure the creation of a comprehensive marketing plan to expose the public and the real estate brokerage community of the availability and the features of your new listing. Does the REALTOR advertise in many of the local papers? How about national newspapers and magazines? Does the REALTOR have a website that promotes the area and properties? Does the REALTOR perform direct mail to potential buyers? Does the REALTOR’s Brokerage company do the expected job of promotion? Do they have a website that promotes the area and properties?

Top 10 Tax Breaks This Year

The New Year always turns thoughts to the new tax season and when it comes to taxes there’s no place like home to find shelter. Your home offers a score of tax deductions and credits designed to help offset the cost of housing and to keep the housing market fueled with new buyers.

Here’s a look at the Top 10 Tax Breaks
Mortgage Loan Interest: The Mother Of All Tax Breaks, because interest payments comprises a large portion of your mortgage payment in the early years of the loan’s term, mortgage interest on a maximum of $1 million in mortgage debt secured by a first and second home is deductible. Deductions reduce your taxable income against which your taxes due are calculated. The $1 million level applies to joint tax filers. You get half the deduction if you file single or separately.

Likewise, home equity loan interest is deductible, but limited to the smaller of $100,000 (half as much for each member of a married couple if they file separately), or the total of your home’s fair market value as determined by a complicated formula.

Home Improvement Loan Interest: The interest on a home improvement loan is also deductible, but calculated differently. You can deduct all the interest on a home improvement loan provided the work is a "capital improvement" rather than repairs, maintenance or cosmetic upgrades. Capital improvements typically increase your home’s value (say, because you added a room), prolong it’s life (a new roof) or adapt it to new uses (universal design improvements to assist older people or people with disabilities).

Points: Points, each equal to 1 percent of the loan principal, are charged by lenders as part of the cost of the loan. You can fully deduct points associated with a home purchase mortgage, but not a mortgage broker’s commission. Refinanced mortgage points are deductible too, but only when they are amortized over the life of the loan. Once you refinance a second time, the balance of the old points from a refinanced loan offer an immediate write off, as you begin to amortize the new points.

Property Taxes: Property taxes or real estate taxes are fully deductible. Any local city or state property tax refunds reduces your federal property tax deduction by the same amount.

Capital Gains Exclusion: Home buying investors’ best tax shelter comes from provisions in the Taxpayer Relief Act of 1997 which allows married taxpayers who file jointly to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence for two of the prior five years. The amount is halved for those filing single or separately.

Home-Based Business Deduction: Home offices that use a portion of your home exclusively for business could qualify you to deduct a percentage of costs related to that portion. Included are a percentage of your insurance and repair costs, utility bills and depreciation.

Selling Costs and Capital Improvements: When you sell your home, you can reduce your taxable capital gain by the amount of your selling costs, which include real estate commissions, title insurance, legal fees, advertising and inspection fees. Cost typically stemming from decorating or repairs — painting, wallpapering, planting flowers, maintenance, and the like — are also selling costs if you complete them within 90 days of your sale and with the intention of making the home more saleable.

Selling costs are deducted from your gain. Gain is your home’s selling price, minus deductible closing costs, minus selling costs, minus your tax basis in the property. Your basis is the original purchase price, plus the cost of capital improvements, minus any depreciation.

Moving Costs: A move triggered by a new job comes with some deductible moving costs. To qualify, you must meet certain requirements including, moving within one year of starting your new job, moving 50 miles farther from your old home than your old job was and working full-time at the new job for 39 of 52 weeks following the move. Deductions include travel or transportation costs and expenses for lodging and storing your household goods.

Mortgage Tax Credit: Mortgage Credit Certificates (MCCs) allow qualifying low-income, first-time home buyers to take a mortgage interest tax credit of up to 20 percent (the amount varies by jurisdiction) of the mortgage interest payments made on a home. This credit is available every year you keep the loan and live in the house purchased with the certificate. Unlike a deduction that reduces your income, the credit is subtracted, dollar for dollar, from the income tax owed.

Energy Tax Credits: The newest home-based tax credits were made possible last year by the Energy Policy Act of 2005. Tax credits of up to $500 in 2006 and 2007 are available for upgrading heating and air conditioning systems, insulations, windows, doors and thermostats, caulking leaks, installing pigmented metal roofs and for otherwise putting the bite on energy waste in your home.

1031 Exchange FAQs

What are the tax advantages in a 1031 exchange?

You can defer the payment of capital gains taxes associated with real estate transactions. By selling one property and buying a higher-priced property, you can also get additional depreciation deductions, which can act to increase your after-tax income. In addition, you can eliminate paying taxes on the recapture of depreciation you’ve taken on the property.

Can I use my primary residence or second home in for a 1031 exchange?

No, only real estate property held for business or investment purposes can be used in a 1031 exchange, and both properties in the transaction must be of "like kind".

What is meant by "like-kind" property in a 1031 exchange?

Like kind property is real estate or other tangible property that is similar in nature, characteristics, or SIC classification in a 1031 exchange. Whether two properties are of "like kind" can also be dependent on state law.

Can I sell or buy multiple properties in a 1031 exchange?

Yes, you can exchange multiple smaller properties for a larger one and vice versa. The key is always trade up in value in order to maximize the amount of capital gains taxes that are deferred.

Are their time restrictions on a 1031 exchange transaction?

Yes, there is a 180-day time span in which the 1031 exchange must take place. During this period there is also a 45-day period where the exchanger must identify which replacement property will be purchased.

How can I defer the maximum amount of capital gains tax in a 1031 exchange?

The main rule is that the replacement property being purchased must be equal or greater in value to the relinquished property being sold. The net effect must be that the entire net proceeds from the sale must be used to purchase the replacement property.

Does one receive cost basis for the replacement property?

No, cost basis from the relinquished property is carried forward to the replacement property in a 1031 exchange. This is one drawback and is often overlooked or misunderstood.

What is a Qualified Intermediary and must I use one in a 1031 exchange?

The Qualified Intermediary (QI), also called an accomodator, is a third-party that facilitates the transaction and is required by the IRS to qualify a 1031 tax exchange. The IRS does not allow your accountant, attorney, or escrow company to act as the QI.

Can I do multiple 1031 exchanges and avoid paying taxes altogether?

Yes, by continuing to sell and buy like-kind properties and following 1031 exchange rules, your estate when you die can avoid paying capital gains taxes.

1031 Tax Exchanges

The Crested Butte area offers many possibilities for 1031 Exchange transactions. We have extensive experience assisting 1031 Exchange clients and would welcome the opportunity to assist you with your sale and/or purchase.

Tax Deferred Real Estate Exchange

This page is intended to provide useful information about tax deferred exchanges of real estate held for investment. There are considerations of time and property value, so check with your tax advisor.

What is a 1031 Exchange?

A 1031 Exchange is tax deferred exchange of investment property. The sale of some currently owned investment property is matched, or exceeded, in value by the purchase of similar investment property within IRS time and value guidelines. In the realm of real estate, the "exchange" means that the sale of one piece of investment property will be matched with the purchase of another "like" piece of investment property within the prescribed time period without any capital gains and therefore the individual will "defer" taxes.

Is This A Good Idea?

In most cases it is a great idea because if offers real estate investors one of the last great investment opportunities to build wealth and defer taxes. By using the 1031 Exchange, the investor can sell their current investment property and use all the proceeds to purchase the replacement investment property. Capital gains taxes are deferred and the investor leverages ALL of their equity into the replacement property. Whether it is a good idea for you should be determined only after a review with your tax advisor.

Hypothetical Example

With Traditional Tax Handling

Gain on sale of current property – $300,000

Taxes (at 33% rate) – $100,000

Net Gain – $200,000

Value of new purchase (with 80:20 loan) – $1,000,000

With a 1031 Exchange

Gain on sale of current property – $300,000

Taxes – $0

Net Gain – $300,000

Value of new purchase (with 80:20 loan) – $1,500,000

What are the requirements?

There are two basic requirements that must be met to defer the capital gains tax: (1) you must acquire like-kind replacement property (the new purchase must be of equal or greater value) and (2) you must reinvest all net equity (you cannot receive cash or other benefits from the sale of the original property, all proceeds must go towards the new investment). To quote the tax code: "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment purposes if such property is exchanged solely for property of a like-kind which is to be held for either productive use in trade or business or for investment purposes".

Who Should Use This Tax Deferring Instrument?

Anyone who is considering the sale of one piece of investment property and the purchase of another.

What Are The Identification Requirements?

You must identify the property to be received within 45 days after the date you transfer the property given up in the exchange. Any property received during that time is considered to have been identified. You must identify the replacement property in a signed written document and deliver it to the other person involved in the exchange. You must clearly describe the replacement property in the written document. You can identify the larger of (1) three properties or (2) any number of properties whose fair market value (FMV) at the end of the identification period is not more than double the total FMV, on the date of transfer, of all properties you give up.

What Are The Receipt Requirements?

The property must be received by the earlier of:

The 180th day after the date on which you transfer the property given up in the exchange, or

The due date, including extensions, for your tax return for the tax year in which the transfer of the property given up occurs.

What Are Examples of Qualifying Property?

In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Machinery, buildings, land, trucks and rental houses are examples of property that may qualify.

What Are Examples of Non-Qualifying Property?

Property you use for personal purposes, such as your home and your family car.

Stock in trade or other property held primarily for sale, such as inventories, raw materials and real estate held by dealers.

Stocks, bonds, notes or other securities or evidences of indebtedness, such as accounts receivable.

Partnership interests.

Certificates of truct or beneficial interest.

Will The 1031 Exchange Apply To Investment Property In Crested Butte and Gunnison area?

If you are selling rental property somewhere and want to purchase property in a resort community and use it as rental property, this is considered a like-kind exchange. You can review the trend in property values for the recent past in the Vail Valley by checking out my Market Reports at this website.