Monthly Archives: June 2010

“Kiddie” Condos–They make more sense than ever in this Market

Condominium, Marketing / Communication, , , ,

I have written about “kids at school” in prior posts. With more kids at college and grad school (grad school, especially grad school, because jobs our of college are becoming so scarce), there are some strategies we can suggest for “kiddie” condos which may produce some sales for realtors, mortgage originators and real estate attorneys (my defined group “The Resource Triangle”.

These are my thoughts:

      1. Price of Condominiums are lower than they have been. Certain areas of Boston have held up better than others; in general the market is soft, especially in the $200,000 to $400,000 range.

      2. Rental prices are increasing because people have to live somewhere, and they are not buying as rapidly as they did. The rental population is on the increase, as well.

      3. There are some distinct tax strategies which make a parent’s purchasing a condominium for his or her child during the time that the child is a student:

          a. After tax benefits, the actual cost may be lower than rental.

          b. At some point in time, the parent can make the child the owner of the Unit, thus entitling the child to take advantage of the $250,000 exclusion when the Unit is sold. In Boston (and other cities, I am assuming), owners who live at the premises are also entitled to favorable real estate tax treatment.

          c. If we are at the bottomo of the real estate cycle, or close to the bottom, the appreciation in the Unit can be passed on to the child, rather than the parent. That becomes a handy way to handle estate planning transfer for the parent.

          d. In Boston, I am aware of several Lenders who have developed “Kiddie” Condo programs. Wainwright Bank, a Lender for whom I do a lot of work and an ActiveRain member, has such a program.

If your customers need any further advice about Kiddie condos, have them contact me directly. I have completed at least fifty (50) of thes e deals in the past three years, all of which have worked to the Parent’s advantage.

Condominium Due Diligence–Our Professional Responsibilities

Condominium, , , , ,

The stormy winter we have experienced needs to be factored in when purchasing a condominium unit. Roofs and other systems have been under a considerable amount of strain, and according to casualty insurance statistics, claims are at record levels.  Those leaks through ceilings and walls can be plastered and painted over. The causes of the problems, however, are being addressed by Condominium associations and the results may well be future special assessments. I am continually told by Sellers that the Condominium Trustees “do not keep minutes of their meetings.” This is distressing on two levels (1) is it a short-hand way of saying the Trustees really never meet? or (2) are there matters which are being discussed which can have potential financial impact to the Unit Owners, which the Trustees would rather keep to themselves? In either circumstance, this type of response raises a “red flag” for me, the attorney tying to protect my client who is considering a Condominium purchase.

More than at any time, the present state of Condominium governance places a responsibility on us as real estate professionals to ask questions and probe.  Ask the Management Company or a member of the Condominium Board of Trustees whether the Condominium is planning an assessment for a new roof or extensive system repairs. If there are assessments coming, try to negotiate with your Seller to pay some ,or even all, of planned assessments. Speak to other unit owners. Find out what they know.

At Topkins & Bevans, we pride ourselves on giving responsible representation to Buyers.  We review (1) Condominium documents, (2) minutes of the Trustee meetings and (3) recent budgets. and financial statements. We poke holes in these documents, where necessary. We direct question to the Management Company, the Trustees and the Seller so that when the Buyer moves forward, he or she is apprised of the animal he or she is dealing with. Sometimes, our Buyers move forward even though we have warned them of the pitfalls associated with their purchase. That is their choice, but at least we have permitted them to make an informed decision.

Where There’s No Will, There’s No Way

Estate Planning, Health Care Proxy/HIPPA, , , , ,

There always seems to be an excuse why we cannot sit down, organize our priorities, settle on the right set of fiduciaries and get our estate plans in order.  What most people do not seem to realize, however, is that permitting the state to use its formulae to settle your affairs after your death in almost all circumstances does not produce a result that you would have wanted.  More than that, it can cause heartache and pain to those you leave behind, and family disputes that many times cannot be smoothed over, even over time.

There follows a working outline of manageable steps which you can take to prepare to sit down with an estate planning attorney.  If you have a good idea of the answers to these questions, the actual drafting of your will and constituent documents can be relatively painless and completed within a reasonable time at a reasonable cost.

       1. Determine whom you need to protect and provide for.

For married couples with children, this generally flows naturally.  Your surviving spouse is your key beneficiary with children being taken care of should you both perish in a common accident.  But even with these basic tenets agreed upon, there are some ancillary decisions which need to be addressed.

In Massachusetts, 18 years of age is majority. If you and your spouse die and leave children, those children will be entitled to any assets you leave them at age 18.  Is 18 the age you want your child to have unbridled use of hundreds of thousand, or even millions, of dollars?  Most of the time the answer to this question is “no” although many of us have life insurance policies, or pension or profit sharing plans which provide for proceeds to pass to a spouse, or alternatively, children. The way to protect your children from themselves is to create a Trust mechanism, either in your will or by way of revocable trust, which will permit your children to have use of these assets but not be able to spend them without any controls.  Only by getting your estate plan drafted and making proper beneficiary designations can you be sure that these objectives can be met.

For unmarried couples, the perils of not having wills are serious.  Massachusetts intestacy laws make no provision for people who are not spouses, children, parents, siblings or blood relatives.  Whatever your intentions are regarding your partner, it behooves you to make them clear through a will or revocable trust.

Further, when you are not married to your partner, issues such as health care decisions will not flow to your partner without specific designation of the person in a health care proxy or HIPPA designation.  Many are the situation where the person you really want deciding important health issues for you is shunted aside in favor of family members who really are not aware of your wishes and are only involved because of blood relationship.

  1. Determine which individuals you wish to act as fiduciaries and obtain their consent to act in these capacities.

 

There are generally four (4) different roles which need to be addressed.  Many times the same people can act in more than one capacity, but often there is a benefit in spreading the roles out over several people.

•(a)     Executor:  This person needs to be honest and organized.  Choose someone who can take charge of your affairs, select appropriate professionals to act on behalf of the estate, and move on.  Generally, about 18 months time is needed to complete the Executor’s tasks.

•(b)    Guardian:  Surviving spouse will automatically take over as your children’s guardian.  With simultaneous death of spouses, care must be taken to designate someone who can shepherd your children through the years of minority.  Be careful about selecting your parents.  While they may be the natural choice, the burden of raising small children may be too much for them.  Siblings with children are normally the best guardians, although care has to be taken when a larger than manageable family is created with the addition of your children.

•(c)     Trustee:  This is normally a long term person, so age considerations are important.  If you will want a Trust to exist until your youngest child is 35, you should think about someone who is likely to be around through the period in question.  Again, honesty and good judgment are traits which make a good Trustee.  You do not need an accountant, attorney or investments advisor for a Trustee.  You just need someone who can find suitable professionals to serve the Trust.

•(d)    Health Care Agent: This is the person you name in your health care proxy to make medical decisions for you when you are unable.  Your spouse or partner is a natural choice.  Often it makes sense to make alternative selections should the person you wish to use be unavailable.

Armed with answers to the questions and issues described above, you are in a very good position to move forward with your estate plan.  At Topkins & Bevans, we try to make the process efficient and manageable.  Appointments to discuss estate plans are entirely free of charge, and it is only after we have agreed on a document program, that we will discuss a fee arrangement with you.

System “5/25”—A Proven Way to stay in touch with your Players

Customer Service, Marketing / Communication, , , ,

Over the years, it has become more and more apparent to me that sales involves connecting with people who know, and appreciate, what I have to offer, not at my convenience, but, realistically, at theirs. One way I have found to stay in touch with these important contacts is to utilize the “5/25 System” on a consistent basis.

The System is simple. Pick out your 5 most important clients, or customers, and put them on a schedule. Then, analyze the rest of the important people in your business and pare that list down to 25 people. Obviously, the list of 30, as I call it, can change on a dime. The best way for it to change is for some new player to arrive on the scene to supplant someone else, who is marginal. The worst way your list can change is for a “favored 30” player and you to have a falling out, or disagreement, which makes continued contact with that person difficult, or maybe even impossible. If the latter happens, be decisive!!!! Excise that person from the list and find an acceptable substitute.

     1. The “Favored Five”.  You need to get yourself in front of the favored five at least once a week. Since these people are so important, it probably makes sense to vary your contact. Some weeks it may be a long email or a meeting for a cup of coffee. Other weeks you might invite them to a play or ball game. Whatever the excuse, you MUST be in front of these five people every week, without fail. At some point, your “Favored Five” are going to see what you are doing. None of mine have every held against me my elevating them to this favored status. Most understand that I am making a commitment to ============-][frequent communication with them so I can acknowledge how important they are to me practice.

     2. The “Terrific Twenty-five”.  These people are very important to me, but they have not achieved “Favored Five” status. In time, they may reach that level. For the time being, the “Terrific Twenty-five” need to be contacted at least once a month. Obviously, you can get with them more than that, but under no circumstances, should you let a month go by without an email, telephone call, visit at their office, or other contact. You need to stay on the “Terrific Twenty-five” radar screen. You do not need to make them a weekly contact, but they need to know that you are “around” and you care.

The results of this rathered structured approach have been impressive for me. My “Favored Five” people have generally been the ones who respond to new initiatives and proposals. When I am in front of them, they “remember” things which they wanted to discuss with me and thus new opportunities arise. The “Terrific Twenty-five” are in a slightly different category. They have not lost touch with me, but I am not a constant part of their business life, in most circumstances. That can sometimes be a good thing. Sometimes, the “Terrifics” want to change their role. Many times this is justified. The group of thirty is not static; you will see changes evolve as you move ahead.

There is nothing mystical about the 5 and 25 numerical selections. What is important is that you identify your “real players” and your “might be real players” as soon as possible, and then make sure you find ways to have continuing interaction with them. For me, this has been an incredible “practice builder” and also a way for me to develop lifetime friendships. What is better than those two results?

Creating Home Ownership for Your Kinds–Try an LLC

Uncategorized, , ,

When parents want to help their children buy a home, they are often stymied by the myriad gift and other tax considerations which make providing for their children a difficult task. Recently, with the assistance of Scott W. Hazard, a Senior Vice President at GuardHill Financial, and a financial planning associate, our firm was able to circumvent the obstacles and provide a “clear path” to generous parents for effecting real assistance to their children.

There follows a description of how this transaction was structures:

      1. The generous parents form an Limited Liability Company (the “LLC”). The parents became the Managers of the LLC and are majority Members. The Operating Agreement for the LLC provided that the parents put substantially all of the cash required to close the purchase into the LLC. The children are also Members under the Operating Agreement but only to the extent of a few thousand dollars, which entitled them to a small share of the interest in the LLC.

      2. The LLC entered into the Purchase and Sale Agreement for the purchase. The LLC also became the Mortgagor when the purchase closed. Disclosure of all aspects of the transaction was made to the Mortgage lender, and the only extra document the Lender required were the personal guarantees of all four Members of the LLC.

     3. The transaction took place in 2008. Prior to the end of the year, each of the parents made gifts of $26,000 to the children. These gifts were made in the form of amending the Operating Agreement to increase the percentage interest of the children as Members of the LLC. The parents intend to make similar gifts in 2009 and thereafter, until the home is 100% owned by the children.

     4. Because of the size of the gifts, no gift tax return was required of the parents and the parents were not forced to use up any of their lifetime transfer exclusion. If the children are able to develop additional funds, they may make payments to the parents at any time to increase their Member ownership. It is generally advisable for the parties to obtain an appraisal of the home from time to time to make an accurate measure of the value of the Member transfers.
Even in today’s sometimes difficult real estate market, parents want to assist their children to become homeowners. The LLC route described herein is one which has many advantages, and I would recommend that any parents who are inclined to assist their children in attaining home ownership consider it.

Kids at College–Some timely advice for Parents

Health Care Proxy/HIPPA, , ,

Among the learning experiences for parents with children away at college is the fact that having reached the age of 18, your child is no longer your ward, and you are no longer your child’s legal guardian.  That doesn’t mean that cannot pick up the tab for tuition, room and board, but you are not, as of right, entitled to see your child’s grades, and you are not, as of right, entitled to be informed of health issues confronting your child or to make medical decisions for your child.

The grade issue can be circumvented by interaction with your child. The health considerations are a little bit more complicated and require some forethought.  The two documents that will assist you in being in position to help your child in medical emergencies, or even routine medical decisions, are a Health Care Proxy (which gives you the right to make “informed consent” decisions for your child) and the FICCA form (which gives you access to your child’s medical records).  These documents are part of our standard Estate Planning package when we assist our clients with Estate Plans. We are now suggesting that the appropriate execution of these forms, and in certain instances, a durable Power of Attorney, become part of your checklist for sending your child away to college either in January or August.

We, at Topkins & Bevans, can prepare these forms for you, and explain their proper execution, for a minimal fee. We can do this work from Massachusetts, and you can execute them in your state as long as you acknowledge that the documents have been drafted in accordance with Massachusetts law. Please contact me to go over what is required, and how we can assist parents in this area. With the reticence that many medical institutions have developed to release medical information and records, the Health Care Proxy and HIPPA Form have become “don’t leave home without it” items.

The Resource Triangle–“Three” who can make it Happen

Marketing / Communication, Uncategorized, , , ,

As I have evolved from an attorney who sat in my office and waited for the phone to ring into a realist who started to understand that marketing is an essential part of doing business, one thing became clearer and clearer. My best efforts involved finding motivated and talented realtors and mortgage originators with whom I could work on a regular basis.

This “Resource Triangle”, as I like to call it, makes perfect sense. All three professionals involved have one goal in mind, the successful closing of a residential real estate closing. All three have something else in common: if the transaction does not close, none of us gets paid. So if a realtor in one of my Triangles calls me up late on a Saturday afternoon and tells me she or he has a Buyer who is leaving town this evening, can I come by and introduce myself, I need to appear even if it means my Saturday night plans are delayed, or even cancelled. The same availability is required from the mortgage professional. If we are going to be “Resources” and part of the Triangle, we need to be there, any time, any place.

Once the Triangle is established, it can work to everyone’s advantage. The reliability component is huge. When I tell my realtor-partner, I can turn the Purchaser and Sale around in no longer than 48 hours, and I DELIVER on my promise, he or she knows that the chances of the deal coming together are increasing at a rapid pace, and what may have looked like “bragging” was only describing a standard that he or she knew could be achieved. When the mortgage originator promises a full-blown mortgage commitment in fourteen (14) business days, AND DELIVERS, comfort and credibility abound. When I promise a client who owns a home, and is buying another, that my realtor-partner can get their present residence sold in less than a month, AND DELIVERS, I look good, my realtor-partner looks good, and the magic word “closing” is that much closer.

I have been fortunate in that I have developed several unique Triangles in my practice, the difference in make up and composition being a function of the clients I am working with and geographic compatibility. The networking groups I am involved with, such as BNI, are a natural source for Triangles.

Most of the people reading this post are Triangle-eligible. They fit into one of the three (3) categories described.  I urge each and every one of you to get your Triangles in motion at the earliest possible opprotunity. The confidence in referring your most trusted clients and customers to people who have time and again DELIVERED can make all the difference for you. You will no longer be a face in the crowd. You will be the one person who can make the deal happen

The Perfect Closing-One Lawyer’s Dream

Uncategorized, , , ,

Strangely enough, after more than forty years of doing residential closings, I cannot remember one closing which was perfect in every way. My state, Massachusetts, still has lawyer’s serving as closing agents and also reviewing the title and writing the title insurance. This means that my firm, Topkins & Bevans, is responsible for checking at the appropriate registry to make sure that the Seller really owns the property, and there are no liens which cannot be paid off, or accounted for, at the Closing. We also need to check on water and sewer charges, and other municipal liens (such as property taxes) and common area fees, where a Condominium Unit is involved. Once we receive the rest of the “figures” from the Lender, we produce a HUD-1 Settlement Statement and distribute same to the Buyer and Seller, most of the time at least 36 hours prior to the Closing

There are a lot of balls up in the air, and our job is to try to assemble all of the players, and have each of them walk away with the thought that they had been well attended to, and fairly treated. So, in a perfect world, these are the goals, which I would always try to attain in my “perfect closing”:

1. The Buyer. Buyers are almost always nervous, whether this is their first, or twenty-first, purchase. My job is to make them calmer. I do this by being prepared for each closing. The Form 1003, which is a part of the Lender’s closing package, is packed full of information. I can find out the age of the Buyers, how many kids they have, what they do, and where they work. This almost always leads to a comment like:”Oh, you are a nurse, my sister-n-law is a nurse.What is your specialty?” or “Oh, you have four children, I have four children, where are they at school?” Get the picture!!! I have identified something I have in common with the Buyers. I am a human being, too, not a robot who is there to make sure they do not purchase the home of their dreams. I tell my Buyer at the start that I will take as much time as they wish going over, and explaining, the HUD-1. I tell them that this is really the most important part of their closing. The numbers on the HUD-1 help them to establish an “opening balance sheet” for their home. I never try to rush closings; this is a big moment for the Buyers, and I want them to relish it. Whenever possible, I take a picture of the Buyers with my digital camera after the Closing and send it to them with an email. I want them to have a memory of their “big day”

2. Sellers. Sellers have feelings, too. I tell them that I will explain the HUD-1 to them as well, especially if they do not have an attorney present. I try to move the closing along so the Seller is not inconvenienced.

3. Realtors. Most realtors come to closings. I try to involve them in the proceedings as much as they wish. I will ask their opinion on certain issues, and assist them by having an extra copy of the HUD-1 available for them to take with them. Lately, I have been trying very hard to make sure that Seller’s Agent, or the Buyer’s Agent, gets paid from my Client’s Account at the closing. These people have worked as hard as the Listing Agent for their commission, and there is no reason to make them wait additional weeks to be paid.

4. Mortgage Professionals. Most of my Originators do not attend the closing. I think they should but they do not. Since they are not there, I ALWAYS call or email them after the closing is completed. I tell them just how the closing went, and if the closing went especially well, I urge them to contact the realtor(s) or Buyers to inquire. The positive reinforcement the originator receives may be helpful for future referrals.

If I can do all these things every time, my closings will be perfect.I am not there yet, but at least I know what I am shooting for. I would be interested in hearing from any of you with helpful hints as to how I can make my closings better. I used to have a slogan “my closings close”. That is an important statement, but I would rather be able to say “My closing closed, and I enjoyed they way I was treated”.

Review of Condominium Financial Statements and Operations–Some Guiding Principles

Condominium, trusts, ,

One of the functions of an attorney representing a Buyer of a Condominium is to review the financial statements and operations of the Condominium, as well as the constituent condominium documents such as the Master Deed and the Condominium Declaration of Trust. In a future post, I will delineate what I look for in the Condominium Documents. This post, however, concerns the important information which can be gleaned by doing a careful review of the Condominium Financial Reports,  and Minutes of Trustees, and asking some questions of the Condominium Trustees, either directly or through the Selling Agent or Buyer’s Agent, as the case may be.

        1. Condominium Statement of Operations

                          a.  Look at ALL of the captions, especially Repairs. Do the Repair costs seem high? If they are more than a few hundred dollars, more information is needed.  Is the Condominium “patching” where they should be making capital improvements? Will the new Buyer be required to pay for prior problems? Higher than normal Repair costs can tell you about how carefully the Condominium has been managed. See if the Condominium has a caption for “Accounting” and “Legal”. If there is none, that may be a danger sign. The Trustees may be “winging it” on decisions where they need professional guidance.

                    b.  See whether the income received represents payment in full from all units for the entire year. If that number does not compute, there are almost always delinquencies for common area fees. Massachusetts Condominium law ( and most other jurisdictions, too) gives the Trustees broad powers to start litigation for common area fees. The cost of same, including attorneys fees, is to be borne by the delinquent Unit Owner. If there are delinquencies, it may mean that the Trustees, for one reason or another, are not making real efforts to collect what is due from their neighbors. That is a danger sign for a potential Buyer, and could signal problems down the road.

                    c. If possible, obtain Financial Statements for more than one year. Carefully analyze the receipts section. If the number is consistently on the rise, it means that the Trustees are constantly raising the common area fee. Find out what the reason for that has been. If there is a pattern of loose or sloppy management, it may manifest itself in continuing increases in the common area fee.

     2. Condominium Balance Sheet

                             a. Look for how much is in the Reserve Account. While many Condominiums have taken a “pay as you go” approach to improvements, make sure that a Reserve Account is, at least,  in existence. In most states, Trustees are required to maintain an Operating Account and a Reserve Account. If there is no Reserve Account at all, the Trustees are not adhering to their statutory responsibilities. Perhaps, they are not adhering to other provisions of the Condominium law, as well.

                              b. See if there are any Accounts Receivable on the Balance Sheet. If there are, they are more than likely from delinquent Unit owners. Inquire as to the status of collection efforts. If they have not begun, that is a red flag for poor Condominium Management.

The other thing I always ask to see are Minutes of the Trustees for at least the prior Eighteen (18) months. If none exist, or if the Trustees do not regularly meet, there may be problems. I try to ask why.  If there are Minutes, i look at them for any indication that a Special Assessment may be coming. This can be an unpleasant surprise for my client, and when I know a Special Assessment is “right around the Corner”, I can sometimes request that the Seller bear some of the cost thereof. Depending on whether the Special Assessment is forward (something new that really is not the Seller’s issue) or backward (a repair of a roof or other important constituent common area part) I have had some success in requests for contribution.

1031 Exchanges–Having Your Cake and Eating it, too!!!!

Uncategorized, , , ,

1031 Exchanges, tax deferring transactions much used in our Western states, are moving east, and you should know more about them, if you own any kind of investment real property. In the landmark Starker decision in 1979, the United States Supreme Court substantiated the validity of the delayed exchange process. Prior to that time, the courts had never sanctioned an exchange whereby the relinquished property was sold and at a later date, replacement property was purchased. What this means to you as an owner of investment property, is that you can dispose of property in which you have sizable gain, but perhaps the headaches of management, and replace the old property with a different more manageable property, or even an ownership interest with others, in new property.

If done correctly, a 1031 Exchange can permit an investor to defer tax due in connection with the sale of real property, enabling the investor to consolidate, diversify, leverage or relocate her investment. Fortunately, in 1994, the Internal Revenue Service promulgated “Safe Harbor” regulations which provide the steps to take to make sure a 1031 Exchange produces the desired tax deferral. At Topkins & Bevans, we have always advised our exchanging clients to use a Qualified Intermediary which is affiliated with a Title Insurance Company. There have been some problems with intermediaries absconding with funds in the past, but never, ever, have there been problems with the Company we work with, OREXCO, an affiliate of Old Republic Title Insurance Company. In myriad transactions, we have been most satisfied with the level of expertise, service and financial integrity provided by that organization. OREXCO is best reached locally by contacting Lynne Bagby, the New England Regional Account Manager, at lbagby@ortc.com.

The key to a successful Exchange is identifying replacement property in a timely manner. It is essential that the investor locate “like-kind” property. Generally, real estate is like kind to all other real property, except foreign real property, as long as it is held for investment or the productive use in a trade or business. There is a 45 day time frame in which the investor must “identify” replacement property. Identifying the property on a timely basis is not all that must be done. It is also essential to “close” on the identified property in or within no longer than 180 days from the sale of the subject property. The 45 and 180 day periods are calendar days. There is no grace period if the day in question falls or a Saturday, Sunday or holiday.

Even if you own property with another investor, you may be able to exchange property if he or she does not wish to. In this type of transaction, you must clearly indicate and allocate each investor’s interest in the property before you sell. The investor who wishes to exchange may do so, and the other investor may receive cash (taxable). It is, of course, very important that the investors be clear on their intentions before entering into an exchange agreement with the Qualified Intermediary. Once a relinquished property is closed where all exchanging properties are under one exchange agreement, the exchangers do no have an option of dividing proceeds and buying separate replacement properties.

It is also possible to enter into an exchange transaction where part of the tax is deferred and a portion recognized as taxable gain. If the equity in your investment property is $150,000,00, and you wanted to use only $100,000.00 to purchase your investment property, and take $50,000 out to buy a new car, you would have a partially tax deferred exchange. The $50,000 you took to purchase the car is considered taxable cash “boot”.

Even is you live in one apartment, in the three family dwelling you own as an investment, you may be able to utilize a tax free exchange for the other two units. That type of approach works out extremely well if you are converting the investment rental property into condominiums for sale to third parties (See my previous post on this type of advantageous transaction). The unit you live in is sold as your principal residence, and you are eligible for the tax exclusion permitted for the sale of your principal residence where you resided for at least two of the last five years. The other two units can be sold as part of a 1031 Exchange, as long as the percentage of the value of the property is consistent with your past tax returns. This is a somewhat complicated area, and you should consult your tax advisor with regard to the particular aspects of this type of 1031 Exchange transaction.

I would be more than willing to communicate with you, and your tax advisor, to discuss any type of 1031 Exchange which you may be interested in. You should also feel free to contact Lynne Bagby at OREXCO for assistance. Our firm has enjoyed an extremely positive relationship with OREXCO and drawn much of the materials for this post from information furnished by OREXCO. If you use a sold, reputable company like OREXCO as your Qualified Intermediary, you will have little, if any, risk about the safety of your funds. In these days of uncertainty, selecting the “right” Qualified Intermediary is more important than ever.

TOPKINS & BEVANS is a mid-sized suburban Boston law firm, with offices located in Boston, Waltham and Braintree. Elliott Topkins, the senior partner in the firm, has more than 35 years of experience in real estate and estate planning matters. He is best reached at etopkins@topbev.com.

1031 Exchanges, tax deferring transactions much used in our Western states, are moving east, and you should know more about them, if you own any kind of investment real property. In the landmark Starker decision in 1979, the United States Supreme Court substantiated the validity of the delayed exchange process. Prior to that time, the courts had never sanctioned an exchange whereby the relinquished property was sold and at a later date, replacement property was purchased. What this means to you as an owner of investment property, is that you can dispose of property in which you have sizable gain, but perhaps the headaches of management, and replace the old property with a different more manageable property, or even an ownership interest with others, in new property.

If done correctly, a 1031 Exchange can permit an investor to defer tax due in connection with the sale of real property, enabling the investor to consolidate, diversify, leverage or relocate her investment. Fortunately, in 1994, the Internal Revenue Service promulgated “Safe Harbor” regulations which provide the steps to take to make sure a 1031 Exchange produces the desired tax deferral. At Topkins & Bevans, we have always advised our exchanging clients to use a Qualified Intermediary which is affiliated with a Title Insurance Company. There have been some problems with intermediaries absconding with funds in the past, but never, ever, have there been problems with the Company we work with, OREXCO, an affiliate of Old Republic Title Insurance Company. In myriad transactions, we have been most satisfied with the level of expertise, service and financial integrity provided by that organization. OREXCO is best reached locally by contacting Lynne Bagby, the New England Regional Account Manager, at lbagby@ortc.com.

The key to a successful Exchange is identifying replacement property in a timely manner. It is essential that the investor locate “like-kind” property. Generally, real estate is like kind to all other real property, except foreign real property, as long as it is held for investment or the productive use in a trade or business. There is a 45 day time frame in which the investor must “identify” replacement property. Identifying the property on a timely basis is not all that must be done. It is also essential to “close” on the identified property in or within no longer than 180 days from the sale of the subject property. The 45 and 180 day periods are calendar days. There is no grace period if the day in question falls or a Saturday, Sunday or holiday.

Even if you own property with another investor, you may be able to exchange property if he or she does not wish to. In this type of transaction, you must clearly indicate and allocate each investor’s interest in the property before you sell. The investor who wishes to exchange may do so, and the other investor may receive cash (taxable). It is, of course, very important that the investors be clear on their intentions before entering into an exchange agreement with the Qualified Intermediary. Once a relinquished property is closed where all exchanging properties are under one exchange agreement, the exchangers do no have an option of dividing proceeds and buying separate replacement properties.

It is also possible to enter into an exchange transaction where part of the tax is deferred and a portion recognized as taxable gain. If the equity in your investment property is $150,000,00, and you wanted to use only $100,000.00 to purchase your investment property, and take $50,000 out to buy a new car, you would have a partially tax deferred exchange. The $50,000 you took to purchase the car is considered taxable cash “boot”.

Even is you live in one apartment, in the three family dwelling you own as an investment, you may be able to utilize a tax free exchange for the other two units. That type of approach works out extremely well if you are converting the investment rental property into condominiums for sale to third parties (See my previous post on this type of advantageous transaction). The unit you live in is sold as your principal residence, and you are eligible for the tax exclusion permitted for the sale of your principal residence where you resided for at least two of the last five years. The other two units can be sold as part of a 1031 Exchange, as long as the percentage of the value of the property is consistent with your past tax returns. This is a somewhat complicated area, and you should consult your tax advisor with regard to the particular aspects of this type of 1031 Exchange transaction.

I would be more than willing to communicate with you, and your tax advisor, to discuss any type of 1031 Exchange which you may be interested in. You should also feel free to contact Lynne Bagby at OREXCO for assistance. Our firm has enjoyed an extremely positive relationship with OREXCO and drawn much of the materials for this post from information furnished by OREXCO. If you use a sold, reputable company like OREXCO as your Qualified Intermediary, you will have little, if any, risk about the safety of your funds. In these days of uncertainty, selecting the “right” Qualified Intermediary is more important than ever.