Title: Modern Real Estate Practice in Texas, 15th Edition
1Modern Real Estate Practice in Texas, 15th
Edition
- By Cheryl Peat Nance, Ed.D., DREI, CREI
221 Leases
- Learning Objectives
- Discuss the requirements of laws related to
leasing residential real estate - Identify the characteristics of the four types of
leasehold estates and the various types of leases - Describe
- The requirements and general provisions of a
valid lease - How a lease may be discharged
321 Leases
- Learning Objectives (cont.)
- Explain the key points of the Texas Landlord and
Tenant Act - Occupancy limits
- Rental applications
- Security deposits
- Maintenance of premises
- Smoke alarms
- Security devices
- Breach of lease
421 Leases
- Lease, Overview
- A lease
- Is a contract between
- An owner (lessor) and a tenant (lessee)
- Transfers right to exclusive possession and use
- For a specified period of time
- Is conveyance of a leasehold estate
- Landlord retains
- rights for payment for use and
- reversionary right for possession after lease term
521 Leases
- Related Laws
- Statute of Frauds
- Agency Disclosure - Information about Brokerage
Services form - Sex Offender Disclosure
- Lead-Based Paint Disclosure
- Americans with Disabilities Act (ADA)
- Fair Housing ? ? ?
621 Leases
- Fair Housing
- Equal access to housing without differentiation
in terms or conditions because of - Race ?Color
- Religion ?National origin
- Sex ?Handicap
- Familial status
721 Leases
- Fair Housing (cont.)
- Special focus on accessibility
- To allow full enjoyment of housing and related
facilities for persons with a handicap - Modification
- Permit a structural change to be made to premises
- Accommodation
- Make a change, exception, or adjustment to a
rule, policy, practice, or service
821 Leases
- Leasehold Estates
- Estate for Years
- Lease for a definite period of time
- Specific start/stop dates
- No automatic renewal
- No notice required to terminate
- Periodic Estate (Estate from Period to Period)
- Lease for an indefinite period of time
- Automatically renews with payment and acceptance
of rent - Notice required to terminate
921 Leases
- Leasehold Estates (cont.)
- Tenancy at Will
- Lease for an indefinite term
- At the will of each party
- Notice required to terminate
- Terminates on death of either party
- Tenant enters rightfully and holds over rightfully
1021 Leases
- Leasehold Estates (cont.)
- Estate at Sufferance
- Previously lawful tenancy, continued without
landlords consent - Tenant suffered or permitted to remain
- May require eviction
- Tenant enters rightfully but holds over illegally
1121 Leases
Leasehold Estates
1221 Leases
- Requirements of a Valid Lease
- Offer and Acceptance
- Consideration
- Capacity to Contract
- Legal Objectives
- Legal Description Covenant of Quiet Possession
(Implied)
1321 Leases
- Common Lease Provisions
- Term of Lease state start/end dates
- Possession of Leased Premises
- Use of Premises
- Improvements
- Neither party is required to make improvements
- Tenant improvements are with landlord consent and
remain on lease termination - Options and Right of First Refusal to renew
lease or purchase property
1421 Leases
- Landlord and Tenant Act
- Occupancy Limits
- HUD 2/bedroom infant with parents
- Texas 3 adults/bedroom
- Owner needs a written occupancy policy
1521 Leases
- Landlord and Tenant Act (cont.)
- Rental Application
- Applicant must be given printed or online notice
of tenant selection criteria - Before completing the application
- Including grounds for which application may be
denied - Criminal history previous rental history
current income - Credit history inaccurate or incomplete
application form - Applicant must sign an acknowledgment of notice
or acknowledge receipt online
1621 Leases
- Landlord and Tenant Act (cont.)
- Application deposit
- Similar to earnest money
- Given with rental application before lease signed
- Binds the applicant while application is
reviewed, credit checked, etc. - Refunded if applicant rejected
- Applied to other fees due when lease signed if
applicant accepted
1721 Leases
- Landlord and Tenant Act (cont.)
- Application fee
- Charge to offset actual costs of screening
applicant credit report, etc. - Does NOT have to be returned if applicant
rejected UNLESS - Landlord does not have a copy of Tenant Selection
Criteria signed by applicant
1821 Leases
- Landlord and Tenant Act (cont.)
- Security Deposits
- Safeguards against tenant destruction of premises
- Induces tenants to honor their agreement
- Encourages thorough cleaning on move-out
- Frequently 1 months rent
1921 Leases
- Landlord and Tenant Act (cont.)
- Security Deposits (cont.)
- Must be returned within
- 30 days of residential tenants surrender of
property - 60 days of commercial tenants surrender of
property - Return the money or
- An accounting for money withheld
- No obligation to return earnest money without
tenants written notice of forwarding address - Transferred to a new buyer not prorated upon
sale of property
2021 Leases
- Landlord and Tenant Act (cont.)
- Late fees
- Must be specified in the lease
- Must be a reasonable estimate of damages to
landlord for getting rent late - May be charged after rent has been unpaid one
full day after the initial due date rent due on
the 1st late fees, on the 3rd
2121 Leases
- Landlord and Tenant Act (cont.)
- Assignment and Subleasing
- May not assign or sublease without landlords
consent - Maintenance of Premises
- Tenant Must return the property in same
condition received, reasonable wear and tear
excepted - Landlord Units and common elements must be in
habitable condition - Habitability Statute
2221 Leases
- Landlord and Tenant Act (cont.)
- Smoke Alarms
- Must be installed in all residential rental
property - Unless rented under 90 days through a sale
- Must be in each bedroom and a corridor that
serves multiple bedrooms - Must install for hearing-impaired, if asked
- Must be in good working order when tenant moves
in - Presumed to be working until tenant requests
repair - Tenant must replace batteries
2321 Leases
- Landlord and Tenant Act (cont.)
- Security Devices
- Specified by law
- Window latches doorknob locks
- Sliding door handle latches and pin locks
- Keyless deadbolts
- Door viewers on each exterior door
- 7 days to rekey locks after new tenant occupancy
2421 Leases
- Discharge of Leases
- Termination of Lease
- May be terminated by
- Expiration of lease term estate for years
- Notice from either party (written usually)
- Periodic estate and tenancy at will generally
30 days notice - Active military duty
- Victim of family violence or sexual assault,
under certain circumstances
2521 Leases
- Discharge of Leases (cont.)
- Landlord termination of lease and eviction if
tenant breaks the lease - Mutual agreement
- Tenant abandonment
- Tenant liable for terms of leaseincluding rent
- Landlord duty to mitigate damages
2621 Leases
- Discharge of Leases (cont.)
- Foreclosure of property
- May 20, 2009 - December 31, 2014
- Protecting Tenants at Foreclosure Act
- Renter of foreclosed property may remain until
the end of the lease - Unless the tenant has no lease or
- The purchaser intends to use the property as a
primary residence then a 90-day notice required
2721 Leases
- Discharge of Leases (cont.)
- Foreclosure of property
- January 1, 2015
- Return to Texas law
- Leases executed after the date of the mortgage
require a 30-day notice to vacate before a lease
can be terminated
2821 Leases
- Discharge of Leases (cont.)
- Termination Does Not Occur
- When the Owner or Tenant Dies
- Heirs are bound by the lease
- Landlord of deceased tenant has duty to mitigate
damages - When the Landlord Sells the Property
- Purchaser is bound by the lease
2921 Leases
- Discharge of Leases (cont.)
- Breach
- Landlords lockout remedy
- Suit for possessionactual eviction
- Tenants remedyconstructive eviction
3021 Leases
- Breach of Lease
- Landlords lockout remedy for nonpayment of rent
- Must give tenant 3-5 days notice that locks are
going to be changed - Include amount of rent due
- Designate where rent can be paid to avoid lockout
- Can use lockout remedy only once per payment
period - If locks are changed ? ? ?
3121 Leases
- Breach of Lease (cont.)
- Landlords Lockout Remedy (cont.)
- If locks are changed
- No legal resident can be inside
- Landlord must leave written notice on the door
- Amount of rent and other charges due
- 24-hour address or phone number for tenant to get
a key - If no on-site location for key pickup, owner must
deliver a key within 2 hours after the tenant
calls
3221 Leases
- Breach of Lease (cont.)
- Suit for PossessionActual Eviction
- For breach of any terms of the lease
- Owner must give a 3-day notice of suit
- Suit for possession or forcible detainer suit
- Must be heard in court within 10 days
- If court issues a judgment for possession to the
owner, - Tenant has 5 days to file an appeal
3321 Leases
- Actual Eviction (cont.)
- After 5 days or after appeal
- Court may issue a writ of possession to the owner
- Within 48 hours after receiving the writ, owner
must deliver written notice to the tenant that
the writ will be enforced - Tenant must remove himself or herself and
possessions
3421 Leases
- Actual Eviction (cont.)
- If tenant does not vacate
- Deputy sheriff or constable will oversee forcible
removal of tenant and possessions - During or after eviction suit
- Owner can file suit for damages, lost rent,
attorneys fees
3521 Leases
- Breach of Lease (cont.)
- Tenants remedyconstructive eviction
- If certificate of occupancy is revoked, landlord
must - Return security deposit and prorated rent
- Reimburse tenant for expenses
- If landlord breaches lease, tenant can sue for
damages - If premises become uninhabitable, tenant may
abandon them constructive eviction ? ? ?
3621 Leases
- Breach of Lease (cont.)
- Tenants Remedy (cont.)
- To claim constructive eviction, the tenant
- Must give written notice to landlord
- Must abandon the premises while uninhabitable
- Tenant entitled to prorata refund of rent paid or
- Seek court order requiring repairs (up to
10,000) and awarding damages to tenant
3721 Leases
- Types of Leases
- Gross Lease
- Net Lease
- Percentage Lease
- Variable Lease
- Ground Lease
- Oil and Gas Lease
3822 Property Management
- Learning Objectives
- Describe
- A property managers functions
- The basic elements of a management agreement
- Explain the property managers role in
- Budgeting
- Renting
- Maintaining property
3922 Property Management
- Learning Objectives (cont.)
- Identify
- Techniques a manager may use to attract, select,
and retain quality tenants - The characteristics of an effective rental
collection policy - A property managers primary responsibilities
regarding compliance with consumer protection and
privacy laws - Distinguish the property managers
responsibilities for handling environmental and
risk management concerns
4022 Property Management
- Property Management Overview
- Leasing, managing, marketing, and maintenance of
real estate owned by others - Real estate license required unless on-site
apartment manager or employee of owner
4122 Property Management
- Property Management Overview (cont.)
- Property manager Someone who preserves the
value of an investment property while generating
income as an agent for the owners may be - A general agent for the owner
- Sharing operational liabilities with the owner
- An independent contractor
- Bearing almost all operational liabilities
4222 Property Management
- Elements of a Management Agreement
- Description of property
- Time period
- Definition of managers responsibilities
- Statement of owners goals
- Extent of managers authority
- Reporting requirements
- Compensation
- Allocation of costs
4322 Property Management
- Activities of the Property Manager
- Administration
- Marketing
- Physical Management
4422 Property Management
- Management Functions
- Hiring and supervising employees
- Budgeting expenses
- Controlling expenses
- Keeping detailed records
- Making periodic reports
4522 Property Management
- Marketing Functions
- Setting rental rates
- Selecting tenants
- Tenant Selection Criteria printed notice
- Identity Theft and Privacy Laws
- Fair Credit Reporting Act
- Fair and Accurate Credit Transactions Act of 2003
- Red Flag Rules
4622 Property Management
- Marketing Selecting Tenants (cont.)
- Identity Theft and Privacy Laws (cont.)
- FTC privacy rule best practices
- Get permission from rental to give out info.
- Get request in writing from third parties
- Texas privacy laws
- Owners privacy policy if SSN required on
application - Identity Theft Enforcement and Protection Act
- U.S. Patriot Act
4722 Property Management
- Marketing Selecting Tenants (cont.)
- Telemarketing
- Federal Do-Not-Call Registry
- State No Call List
- Junk Fax Prevention Act
- CAN-SPAM and Texas Anti-Spam
- Collecting Rents
- Resident Retention
4822 Property Management
- Physical Management Functions
- Maintaining the Property
- Preventive
- Repair or Corrective
- Routine
- Construction
- Handling Environmental Issues
4922 Property Management
- Risk Management
- Avoid it
- Control it
- Transfer it share it
- Retain it
5022 Property Management
- Risk Management (cont.)
- Common Insurance Coverage
- Fire and extended coverage
- Business interruption
- Liability
- Workers compensation
- Casualty
- Surety bonds
- Flood and hurricane
5122 Property Management
- Risk Management (cont.)
- Specialty Insurance Coverage
- Errors and omissions
- Lead liability
- Employment practices liability
- Liquor liability
- Employee benefits liability
- On-site pollution liability
- Tenant discrimination legal expense
- Terrorism coverage
5222 Property Management
- Professional Management Organizations
- Institute of Real Estate Management
- Building Owners and Managers Association
International - International Council of Shopping Centers
- National Apartment Association
- Texas Apartment Association
5323 Control of Land Use
- Learning Objectives
- Identify the various types of
- Public and private land-use controls
- Subdivision regulations
- Distinguish the function and characteristics of
- Building codes
- Zoning ordinances
5423 Control of Land Use
- Learning Objectives
- Describe the environmental issues an agent must
understand to protect his clients interests - Basic hazards
- Discovery methods
- Disclosure responsibilities
- Liability issues
- Explain
- Major real estate industry green initiatives
- Their goals for reducing the overall impact on
human health and the environment
5523 Control of Land Use
- Public ControlsComprehensive Plan
- Expresses community goals
- Designates areas for residential, commercial and
industrial development - Indicates location for community facilities and
utilities - Proposes means for transportation
- Recommends procedures for historic preservation,
downtown renewals, flood control, and
environmental concerns - Lists actions to carry out the plan
5623 Control of Land Use
- Public Controls - Zoning
- Police Powerto regulate use of private land
- Prevents incompatible adjacent use
- Restricts height/size of buildings
- Provides setbacks
- Controls density
- Promotes aesthetic values
- Enforced through requirements for building permits
5723 Control of Land Use
- Public Controls - Zoning (cont.)
- Use Classifications
- Residentialsingle family
- Residentialmulti-family
- Commercial
- Industrial
- Agricultural
- Planned Unit Development Buffer
zonesTransition between uses
5823 Control of Land Use
- Adoption of Zoning Ordinances
- Planning and Zoning Commission (PZ) recommends
zoning ordinances to City Council for approval - Validity of ordinances require that
- Power be exercised in reasonable manner
- Provisions be clear and specific
- Ordinances not discriminate
- Ordinances promote public health, safety . . .
- Ordinances apply to all property similarly
5923 Control of Land Use
- Zoning Issues
- Zoning Map Amendment
- Notification of property owners within 200'
- Newspaper notice of public hearing
- Public hearing and governing body vote
- Spot zoning
- Amendment differing significantly from area plan
- Not permitted by courts if only one owner
benefited
6023 Control of Land Use
- Zoning Issues (cont.)
- Conditional use permit
- Allow a property use if stipulated conditions are
met - Benefit a neighborhood
- Nonconforming use
- Building or use no longer conforms to zoning
classification - Usually permitted to remain until use or
ownership changes
6123 Control of Land Use
- Zoning Issues (cont.)
- Variance
- Exception to a zoning ordinance a waiver from
compliance - Granted when an ordinance would cause undue
hardship to the owner - Usually for height of building, setback, etc.
- Benefits one parcel only
- Requests for a variance Heard by the Zoning
Board of Adjustment (ZBA)
6223 Control of Land Use
- Zoning Board of Adjustment (ZBA)
- Hears complaints about effects of zoning
ordinances on a specific property - Board members must be free of personal or
political influence - ZBA decisions appealed to court
6323 Control of Land Use
- Extraterritorial Jurisdiction (ETJ)
- Subdivision of land within ½ to 5 miles of a town
must be approved - Purchasers of property outside a city limits must
be given a disclosure that the property might be
annexed in the future - City must give 3 years notice prior to
annexation (in most cases) - City may unilaterally annex without permission of
persons living in that area
6423 Control of Land Use
- Process of Land Development
- Initial Planning Stage
- Developer finds land
- Subdivision plat drawn up by licensed surveyor
- Subdivision regulations
- Initiated by city planning staff
- Streets lot dimensions
- Sewers water mains utility easements
- Areas reserved for public use
6523 Control of Land Use
- Process of Land Development (cont.)
- Final Planning Stage
- Approval of final plans and plat
- By PZ and/or City Council
- Plat recorded with county clerk
- City issues a permit to developer
- Developer obtains permanent financing
- Final budgets are prepared
- Marketing programs are designed
6623 Control of Land Use
- Process of Land Development (cont.)
- Disposition or Start-Up Stage
- Streets, curbs, gutters, utilities are installed
- Open areas are landscaped
- Marketing programs are initiated
- Individual lots are sold to builders for home
construction
6723 Control of Land Use
- Building Codes
- Ordinances that specify construction standards
- Must be met when repairing or erecting buildings
- Set requirements for
- Kinds of materials sanitary equipment
- Electrical wiring fire prevention standards
6823 Control of Land Use
- Building Codes (cont.)
- Building permit required before construction or
alteration begins - To verify compliance with building codes and
zoning ordinances - Does not verify compliance with deed restrictions
- Structures built without permits may have to be
dismantled - After structure is completed
- City inspector issues a certificate of occupancy,
if found satisfactory
6923 Control of Land Use
- Private Land Use Controls
- Deed Restrictions or Restrictive Covenants
- Placed on property by a developer
- In a deed or separate recorded declaration
- Restrict use
- Type of building type of construction
- Height, setbacks, size, cost
- May NOT restrict owners rights to sell,
mortgage, or convey
7023 Control of Land Use
- Deed Restrictions (cont.)
- Private transfer fees
- Fee paid to developer on sale of property
- Not permitted after June 15, 2011
- Existing transfer fees must be filed and renewed
with county clerk - If not, void
- Written disclosure must be given to a purchaser
7123 Control of Land Use
- Deed Restrictions (cont.)
- Limited effective term, such as 25 years
- May be extended by majority of owners
- Validity of a deed is not affected if a
restriction found void by a court - Enforced by JP court injunction
7223 Control of Land Use
- Deed Restrictions (cont.)
- Altering deed restrictions or restrictive
covenants 2 methods - ? By waiver
- All owners, mortgage lenders, and original
developer must agree - ? By judicial process filing a lawsuit
7323 Control of Land Use
- Private Land-Use Controls (cont.)
- Conditions
- Deed can be subject to conditions whereby title
may revert to the seller - Determinable fee estate
- Fee simple subject to a condition subsequent
7423 Control of Land Use
- Land Use Control Issues
- Public ownership
- State ownership 1 of Texas land
- Federal ownership 4 of Texas land
- Floodplains
- Interstate Land Sales Full Disclosure Act
7523 Control of Land Use
- Environmental Protection
- Texas Environmental Concerns
- Ozone nonattainment
- Impaired water bodies
- Water supplies
- Toxics Release Inventory
- Superfund sites
- Wetlands
- Endangered and threatened species
7623 Control of Land Use
- Environmental Protection (cont.)
- Disclosure and Discovery of Hazards
- Sellers Disclosure of Property Condition
- Lead-Based Paint
- Conditions under the Surface
- Environmental assessment addendum
- Certified/licensed inspectors, consultants, and
remediators - Environmental auditors
- Phase I site assessment
7723 Control of Land Use
- Environmental Protection (cont.)
- Environmental Responsibility and Liability
- CERCLA Identify responsible parties and order
cleanup action - Landowner may be liable for cleanup regardless of
who created the contamination - Innocent landowner immunity ? ? ?
7823 Control of Land Use
- Environmental Protection (cont.)
- Environmental Responsibility and Liability
(cont.) - Innocent landowner immunity
- A landowner who was completely innocent should
not be held liable - Must have no actual or constructive knowledge of
the damage - Must have had a Phase I site assessment before
purchase - Must not be environmentally damaged
7923 Control of Land Use
- Environmental Protection (cont.)
- Environmental Responsibility and Liability
(cont.) - Real estate professionals
- Responsible for discovery and disclosure
- Appraisers
- Lenders
- Property and mortgage insurance companies
8023 Control of Land Use
Environmental Hazards
8123 Control of Land Use
- Green Initiatives
- Going Green
- A philosophical and social movement centered on
a concern for the conservation and improvement of
our natural resources. - HUDs definition
8223
23 Control of Land Use
- Green Initiatives (cont.)
- Green Building Programs
- Designed to reduce the impact of buildings on
human health and the environment - Efficiently using energy, water, and other
resources - Protecting occupant health and improving employee
productivity - Reducing waste, pollution, and environmental
degradation
The City of Dallas adopted a city-wide green
building ordinance for new construction in 2008
8323 Control of Land Use
- Green Initiatives (cont.)
- Green Building Certifications
- Energy Star EPA and Department of Energy
- LEED U.S. Green Building Council
- National Green Building Standard (NGBS) National
Association of Home Builders and the
International Code Council
8423 Control of Land Use
- Green Initiatives (cont.)
- Green Mortgages
- Energy Efficient Mortgage (EEM)
- New home built to Energy Star or similar energy
efficient standards typically - Energy Improvement Mortgages (EIM)
- Include funds for energy-efficient improvements
to an existing home
8523 Control of Land Use
- Green Initiatives (cont.)
- Tax Incentives
- Texas
- Ad valorem property tax exemption for the value
of renewable energy improvements - Incentive programs for improving energy
efficiency such as Austin Energys Green
Building Program
8623 Control of Land Use
- Green Initiatives (cont.)
- Tax Incentives
- Federal
- Residential Energy Efficiency Tax Credit
- Available periodically for energy efficient water
heaters, doors, windows, insulation . . . - Residential Renewable Energy Tax Credit
- Up to 30 of qualified expenditures for a system
serving a residence - Through December 31, 2016
8723 Control of Land Use
- Green Initiatives (cont.)
- Remediation Programs
- Texas
- Reduction of greenhouse gas emissions
- Clean energy
- Off-shore carbon dioxide storage
- U.S. Government
- Waste disposal
- Zero net energy buildings
- Green building certification with Energy Star
8823 Control of Land Use
- Green Initiatives (cont.)
- Everyday Green Living
- Suggestions? Ideas?
- The Real Estate Professional
- NAR Green Designation
- Becoming an expert in your community
8924 Real Estate Investment
- Learning Objectives
- Explain the advantages and disadvantages of
investing in real estate - Describe major components of the investment
decision - Property appreciation
- Income potential
- Use of leverage and pyramiding
9024 Real Estate Investment
- Learning Objectives (cont.)
- Identify the key tax benefits of investing in
real estate - Distinguish the types of real estate investment
syndicates and/or trusts
9124 Real Estate Investment
- Investing in Real Estate
- Real Estate Assets
- Real Estate Securities
9224 Real Estate Investment
- Considerations for Prospective Investors
- Pros
- Above-average rate of return (usually)
- Tax benefits
- Hedge against inflation
- Leverage of funds
- Equity buildup
9324 Real Estate Investment
- Considerations for Prospective Investors (cont.)
- Cons
- Illiquidity
- Risk
- Change in laws
- Possibility of negative cash flow
- Requires personal attention of investor
- Expert advice needed
9424 Real Estate Investment
- Investment Purposes
- Appreciation
- Inflation
- Intrinsic value
- Income
- Cash flow and cash flow management
- Tax Shelter
- Deductibility of interest and other expenses
- Depreciation
9524 Real Estate Investment
- Leverage
- Use of Borrowed funds
- Make a small down payment
- Get the lowest interest rate
- Obtain the longest mortgage term
- Equity Buildup
- Repayment of principal
- Appreciation in property value
- Equity can decrease
9624 Real Estate Investment
- Leverage (cont.)
- Pyramiding through Refinancing
- Refinance one property
- Released equity used to buy more property
9724 Real Estate Investment
- Tax Benefits
- Capital gains tax
- Basis Initial cost
- Adjusted Basis Cost improvements
depreciation taken as a tax deduction - Capital Gain Selling price Selling expenses
Adjusted basis Capital Gain - Depreciation
- Income tax deduction
- Recover cost of investment
9824 Real Estate Investment
- Tax Benefits (cont.)
- Installment sales
- Receive payment in installments over 2 or more
years - Pay income tax each year based on amount received
in that year - Tax Credits
- Direct reduction in tax due
- Generally low-income housing projects and
historic properties
9924 Real Estate Investment
- Tax Benefits (cont.)
- 1031 Exchanges
- Taxes deferred not eliminated
- Like-kind properties
- Boot
- Net debt relief
- Old property Relinquished property
- New property Replacement property
10024 Real Estate Investment
- 1031 Exchanges (cont.)
- 3 Methods
- Direct, Simultaneous Exchange ? ?
- ? Delayed Exchange ? ?
- ? Reverse Exchange ? ?
10124 Real Estate Investment
- 1031 Exchanges (cont.)
- ? Direct, Simultaneous Exchange
- Two people trade properties in one transaction
- Cannot occur if old and new properties are not
both identified at the same time
10224 Real Estate Investment
- 1031 Exchanges (cont.)
- ? Delayed Exchange
- Old property is sold then new property is found
- The Identification Rule 45 days to find
possible replacement properties - Three-Property Rule
- 200 Rule
- 95 Rule
- The 180-Day Rule Time limit to close on new
- All funds must pass through a third-party
qualified intermediary
10324 Real Estate Investment
- 1031 Exchanges (cont.)
- ? Delayed Exchange (cont.)
- Requires
- Title Names on title on new property must match
names on old property - Reinvestment To avoid capital gains taxes
- New property must have equal or higher value than
old and - All equity must be reinvested in new property and
- New property must have equal or more debt than old
10424 Real Estate Investment
- 1031 Exchanges (cont.)
- ? Reverse Exchange
- New property is found then old property is sold
- Exchange Accommodation Titleholder required
- Rules are more complicated than for Delayed
Exchange!!! - Careful planning is crucial in a 1031 exchange!
- Enter into it only with professional assistance!
10524 Real Estate Investment
- The Tax Reform Act of 1986
- Limits deductibility of losses from rental
property - 2 categories of investor
- Active
- Personally manages the day-to-day or
- Makes management decisions, hiring others to
provide services - Passive
- Contributes investment money
- Has no voice in management operations
10624 Real Estate Investment
- The Tax Reform Act of 1986 (cont.)
- Active Investor may deduct
- Up to 25,000 of loss to offset income from any
source - 100,000 maximum taxable income (before rental
loss deduction is taken) to be eligible for full
deduction - Passive investor
- Offset investment losses only against investment
income
10724 Real Estate Investment
- The Tax Reform Act of 1986 (cont.)
- Real estate professionals not subject to passive
loss limitations if - Materially participates in activities
- Spends at least 750 hours in real property
businesses - Performs more than 50 percent of personal
services in real property businesses
10824 Real Estate Investment
- Investment Syndicates
- Pool resources to own property
- Tenancy in common, partnership, corporation,
trust - Private syndication versus Public syndication
- Blue-sky laws
- Securities laws
10924 Real Estate Investment
- Real Estate Investment Trust (REIT)
- No corporate income tax if
- 90 percent of income distributed
- 100 or more investors
- 75 of assets in real estate or related assets
- 3 investment vehicles ? ? ?
11024 Real Estate Investment
- Real Estate Investment Trust (REIT)
- 3 Investment Vehicles
- Equity REIT Buys/sells large scale investment
properties - Mortgage REIT Buys/sells mortgages
- Combination REIT Invests in properties and
mortgages
11124 Real Estate Investment
- Real Estate Mortgage Investment Conduits (REMIC)
- Tax device allowing cash flows from a block of
commercial mortgages to be passed directly to
investors