1031 Tax Deferred Exchange

For a first-time homebuyer, a section on tax deferred exchanges may appear to be a little far out. But, this underutilized financial tool can make a big difference in the following situations: (1) You want to keep your starter home for a rental when you move up. (2) You’ve rented part of your home and it’s subject to capital gains. (3) You want to trade your single family up to a duplex or fourplex. (4) Someone has an investment property (single-family rental, duplex, or even new construction) you would like, but if this person sold, capital gains would kick in. The possibilities are endless for creating win-win deals and deferring capital gains to a time when the tax bite is not so painful. Unfortunately, paying capital gains taxes keeps many owners from selling single-family homes and condos they’ve owned for years and would like to unload. These properties may be homes they couldn’t sell in a slow market, so they rented them. Eventually, the market changes, and suddenly the rental has lots of equity and a growing tax liability.
Not wanting to go through the pain of fixing up the property and putting it on the market, many owners continue living with the problem and delaying doing something proactive. As equity grows, the problem also grows for many owners.
Luckily, a 1031 exchange may be able to solve their problem by getting them into something more suited to their interests. Putting an exchange together is fairly straightforward but may require the expertise of an exchange intermediary, accountant, and a title/escrow company depending on the number of properties and complexity.
The exchange intermediary is the neutral party that handles the nuts and bolts of the exchange. To find one, look in the yellow pages or check the Internet under Real Estate Exchange. Or better still, realtors and title companies who do 1031 exchanges will be able to recommend good intermediaries. You’ll also need a title or escrow company to handle title work and funding, and, of course, the buyers and sellers for the properties in the exchange.
The exciting thing about 1031 exchanges is that you don’t have to have two property owners who want to exchange straight across; you can bring in other buyers and sellers with their properties to add to the mix.
Here’s a simplified example: you find a buyer for the property you want to get rid of (relinquished property), and the sale goes into escrow. You have 45 days to find a property you want to buy (replacement property), and that goes into the escrow. The buy/sell mix closes, and you end up with the property you want. The party with the least equity can use cash or financing to make up the difference.

Buying a Home Using Your 401(k) or IRA

One of the most difficult steps toward buying that first home is coming up with a down payment. Yet many people already have a down payment sitting in their 401(k)s and IRAs that they can tap without triggering stiff tax consequences.
One of the most flexible options allows a couple to jointly borrow up to 50 percent or $100,000, whichever is less, of their individual 401(k). They can do this tax and penalty free, as long as the money is paid back. You can use the loan for home buying, home improvement, or just about anything. If you use the money to buy a primary residence, the payback can be extended from 5 years to 10 years. You can also tap your IRA for up to $10,000 without penalty to help family members buy their first home, providing it’s your first time using the homebuyer exclusion.
Eric and Amanda tapped their IRA when they helped their daughter buy her first home. Eric, a self-employed contractor and Amanda, a legal secretary, had a sizable IRA they could borrow from. When some past clients offered Eric a great deal on a home that was part of an estate sale, he was able to move quickly by borrowing against their IRA. In addition, not having to tap into his business credit lines or qualify for a home equity loan was a big convenience. However, before you borrow from your IRA account, check with a tax professional to make sure you qualify for these exclusions.

Beware of Tax Scams

Around tax time, you’ll probably get letters offering to reduce your taxes for a percentage of the reduction. Many legitimate companies offer this service. Typically, they’ll charge 30–50 percent of the savings. If you don’t have time to protest your tax bill yourself, this can be a better way than not at all. As usual, talk to three companies and get bids and references.
However, beware of scammers who charge a fee up front and promise to lower your taxes or get you a rebate. No one can predict if and what you can save without going through the system. Always be suspicious is there’s an up-front fee involved.

The Formal Appeal

Residential appeals are often settled at the local level. If you are not satisfied with the results of your informal review, you have several more opportunities. The first level of formal appeal is usually to a local board. Here you’ll need to again present your evidence and point out the similarity between your property and the comparable ones on your list. Include a recent appraisal of your property if you have one. Close by asking the board to reduce your assessment to what you think is fair, based on your data.
Remember, keep it focused and professional. The appeal board is interested only in the fairness and accuracy of your assessment. Don’t go off on tangents about how your aging mother needs a lifesaving operation or why you think property taxes are too high. If you disagree with the local board’s decision, additional administrative or legal remedies are available, which vary from state to state. Information about these is available from your assessor’s office.

Next Step, the Meeting

Follow the instructions on your tax notice and make an appointment with the tax assessor. The purpose of this informal review—which is not yet an appeal—is to verify the information on your property record form and make sure you understand how your value was estimated. Also, the meeting is to discover if the value is fair compared with the values of similar properties in your neighborhood and to find out if you qualify for any exemptions.
The person conducting the meeting will probably review your property record form with you, along with information you have about comparable properties. At this time you can present the information you’ve gathered.
You may not get a commitment for a change in value at this meeting, even though you have uncovered an error or the assessment appears to be inequitable. The decision to change a valuation may have to be made by someone else in writing. If so, find out when you can expect a decision.
It’s possible that this is as far as you’ll have to go if you get a favorable ruling. If you don’t, then you’ll have to proceed to the next step, which is a formal appeal.
In the meeting, view the person you’re talking to as an ally, not an adversary. If you’re calm, polite, and professional, that person will likely be more helpful and can concentrate on giving you the information you need for an appeal, if it comes to that.

Preparing for the Appeal

Find your property identification number on your assessment notice and use this number to get a copy of your property record from the assessor’s office or title company.
Next, review the facts on the property record. Is the architectural style correctly stated? If not, a recent photo of your home will help correct the information. Check the living area of your home, lot size, number of bathrooms and bedrooms, garage or finished basement, construction materials, condition, and so on. Gather as much information as you can on similar properties in your neighborhood. Ask the assessor’s office, call the friendly realtor who sold you the house, or someone you know who has access to the MLS. They can print out a list of comparable sold homes in minutes that you can use for ammunition in your appeal. Compare your home with the assessed values of similar properties and put together a simple chart comparing the homes feature for feature. Some MLS (Multiple Listing Service) databases can organize the data from comparable homes into columns and make it easier for you. The key is to know what you’re talking about and have the proof to back it up.

How to Appeal Your Assessed Value

When you receive your assessment notice, read it for instructions about deadlines and filing procedures. They vary from state to state. If they’re not clear, call the assessor’s office for information. A missed deadline or incorrect filing can cause an appeal to be dismissed. The first step in an appeal is usually an informal meeting with someone in the assessor’s office. (Sometimes, this informal review is handled by telephone or mail.) Information on the mechanics and deadlines for setting up an appointment should be included with your assessment notice, along with additional information for the entire appeals process.

What Are the Grounds for an Appeal?

First, an assessment appeal is not a complaint about higher taxes. It’s an attempt to prove that your property’s estimated market value is either inaccurate or unfair.
For a successful appeal, you’ll need to prove at least one of three things:

1. Items that affect value are incorrect on your property record. For instance, you have one bath, not two. You have a carport, not a garage. Your home has 1,600, not 2,000 square feet, and so on. This is an easy one; you just compare the assessor’s record to what you’ve really got and submit proof such as a recent appraisal or photos.
2. You have evidence (comparables) that similar properties have sold for less than the market value of your property.
3. The estimated market value of your property is accurate but inequitable because it is higher than the estimated value of similar properties. If your home is in a subdivision of similar homes and your neighbors’ taxes are less, then you have a case for appeal. A title company, county recorder, or realtor can give you a list of what other homes in your neighborhood are paying in property taxes.

If You Think Your Tax Bill Is Too High, Appeal It

Suppose your tax notice values your house at $200,000. You feel that this is high because you had an appraisal when you refinanced two months ago for $185,000. Then you happen to talk with your neighbor, whose home is a bit larger and has a bigger yard, and his tax is $200 less than yours. You wonder how can that be.
Easy, according to Consumer Reports, tax records show an error rate of 40 percent in estimating property taxes. Also, the National Taxpayers Union writes that as many as 60 percent of all homeowners are overassessed on their home’s value. If this is the case, then most likely you’re paying more property tax than you should. Unfortunately, to correct this and put some dollars back in your pocket, you have to be proactive and prove to the county that it owes you money.