In this bond, the surety underwriter is liable to the landlord and not the tenant for breach of the lease contract. The surety underwriter’s responsibility on the lease bond is strictly monetary; the surety underwriter is generally not required to perform the unfulfilled non-monetary obligations of the tenant.”

This info from http://www.integritybonds.com/lease_bond.php

Many of our clients think they can only exchange between the same asset class, for example from “multi family” to “multi family” assets. This is not the case.

Here are some sample exchanges you can conduct:

Sell a piece of land, say a farm, and buy an office building of equal or greater value.

Sell a residential duplex unit and purchase an industrial warehouse of equal or greater value.

Sell a strip mall shopping center and purchase raw land of equal or greater value.

And so on. As long as the assets are of “like kind”, meaning they are all real estate assets, you can perform the exchange. You’ll notice that the only caveat is that the asset you’re purchasing be “of equal or greater value” in the exchange.

Answer: You can move into your rental as your primary residence and if you live there for two years, you will be eligible for the Section 121 homeowner exemption, which is $500k if you are married and $250k if you are single. The exemption will cover the entire appreciation protion of your gain. Unfortunately, you will still need to pay taxes on your depreciation recapture, no matter what your examption. So the way to think of it is that you are carryinng an inherent gain with two components, appreciation and depreciation. The appreciation can be exempt using Section 121, but the depreciation cannot.

If you instead decide to sell the property as an investment and do a 1031 Exchange, your entire gain will be deferred, which includes both components.

The tax rate on the depreciation recapture is 25% federal and various rates depending on the state.

My company is a 1031 Exchange qualified intermediary. We would appreciate the opportunity to work with you if you decide to sell as an investment, rather than a primary residence.

Sincerely,

Adam Skarsgard, Esq., CPA
Principal
Asset Exchange Company
Office Phone: (877) 471-1031
Office Fax: (877) 480-1031
www.ax1031.com

Price per Square Foot (PSF): This is calculated by taking the sales price and diving it by the number of square feet in the property. For example, if a property is selling for $2,500,000 and it’s 11,300 square feet in size, then your PSF will be $221. PRO’s of this approach: It’s a quick & easy way to compare multiple properties to each other with usually published, public data. CON’s of this approach: It does not take into account the net operating income (NOI) of the property, nor its expenses. For example, if a property has a tenant who’s paying unusually high or low rent, or the property is unusually cheap or expensive to operate, that is not reflected in the PSF. Additionally, the PSF assumes the property is “average” as compared to other properties, so any unusual non-average features (such as more land) are not considered.

Gross Rent Multiplier (GRI): This is calculated by taking the value (usually price) of the property, and dividing it by the potential rental income (PRI). For example, if a property is selling for $2,500,000, and it’s potential rental income (annually) is $455,000, then the GRI is 5.49. The downfall of this method of computing & comparing values of one asset vs. another is that it only takes into account the asking price and rental income. For example, if a tenant is paying $455,000 annually, but its lease is coming due the next year, there is much less value in that asset than if it has 10 years left. This type of thing is not considered by the GRI.

Capitalization Rate (Cap Rate): This is probably the most popular way to value & compare property. It is calculated by taking the net operating income (NOI) and dividing it by the price. The NOI is calculated by taking the PRI (potential rental income) and subtracting out the operating expenses. The NOI does *not* include debt service. For example, if the PRI of a property is $455,000, and operating expenses are $100,000, then the net operating income, NOI, is $355,000. In this case the cap rate is $355,000 / $2,500,000, or 14.2. As the cap rate goes down, the value (price) of the property goes up. So, sellers want cap rates to be as low as possible, and buyers want cap rates to be as high as possible. The limitations to cap rates are several. Cap rates only consider one year of NOI, not multiple years. The sellers usually project the future NOI when publishing cap rates for a property that’s for sale. The cap rate also does not take the future buyer’s disposition of the asset into account. Lastly, it only considers the NOI and price, and no other features of the property.

Internal Rate of Return (IRR): The IRR provides the “percentage rate of return for each dollar invested, for each period in which it’s invested”. Here’s what that means: if you’re investing one dollar ($1) into a project for 5 years, and that $1 turns into a larger amount by the 5th year - let’s say it’s $1.25, because someone is willing to pay $1.25 for an asset that cost you $1, then your IRR for that dollar is 4.56%. If you didn’t sell until year 10, then your IRR on that $1 would be 2.26%. This $1 example easily scales to large assets of $2,500,000, etc. The IRR is the most comprehensive way to value a property, but it too has its limitations. For example, if a property has both positive and negative cash flows throughout its life, you may end up with multiple IRR calculations or an inaccurate assumption about the initial investment’s true size. IRR also does not take into account the reinvestment of the cash flows. For example, if a property is producing a cash flow of $250,000 per year, the IRR will not help you determine how best to handle these cash flows.

Capital Accumulation: This method allows you to compare two or more investments in terms of accumulated dollars rather than the IRR. While the IRR measures the yield on dollars while they remain in an investment, capital accumulation accounts for the dollars an investment produces, whether they remain in the investment or are reinvested elsewhere. To calculate & compare value by using the capital accumulation method, you’ll need a “safe” investment rate (like a CD or T bill rate) and a reinvestment rate (a riskier rate). This method requires some calculation, which we’ll be happy to show you if you ask!

Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of “like-kind”, while deferring the payment of federal income taxes and some state taxes on the transaction.

The theory behind Section 1031 is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer’s investment is still the same, only the form has changed (e.g. vacant land exchanged for apartment building). Therefore, it would be unfair to force the taxpayer to pay tax on a “paper” gain.

The like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

• long-term holding periods and no active secondary market for the sale of TIC interests.  This could impact your ability to access your investment.

• limited liquidity that could affect your ability to access or cash out your investment

• unique fees different from other real estate investments that could impact cash flow and investment returns.

TICs are subject to risks similar to other real estate investments such as:

• fluctuations in value due to changes in occupancy rates and economic factors.

• although rare, TIC owners could potentially face capital calls on the investment.