Home and Real Estate

Real Estate is booming in India like never before. Almost all sectors of the industry – be it commercial, residential or retail are witnessing an exponential growth in major as well as the B Grade cities of India. This astounding growth in the real estate segment has attracted the interest of NRIs and they are more than ever keen on investing their hard earned moolah in the highly lucrative Indian real estate market.

Owing to the spurt in demand, a lot many real estate companies and service firms are providing dedicated services to Non-Resident Indians interested in making investments. The service providers’ help NRIs make assessment of the properties, judge its worth and help make informed investment decisions. Depending upon the client’s request real estate service providers keep a tab on upcoming projects, help them in availing finance and even provide assistance in completing legal formalities pertaining to the purchase of property.

Apart from the real estate management a host of companies are providing property maintenance services in India. These services are highly beneficial for NRIs who have property in India or who wish to assist their parents and loved ones in taking care of their residential or commercial property. Most popular services covered under property maintenance is the renting of property. Real estate service providers help their clients in letting out their property by looking for eligible tenants. They even help them in collection of payments and complete other formalities. Non-Resident Indians may also take help of real estate service providers to find property on rent for their friends and family members.

Other services coming under property maintenance portfolio include whitewashing, plumbing, carpentry and electrician jobs, gardening, pest controlling etc. Many service providers also offer you the option of subscribing to annual maintenance packages at discounted rates and ensure complete care of your property.

The real estate contract can be basically described as the document that bears the agreement behind any real estate transaction, whether that be the sale or purchase of a property, the lease of a property or any other transaction of that sort. Failure to understand the real estate contract can cause a lot of pain to the parties to real estate transactions who do so. This is because most disputes that arise in the course of real estate transactions (like where one parties feels that they are being ‘misused’) tend to turn out to be cases caused by failure to properly understand the real estate contract.

Normally, real0estate contracts are prepared by the ‘dominant’ parties in property transactions – and then presented to the other parties ‘for signing.’ The word ‘dominant’ here is used to refer to the parties who appear to have more ‘power’ in the transaction. Of course, the ideal situation would be to have the real estate contract prepared by an uninterested third party, say a law firm consensually contracted by both parties to the property transaction to oversee it. The reality however, tends to be that the real-estate contract ends up being prepared by one party (naturally biasing it somehow in their favor) and then just presented to the other party for signing.

In the situation where you are the party preparing the property contract, there would be little reason to worry, because you have control over what goes into the contract, and what doesn’t. The problem, however, is where you happen to be the party for whom the real estate contract is being prepared, and where all that is expected for you to do is just to sign on the dotted line – and get the transaction moving.

In this case where you are the party for whom the property contract is being prepared, it would be essential for you to ensure that you go through the contract with a tooth comb, scouring it for any clauses that may be injurious to your interests, before signing on the dotted line. This means overcoming the lazy feeling that you should just sign on the real estate contract and get done with it: because such an action has often driven people into great regrets. True, the other party (the party that prepared the contract) may not be very happy about your scouring through the document so thoroughly, but there is little else you can do – and you should not even consider signing on a property contract you have not really understood.

While you should not expect to have a perfect real estate contract (one that has absolutely no negative clauses) there should be a clear boundary that you shouldn’t go beyond, in terms of compromising on your interests. And if you happen to come across such truly injurious clauses in your bid to understand the property contract, you should not fear telling the other party to amend the contract, and neither should you sign on such an obviously flawed contract, even if it means pulling out of the deal.

Real estate investing strategies have undergone major changes in the past four years. Before the banking crisis and economic recession, many investors were generating massive profits through rehabbing distressed properties and engaging in house flipping. Today, investors are using distressed properties to generate rental income or to offer creative financing options.

The first step to achieving real estate investment success is to become educated about the market. Investors should become familiar with the various types of investment properties such as residential, commercial, and vacant land, as well as investing in real estate notes and land contracts.

Residential real estate can be used as rental properties or placed for sale. Many investors are offering creative finance strategies to attract buyers who cannot qualify for bank financing. Popular financing options include lease purchase option agreements and seller carry back mortgages.

Commercial real estate includes a wide mix of properties such as condominium and apartment complexes, retail shops, warehouses, and office buildings. Investors often partner with other investors or investment groups when purchasing commercial property in order to cover the costs and management duties required to maintain investment properties.

Commercial property has the potential to generate substantial profits as long as investors evaluate market conditions. Investors may be entitled to tax incentives when commercial investments bring employment opportunities to the area or when properties are upgraded using energy-efficient technology such as solar panels or other forms of green energy.

Investors often seek out bank owned foreclosure properties because this type of realty is usually priced well below market value. Bank owned realty encompasses all types of properties and can range from mobile homes to swanky high-rise apartments and industrial parks to golf courses.

Locating residential and commercial foreclosures is relatively simple. Using the services of a realtor can expedite the process. Agents can access the multiple listings (MLS) database to quickly locate all types of properties for sale.

Once banks repossess properties they are first placed for sale through public or government auctions. The property is given back to the bank if it goes unsold at auction. Banks then sell foreclosure properties through their loss mitigation division or local realtors.

Prices of bank owned properties are generally higher than properties sold through auction. However, banks remove liens and judgments in order to sell the real estate with a clean title. Buyers are able to take quick possession and can move forward with preparing the property for sale or rent.

Many investors are buying residential properties through Fannie Mae’s Homepath Mortgage program. In addition to selling homes at deeply discounted prices, Homepath Mortgage offers low down payment requirements and special financing options to both individual buyers and real estate investors.

Many Fannie Mae properties qualify for grant money offered through HUDs Neighborhood Stabilization Program. NSP grants are offered to improve properties located in areas with high rate of foreclosure. Qualified investors can obtain up to five NSP grants.

Investors who invest in commercial real estate must become educated about federal, state, and county property laws. Commercial buildings must comply with the Americans with Disabilities Act and be zoned for commercial use.

Although the real estate market continues to head in a downward spiral, there are still plenty of solid investment opportunities. Investors must stay abreast of market conditions and be capable of changing strategies when needed. Otherwise, they will quickly become another real estate statistic.

If you own rental real estate, there are three different ways to treat your rental losses depending on your status. One of these is “Real Estate Professional.”

First, let’s dispense with one myth: Real Estate Professional status does not mean you have to hold a real estate license. Rather, it is a designation you obtain by meeting certain specific requirements. The first requirement is that you spend more than 750 hours in real property trades or businesses in which you materially participate. The second requirement is that you spend more time in your real property trades or businesses than in ALL OTHER trades or businesses combined. Time spent as an employee in real property activities is counted only if you are a more than a 5% owner in that business. If you qualify as a real estate professional you can deduct all your current year rental real estate losses against other income without limitations.

What is a real property trade or business? A real property trade or business is defined as ANY real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

You have to meet the above requirements each year. So, you could be a real estate professional one year but not the next. Only one spouse needs to meet the requirements in order for a married couple to take advantage of the benefits provided by the real estate professional status.

The 750 hours test must be met for each activity. So for example, say you have three rental properties. The general rule is that you have to perform at least 750 hours on activities related to EACH of those three properties. Fortunately, there is an exception to this rule. If you make the election to aggregate all of your rental real estate activities into one activity, you only have to meet the 750 hours requirement once for the tax year.

What types of activities qualify as real estate professional activities? Activities such as:

- Searching for possible rental properties

- Attending real estate seminars or reading real estate books

- Meeting with real estate agents and viewing properties

- Meeting with mortgage brokers with regards to getting loans on properties

- Travel time to and from the seminars and your property searches

- Preparing your bookkeeping and tax information for your rental properties

- Time spend buying or selling properties (i.e. signing the closing documents)

- Studying and reviewing financial reports (Investor-type)

- Preparing summaries or analyses for personal use (Investor-type)

- Monitoring finances or operation in a non-managerial capacity (Investor-type)

An important note to the investor-type activities mentioned above is that these activities can only be counted towards real estate professional time if you are involved in the day-to-day operations or management of the activity for which you perform those tasks. Essentially, this means that if you have an independent property manager and your only real estate business is your rental properties, you probably will not qualify as a real estate professional.

The extent of an individual’s participation in an activity may be established by any reasonable means. Contemporaneous daily time reports, logs, or similar documents are not required if the extent of such participation may be established by other reasonable means. Documentation required includes the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period, based on appointment books, calendars, or narrative statements. Documentation is the key when claiming real estate professional status. Most taxpayers who lose in the tax courts lose because of poor documentation. Although documentation through a reasonable means is pretty vague, the tax regulations are clear that post-event “ballpark guesstimates” are not permitted and will not hold up in the tax courts.

Real Estate Professional status is such an important designation for a high-income real estate investor that we strongly recommend you spend time with your Tax Coach to determine if and how you can become a Real Estate Professional and deduct all of your rental losses.

Are you ready to permanently reduce your taxes?

Warmest Regards,

Tom

We know that you can give up to $12,000 per person per year and never pay a federal gift tax – thanks to the annual gift tax exclusion. That’s fine if you’re writing out a check or just giving cash. But, how can you give someone a house or a business or anything else that is not money and still have it come under the annual gift-tax exclusion?

Let’s say you’re parents have a condo in Florida that they bought several years ago for $100,000, and it’s now worth $400,000. Now, they want to give it to you and your two sisters because they’re concerned about the new Medicaid laws and their estate taxes.

Qualifying the entire $400,000 condo under the annual gift tax exclusion is not easy. First, it’s hard to gift real estate in $12,000 increments. Sure, you can do it by simply dividing the value of the condo ($400,000) by the annual exclusion amount ($12,000 in 2006). In our example, $12,000 is equal to a 1/34th interest in the condo, which means that each of your parents could give you and each of your sisters a 1/34th interest in the condo each year. At that rate, it would take roughly 6 years to complete the transfer. If spouses were included in the annual gifts, then the time needed to transfer the entire condo would be reduced to about three years. [Careful planning could reduce that time to 366 days by making the first transfers on December 31st, the second transfers on the following January 1st, and the final transfers on January 1st of the next year.]

Seems pretty cumbersome though, doesn’t it? And, it is. Besides, every year your parents would have to prepare a new deed for each gift and would have to record each deed on the land records. Plus, they’ll probably need an attorney to take care of all that for them. The costs for all that work, including the recording fees, can be quite substantial. Then, when all of you decide to sell the condo, you’ll have to put 34 different deeds together, with every owner signing off on the sale.

There’s still another problem – that is, you have to make sure that your values are all correct. You see, if you give money, there’s no queston as to what the value of the gift is. With anything besides money, whether it’s real estate, stock, bonds, collectibles, etc., there is often no readily ascertainable value. So, you need to have the property appraised by a qualified appraiser so that the value comes under the annual exclusion. There are rules for doing this and, if you don’t comply, then the IRS can always challenge your value. If the value is found to be more than the annual exclusion amount, then you’d have to file a gift tax return each year and possibly pay a gift tax. Appraisals cost money and have to be done every time a gift is made.

Is there a better way to transfer real estate under the annual gift tax exclusion? Sure there is! No one wants to transfer real estate in the manner we just discussed. It’s just too cumbersome, time consuming, and expensive. The preferred way to transfer real estate under the annual gift tax exclusion is to use a separate legal entity, such as a corporation, or a limited liability company, or a family limited partnership to facilitate the transfer. My preference is a limited liability company (LLC) because it is easy and inexpensive to set up, and does not create the need for additional on-going expenses.

Here’s how it works: First, your parents would create a limited liability company. Let’s call it the Smith Family Condo, LLC. The LLC would be created with 34 membership units ($400,000 / $12,000). Your parents would then transfer their condo to the LLC in exchange for all 34 membership units (each parent would receive 17 membership units). Only one deed is necessary when your parents transfer the condo to the LLC, and only one recording is required. Likewise, only one appraisal is necessary to establish the value of the condo at the time of the transfer.

Now, whenever your parents wish to make a gift to each of you under their annual gift tax exclusion, all they have to do is transfer one membership unit in the LLC. No further deeds are required, no recording of deeds is required, and no attorney’s fees are required. The transfers have to be reflected on the books of the LLC, but that’s it. Not only does the LLC make it very easy to transfer the property in the first place, it also makes it very easy to manage the property and eventually sell it when the time comes.

That’s the preferred way to transfer real estate or any other type of property to multiple beneficiaries under the annual gift tax exclusion.

Next time: Is it so terrible if you go over the annual gift tax exclusion amount in any year?