Date Archives: November 2021

You've just moved into your new home. Now you need to decorate it and make it your own. You don't need a lot of fancy trinkets and expensive doodads. All you really need to make your house a home is a few mason jars. With National Mason Jar Day coming up on November 30th, let's look at some of the many fun things you can do with these durable, beautiful, and versatile jars.

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November 23rd is National Espresso Day. What better way to celebrate than with a delicious latte? There are plenty of coffee shops in the area, but if you've just moved to a new place, it might be nice to try out your new kitchen and make one yourself. Here are some tips for making the perfect latte.

Ingredients and Equipment Needed

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What Is A Section 1031 Exchange, And How Does It Affect Tax Liabilities

Real estate has always been a great way to build wealth. When you buy a property by putting a relatively small amount of money down and obtaining a mortgage, you're leveraging your investment; in other words, you're getting an asset worth significantly more than the money you've invested as a down payment. 

If your home increases in value, you build equity based on the total price of the asset. Another significant benefit of real estate is the tax breaks. When you live in the home, the interest you pay on your mortgage is tax-deductible if you itemize your return. Thanks to the Taxpayer Relief Act of 1997, another tax break comes in reduced capital gains taxes. For example, when you sell your home, the first $250,000 gains are free from capital gains taxes ($500,000 for married couples). These tax advantages make owning a home a wise investment for many of us and allow us to build wealth relatively tax-free when investing in a residence.

If you're a commercial real estate investor, there is another rule you can also use to defer capital gains on your investment property to build wealth. It's called the 1031 Exchange Rule, and it has many moving parts. Real estate investors must understand the law before attempting to use it, and it can be complicated to follow. An exchange can only be made with like-kind properties. In addition, there are tax implications and time frames that must be strictly followed, or it may be problematic. 

If you're considering using a 1031 Exchange or want to learn more, we're going to help you gain an understanding of this investment benefit in this post.

What Exactly is a Section 1031 Exchange

In simple terms, a 1031 exchange (also known as a like-kind exchange) is a swap of one investment property for another. Although most swaps are taxable as sales, if you meet the requirements of 1031, you'll pay no tax or a limited tax due at the time of the exchange.

In effect, you are changing the "form" of your investment in the eyes of the IRS without cashing out or recognizing a capital gain. This allows you to grow your investment tax-deferred. Because there are no limits as to how many times or how frequently you can use 1031, you can continue to roll your capital gains from one investment property to another, and another, and another.

Even though you may be profiting from each swap, you avoid paying any taxes until you finally cash out many years (or even decades) later. If it works as planned, you'll pay a single tax at the current long-term capital gains rate (currently 15 or 20% depending on your income).

Most exchanges must meet the criteria known as "like-kind." However, this phrase doesn't necessarily mean what the name implies. For example, you can exchange an apartment building for raw land or a ranch for a strip mall. The rules are surprisingly liberal. You can also exchange one business for another. However, there are "traps" of which you need to be aware.

The 1031 rules are for investment and business property, although they can apply for a former primary residence under certain conditions. It's also possible to use the 1031 Exchange for swapping a vacation home, but this loophole has been made much narrower in recent years.

When You Might Want a 1031 Exchange

As a real estate investor, there are several reasons that you may consider using a 1031 exchange. These include:

• You're looking for a property with better prospects for an ROI, or you might want to diversify your assets.
• If you own investment real estate, you might be looking for a managed property rather than managing it yourself.
• You may want to consolidate your holding for estate planning purposes, for example, dividing a single property into several assets.
• To reset the depreciation clock (more below.)

The main benefit of a 1031 exchange over simply selling one property and buying another is the tax deferral. By deferring capital gains taxes using a 1031 exchange, you're freeing more capital for investment in a replacement property.

Bear in mind that 1031 might require a higher minimum investment and a longer holding time. 1031exchange transactions can be complex and should be handled by professionals.

Understanding Depreciation and Why It's Important

It's essential to understand the concept of depreciation to gain a proper understanding of the benefits of a 1031 exchange.

Depreciation is the percentage of the cost of an investment property written off every year, recognizing the effects of wear and tear. When you sell a property, capital gains taxes are calculated based on the property's net-adjusted basis, which combines the property's original purchase price plus capital improvements, minus depreciation. 

If your property sells for more than its depreciated value, you may need to "recapture" the depreciation. That means the amount of depreciation is included as taxable income when you sell.

Since the size of depreciation increases with time, you might want to consider a 1031 exchange to avoid the significant increase in taxable income that recapture would cause. Depreciation recapture is a factor to account for when considering a 1031 exchange.

The Replacement Property: Timing and Rules

The classic exchange involves a simple swap of one property for another between two people. However, it's long odds to find someone with the exact property you want, who wants the exact property you have. As a result, the majority of exchanges are delayed, three-party exchanges.

In a delayed exchange, you need a qualified intermediary or middleman. He or she will hold the cash after you sell your property and then uses it to purchase the replacement property for you. This is a three-party exchange that is classified and treated as a swap. Here are two essential timing rules you need to follow in a delayed exchange.

The 45-day Rule

This rule relates to the designation of a replacement property. Once a sale occurs, the intermediary receives the cash. Within 45 days of the sale, you must designate the replacement property in writing to the intermediary, specifying the property you wish to acquire. The IRS rule states that you can select three properties as long as you eventually close on one of them. 

The 180-day Rule

The second timing rule you need to be aware of in a delayed exchange relates to closing the replacement property. You must close on the new property within 180 days of the sale of your original property.

One crucial fact to be aware of is that these periods run concurrently. That means the clock starts when you close on the sale of your original property. For example, if you designate a replacement property exactly 45 days after you close, you'll have just 135 days left to close on the replacement.

Tax Implications

While there are plenty of benefits to 1031 exchanges, it's essential to understand potential pitfalls if the transaction isn't handled correctly. For example, you may have cash left over after your intermediary acquires the replacement property. If so, they will pay it to you at the end of the 180 days. This cash is known as "boot," will be taxed as the partial sales proceeds from the sale of your property, typically as a capital gain. 

One way people can get into trouble with this type of transaction is by failing to consider loans. You must consider any mortgage loans or other debts on the replacement property. If you don't receive cash back, but your liability is reduced, that is treated as income to you – just like cash. 

For example, if you were carrying a mortgage of $1 million on your old property, but the mortgage on the replacement property you receive in the exchange is only $900,000, you will have a $100,000 gain. This is classified as "boot," and it will be taxed.

The Bottom Line...

While we've just touched on the highlights of 1031 exchanges, the fact is, 1031 is an intelligent tax-deferral strategy that real estate investors can use to build real wealth. The bottom line is that while using a 1031exchange strategy is a savvy business move, there are many complex moving parts that not only require you to understand the rules. It is important to enlist professional help, even if you're a seasoned real estate investor. 

With the start of the holiday season so close at hand, you're probably already thinking about how you're going to get all your holiday shopping done. This year, our real estate agents have challenged themselves to do what they can to help the small businesses that make every community a better place to live. Want to join them in their support of local entrepreneurs? Here are seven ideas to get you started.

Tips for Supporting Local Businesses During the 2021 Holiday Season 

• Chat with the Owners 
  When big businesses get so much of the local economy's market share, it's easy for local shop owners to begin to feel underappreciated. Take a few minutes to stop and talk with the owner of the store you are visiting. That person will undoubtedly appreciate the gesture, and you'll get a chance to learn more about their wares and what makes them special. You may not be aware of some of the small details that make their products special – for instance, maybe their café makes all of its food items with locally sourced ingredients.  
  
  Talking with the owner may also open doors for you if you discover they do not currently stock the product you were looking for. Many shop owners are happy to do the legwork of finding and ordering specific products for patrons if they know someone is interested in those items.  
  
  
• Look for Local Alternatives 
  Many of the items on your friends' wishlists are probably available from local retailers. They may not carry the exact item that was requested, but if you know the recipient isn't typically concerned with brands, you might be able to find a great substitute from a quality local producer instead. Stick to the spirit of everyone's gift requests instead of trying to follow them to the letter, and you'll end up with nicer gifts while also injecting money into your local economy. 
  
  
• Speak Up for Small Business 
  Instead of buying from a small retailer yourself, spread the word about these businesses to people who do have a holiday budget they want to spend. Recommend small local shops to your friends and family, and consider leaving the business a good review on Google, Facebook, or Yelp. Every bit of good publicity helps these small businesses grow their customer base and stay profitable.  
  
  
• Don't Forget About Food 
  Even if you aren't buying many presents this year, chances are good that you're still planning to have something special to eat during the holiday season. If so, remember that local retailers carry food too! Whether you're cooking a full festive dinner or just want a few small treats to indulge in, there is probably a butcher, cheesemaker, vineyard, confectioner, or other local business that sells what you need. As a bonus, their wares are probably much higher quality than what you would get at your neighborhood grocery store. The premium flavors and textures will add a little extra magic to your holiday table.  
  
  
• Shop Based on Your Values 
  Shopping local is an excellent opportunity to use your money to support the outcomes you want to see in the world. Many small businesses partner with local charities to raise money or organize important local events, so you can buy from a shop that is affiliated with a cause that is near and dear to your heart.  
  
  
• Look for Extended Deals 
  Small businesses know they are competing with many other retailers to win your dollars. To make shopping at their locations more attractive, many extend their Black Friday deals for longer than bigger stores do. You can often get excellent prices on all kinds of items well into December, making it easier to fit the cost of shopping local into your budget.
  
  It is still a good idea to shop as early as possible, though – unlike their competition, small retailers may not have a regularly updated Facebook page or website that you could use to find out when these promotions end. If you don't want to miss out, don't wait.
  
  
• Look for One-of-a-Kind Artisan Gifts 
  Local retailers rarely stick to selling the same old merchandise you could get from the big box store down the street. Instead, many of them pair up with local creatives to sell hand-crafted items you won't find anywhere else. Buying a handmade necklace, scented candle, or piece of furniture not only supports two local independent businesses at the same time – but it also gets you an incredibly unique gift that your loved ones are sure to treasure.  

Once you've experienced the magic of shopping local around the holidays, this practice is sure to become a household tradition for your family. Do your part to support your local economy today, and if you have an imminent move on the horizon, don't fret. Contact us for help finding a home and getting settled into your new community.  

Planning to Sell Your Home? Be Aware of the Cost to Sell a House

Selling your home is both time-consuming and expensive, often more than a homeowner might expect. It's easy to get excited when you look at the latest Zestimate and seeing how much more your home is worth than when you bought it. However, if you're considering selling your home, you need to factor the cost to sell a house into your calculations. 

It's important to factor in and be prepared for the hidden and sometimes overlooked cost to sell a house. Some expenses are negotiable, but sellers need to expect to pay the costs of selling their homes. Today we're living through one of the biggest seller's markets in our lifetimes, on average in a typical market, homeowners will spend seven months planning and preparing to sell their home, and three additional months with their home listed, pending, and closing. 

What follows is a breakdown of what a homeowner can expect when determining the cost to sell a house.

The Cost of Selling a House: The Common Expenses

Some expenses are common, and you can expect to pay them when selling a house. Some costs may be hidden or not commonly considered. 

The typical cost to sell a house includes:

• Agent Commissions- The seller's agent typically charges 5 to 6% of the home's purchase price when the deal is completed. This is likely the highest cost you'll pay, aside from paying off your mortgage. When shopping for an agent, ask them about their commission fee. Some may be willing to negotiate their rates. Make sure you get any agreement in writing. The seller's agent may split their commission with a buyer's agent, but this does not affect you.
• Taxes and Neighborhood Fees -You'll owe a prorated share of your property taxes when you sell. This amount might be close to zero if you've recently paid your taxes or several thousand dollars if the due date is coming up. In some states, you may also be charged a local transfer tax. This is a fee the seller pays to transfer the title to another person. Depending on the location this tax is typically .01% to 2% of the final sale price.  If you profit more than $250,000 ($500,000 if married) you may also be liable for capital gains taxes unless you can use a 1031 Exchange. You may also be liable to pay a prorated membership fee if your neighborhood has a homeowners association and possibly an HOA transfer fee.
• Title Insurance for the Buyer - This is protection for the buyer in case there is an issue with the home's ownership. Buyers may also purchase a title policy if they apply for a mortgage, but this policy protects only the lender. In some areas, the seller pays for a separate policy for the new homeowner. The average cost is around $1000.
• The Mortgage Payoff - Unless you own your home outright when you sell you'll need to pay off your lender. The payoff amount may be different from the balance due listed on your last mortgage statement because of interest charges. You'll want to know the exact payoff amount. If your mortgage has a prepayment penalty, that will be added to the amount due.
• Home Repairs - Your buyer will most likely order a home inspection before closing. If the inspection finds any issues, you may be asked to pay for any repairs.
• Moving Costs - Whether you buy and pack your own boxes and rent a truck or hire a moving company, you'll want to budget for your move after the sale is closed.

The Cost of Selling A House: The Optional Costs

Depending on how competitive your local market is, it may make sense to pay for extra services to attract more potential buyers. Many of these are optional, but they can help alert you to potential problems and help make your home stand out from others in the market.

• Pre-Sale Home Inspection - This one is strictly optional, and it can cost you around $400 or more, but it can be worth it. Some sellers choose to make this investment to find any significant structural or mechanical problems before a potential buyer does.  Getting a pre-sale inspection allows you to make major repairs ahead of time. This removes the possibility of a buyer demanding them or using them as a negotiating tool to lower the price. Discuss this with your real estate agent. Remember, if the inspection reveals material defects, you'll need to repair or possibly disclose them, depending on your state's disclosure rules.
• Home Staging - It's always a smart move to remove clutter and give your home a good deep clean before listing. Your agent may suggest going a step further and hire a home stager to make your home more appealing. A stager may re-arrange your existing furniture, change your interior design and replace old worn furniture. The typical cost is $500 to $2000.
• Buyer's Closing Costs - Buyers are typically responsible for mortgage fees, home inspections, and appraisal expenses, which can often add up to be 2% to 5% of the final selling price. If you're in a slow market, or your buyer is on the fence, you can offer to pay some of these closing costs to help seal the deal.

Selling your home can be challenging and exhilarating at the same time. In today's super hot seller's market, it can also be lucrative. If you are planning or considering selling your home, make sure you factor both the typical and potential cost of selling a house into your plan. A REALTOR® can help you to better understand the exact cost of selling your home.

If you're considering selling your home, contact the REALTORS® at Masiello Residential Real Estate. We can help you get the best price for your New England home, can assist you to find the perfect new home to meet your needs, and understand the true cost of selling your home.

If you're planning to buy or sell a home, then you should be prepared to receive loads of advice from family, friends, and neighbors. When it comes to real estate transactions, everyone has their own unique perspective. While advice can be helpful and well-intentioned, it's important to weigh the advice based on experience. The average person is involved in a real estate transaction once every 5 to 7 years while the average Masiello agent manages 11 transactions every year. These uneven experiences have given rise to numerous industry myths.

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