The last two days I told you a story about something that happened in regard to a Section 1031 Exchange. I know that this is a very well known Internal Revenue Code section and that just about all people in Real Estate know the rules. But, what is going to happen to this favorable Code Section and how can you benefit from it?

First, the rules, which a lot of you know very well. If you want to defer the gain on a sale of Real Estate, as this does not work for personal property, you have to choose a replacement property or properties of equal or greater value within 45 days and complete the transaction in 180 days. Delaware Statutory Trusts can be used to accomplish this. You have to place the proceeds of the sale with a facilitator, you cannot see it, touch it or smell it!!! And, the rules have to adhere to exactly or else the exchange is void and you have to pay taxes on the gain. The deferred gain reduces the tax basis of the replacement property meaning that, when you do the final sale, you will pay taxes on the total gain of all of your Section 1031 transactions.

There have been a few creative ways that you could use the Section 1031 Exchange to your advantage. One, for example, is to purchase one property and keep doing section 1031 exchanges until you pass away. Under the current law, upon your passing, the property goes to your heirs at fair market value. So, when the property is sold to your heirs there is no gain on the transaction to be recognized by anyone if the sale occurs shortly after the heir receives the property.

Why am I bringing this up now? Well, Joe Biden, and this is not a critique on the Presidential candidate, wants to do away with Section 1031 Exchanges and the step-up In basis on the transfer of the property upon death. I'll bet that over half of the Congress has taken advantage or is taking advantage of these two Code sections as we speak.

So, what can you do?  You have to plan, plan, then plan again.  If you own real estate and want to complete a Section 1031 Exchange before the laws change, assuming that they will, you have to start now.  Because today is August 22 and 45 days from now is October 6, 2020 and 180 days from that is almost 26 weeks away.

I was a practicing Certified Public Accountant for over 50 years before becoming a Realtor.  And I have seen many changes to the law and the Internal Revenue Code over the 5 decades while I was practicing.  It is my educated opinion that any section 1031 Exchanges transactions started before the possible change in the law will be allowed to be completed.  So, you have time to start the process.  Remember, assuming that Mr. Biden becomes President Biden on January 21, 2021 it will take time to pass the laws changing the Section 1031 Exchanges and the Step up in Basis Laws I referred to above.

So, my advice to you is to start now with the process of completing a Section 1031 Exchange before the law changes.  And, in the event that the law does not change, you’ve lost nothing!!!

My name is PAUL LEVINE and I am a Commercial Realtor practicing in Southern California. I can be reached almost anytime at (818) 298 - 4000 or at "PLevineRealtor@gmail.com".

Part I...

I am going to tell you a story this morning about an event that occurred in the 1970s but is still very appropriate to discuss today. When you start a business or purchase real estate you have to set it up in a proper entity to protect that asset and all of your assets. This story has to do with a business and not real estate but the moral of the story is universal!

When I was a young lad, in 1969, I moved from New York to Los Angeles to work in accounting. I wasn't even a CPA yet, I was all of 23 years old. I got a job in New York for Los Angeles with an international accounting firm and the name of the firm was very long but their initials were L K H & H. I was a staff assistant the first year, I was out of college for 1 year and taught high school in New York when I graduated college for one year. So, I started working at this firm and they had many clients.   I might add that in the accounting profession there are different levels.  I started out as a “Staff Assistant” where everyone starts out.  I am proud to say that I was one of only two people ever in the Los Angeles office, with over 100 employees, to skip a level and make “In Charge Senior” in only one year where everyone else did it in two or three years.

They had one particular client that they had an ownership interest in. It was a glass contracting company of all things. The first lesson here is do what you know and don't get involved in projects or businesses that you have no knowledge of. That is called absentee management and, although, you get to see the financial reports and have monthly meetings and wonderful dinners and drinks after the meetings, and I have seen this, when there is a problem, maybe a BIG problem, you cannot contribute to the solution because you are not trained in this industry.

Back in 1969 there were no Limited Liability Companies (LLCs).  There were Corporations, Subchapter S Corporations and Limited Partnerships that gave the owners limited liability.  This international CPA firm, who works with so many attorneys, was in a GENERAL PARTNERSHIP with this glass contracting company.  General Partnerships have no limited liability and all of the assets of all of the partners are subject to seizure if the company goes bankrupt.  Just keep that in mind as I continue the story.

This glass contracting firm had three different partnerships and, since it was so long ago, I really do not remember the reason for this.  But all three entities were general partnerships.  That means that we had three “In Charge Seniors” on the job at the same time.  I was one of those In Charge Seniors at this point in my career.  In Charge Seniors in an international CPA firm are all Certified Public Accountants, have at least 3 years accounting experience or more and supervise a staff of two to four assistants below them.

The partnership between the CPA firm and the glass contracting company had been going on for many years and at the end of each year’s assignment the In Charge Seniors would submit the financial reports and a list of recommendations to the glass contracting company and the CPA firm, their bosses.  The glass contracting company could not be audited because of a lack of independence between the two entities due to common ownership.  One of those recommendations from the In Charge Seniors to the glass contracting company and the CPA firm EVERY YEAR was that the company should incorporate and afford themselves the benefit of LIMITED LIABILITY.  But they never did it!!!!!  This is the second lesson to take note of.

One day the glass contracting firm got a job to put all of the outside glass on the MGM Hotel and Casino in Las Vegas, Nevada.  By the way, the outside of that building is all glass.  Everyone was thrilled because they were all going to make millions of dollars.  The rest of the story is all down hill.

The glass contracting company could not complete the job and they were all sued by the MGM Company and they lost the lawsuit.  Everyone had to declare bankruptcy.  The Managing Partner of the International CPA firm went from driving a Rolls Royce to driving a Toyota.  The CPA firm broke up into many different firms and many of the partners just started their own CPA firms.  Remember, there were hundreds, if not thousands, of partners who had nothing to do with this company but they were all affected by the bankruptcy.

The moral of the story is to always set up any entities that you create, whether they are involved in real estate, glass contracting, doctors and dentists and every other business to protect yourself and all of your assets that you worked so hard to get.  There are Corporations, Subchapter S Corporations, Limited Partnerships, Limited Liability Companies or Partnerships or Limited Family Partnerships that you could set up to protect your assets.  PLEASE seek the advice of a competent attorney and CPA before you set up your entity.

These days most individuals investing In Real Estate automatically set up LLCs for each property or for groups of properties.  With the current tax laws, you should definitely seek the advice of a competent Real Estate CPA before making that decision.  Then there is the question, are you a Real Estate Professional or are you a Real Estate Investor.  That question could have a big effect on your tax returns as well.

My name is PAUL LEVINE and I am a Commercial Realtor in Southern California from Santa Barbara to San Diego.  I help my investor clients build, buy, and sell Multifamily Housing. I also help investors and realtors throughout the United States and Canada with commercial transactions if they need my expert help.  I can always be reached at (818) 298 – 4000 or at PLevineRealtor@gmail.com.  I was a practicing CPA for over fifty years before becoming a Commercial Realtor and I was an Associate Professor of Accounting for six and a half years.

I have written about Cost Allocation Surveys or Studies before but, for the Apartment Building owners, and for many other businesses, it is an amazing tool under the current tax laws.  And I am writing this on August 26, 2020 for reference to the current tax laws.

Let’s talk about Apartment Buildings.  I have a few thoughts that I would like to bring up about the allocation of the land and building when you purchase the property.  When you purchase an existing Apartment Building you are buying land and building.  The land is not depreciable because it’s going to be there forever.  The building will be depreciated over 27 ½ years according to the Internal Revenue Code.  The first question that has to be answered by your accountant is how much of the purchase price is to be allocated as land and how much of the purchase price is to be allocated to the building.  Accountants normally go to the county property tax bills which show the allocation of land to building.  The IRS likes this method.  BUT this is not always the best source to go to.  Sometimes the amount of the land exceeds the amount of the building and we do not want that.  A lot of accountants just allocate 50% to the land and 50 % to the building.  Why don’t you get an appraisal in order to allocate the land and the building?  The increased value of the structure will give you increased depreciation and tax savings to offset the cost of the appraisal.  

But there is another approach.  If you build you have a clear-cut delineation between land and building.  Typically, in Southern California, the land will cost you $3 million and the construction may be a total of $17 million for a total of $20 million.  Then you allocate 15% to the land and 85% to the building.  Now, that’s an allocation that should put a smile on your face.  And, when the project is complete and you have a full Apartment Building, the value of the building should be around $23 million or $24 million and you created instant wealth.  It took you 3 years to do it but that’s not a bad return on your investment.

Now let’s turn our attention to the Cost Allocation Survey.  The Apartment Building is made up of real property and tangible personal property.  The real property is the foundation, the drywall and all of the components of the building.  The tangible personal property are the appliances and the doors and anything that can be removed from the property without damaging the structure.  When you purchase or build an Apartment Building you want the value of the tangible personal property to be high and you want the value of the structure to be low.  The reason is, under the current tax laws, you can write off up to $1 million of the tangible personal property as bonus depreciation in the year that the building becomes operational.  This can create a large tax loss, known as a net operating loss, that can either be carried back or carried forward to offset other income.  So, you can either get large refunds or not pay taxes in the future for a number of years.  And that is where the story usually ends.

But the smart real estate investor and accountant (CPA) take this a few steps further.  When you go to sell the Apartment Building that has given you cash flow in the form of Net Operating Income (NOI) over the years and has appreciated over the years, depreciation is as much of a consideration as it was when you bought the building.  You should do another Cost Allocation Study when you sell the Apartment Building because this time you want a lower value for the tangible personal property and a higher value for the real estate.  Most companies that do cost allocation surveys will include the second survey in the price of the first.  The reason is that with a higher value of the tangible personal property you will have a gain and that gain is ordinary income.  That is not good.  When you sell the real estate, you will also have a gain and that gain is a capital gain.  Ordinary income is taxed at a higher rate than capital gain income.  But this all makes sense.  When you build the building all of the appliances are new and valued at cost.  So, a dishwasher that was purchased for $450 is valued at $450 in the first cost allocation study.  What is that used dishwasher worth 10 or 15 years later?  Virtually nothing.!!!  So, there is virtually no gain.

When you buy an Apartment Building the value of that dish washer has to be determined by an expert.  The company who performs the Cost Allocation Survey.  You cannot do it; you do not have the expertise.  And the results of the Cost Allocation Survey are so important because they mean how much depreciation you can take and that means money in your pocket.

My name is PAUL LEVINE and I am a Commercial Realtor in Southern California from Santa Barbara to San Diego.  I can always be reached at (818) 298 – 4000 or at “PLevineRealtor@gmail.com”.  My specialty is building, buying and selling Apartment Buildings for my investor clients. 

My name is Paul Levine and I am a Commercial Realtor in Southern California and here is my story!!!

Every morning I get up at 6 AM to 7 AM and check and return my emails, say Good Morning to my friends on my Facebook page and write an article for my “Paul Levine, Realtor” Facebook page.

Let me fill you in on my background.  I was a practicing Certified Public Accountant for over 50 years before becoming a Realtor.  I was also an Associate Professor of Accounting at California State University – Los Angeles for 6 ½ years.  I negotiated the sale of two of my accounting clients to public companies, one of them being E I DuPont.  I had 10 no change IRS audits in a row and won about 90% of my client’s audits.  I did forensic accounting and was an expert witness many times.  I also did so much more but that will take a sit down to let you know everything I have accomplished.  No other Realtor in California has my credentials or negotiating experience or analytical skills.

I am a Commercial Realtor specializing in Multifamily Housing.  I help my clients build, buy, and sell Apartment Buildings.  I  also work with other Realtors, Residential Realtors, who either want to get into the Commercial Real Estate market or who get clients either wanting to buy or sell Apartment Buildings and I do that throughout the United States and some places in Canada,  I also give seminars on Commercial Real Estate and some taxes that pertain to Real Estate to groups all over the United States.

I write every morning, as I said, about a myriad of topics from the Los Angeles Multifamily Housing market, to Section 1031 Exchanges, to Cost Allocation Surveys, to my credentials, to bonus depreciation, to how to start your clients out in Commercial Real Estate and Multifamily Housing, to wearing masks washing your hands and practicing social distancing which I think is so important, to how you go about building an Apartment Building for a client.  And, there are so many more topics, too many to list here.

My experience is so varied in Commercial Real Estate, Accounting, Income Taxes and Income Taxes as they relate to Real Estate, Investing in Real Estate and other related topics that I find it easy to find something to write about each morning.  Remember as a Certified Public Accountant over so many years I saw thousands of different businesses and so many different management styles and I learned from each experience.

I am a Realtor so I am not allowed to talk about financing properties, mortgages and loans.  But, as an accountant I helped my clients purchase Real Estate, obtain proper financing and I even audited Mortgage Companies so I know that industry, literally, inside and out.  I know about servicing and FICO scores and what it takes to qualify for a mortgage.  I also work with a wonderful loan officer who can accomplish just about any loan situation.

I am also a great listener.  Many years ago, I took a class in “Active Listening”.  That is a style of listening to your client to find out what they really want.  One day one of my best accounting clients came into my office and wanted to redo the kitchen in her home for $100,000.  Back in that day, that was a lot of money.  But, by using Active Listening I let her speak for an hour, saying virtually nothing, until she talked her way out of doing it and she then said that I was right!  But I hardly said a word.  The point here is that the CLIENT is the main person in the transaction and you have to first find out their real needs, wants, and desires and then make a plan, with the client, to meet those needs, wants, and desires.  In that way you will have a very happy client who will come back to you and refer new business to you.  AND, THAT’S WHAT WE ALL WANT!!!  

But I want more.  I spend a day or two with a new client to review their financial situation, review their last 3 years tax returns (and no other Realtor can understand the tax returns like I can), ask them questions about their dreams and then I put a plan together that fits those needs, wants, and desires.  With my background I feel that it is my responsibility to put them into a deal that will give them the best return on their investment and never, I said NEVER, put them in a situation where they are cash poor or under stress because if their investment.  So, I project out the next three to five years of cash flow to see how much money they might need in reserves, just like a mortgage lender, so that they always have enough money to NEVER feel strapped.

So, now you see what separates me from every other Realtor in California.  I give superior personal service and I have more knowledge and experience than any other Realtor around.

My name is PAUL LEVINE and I am a Commercial Realtor.  I can be reached just about anytime at (818) 298 – 4000 or at “PLevineRealtor@gmail.com”!!!

Just as an add on, I will also sell your luxury home for you!!!

By now most of you know who I am. Just to make sure you all understand where I am coming from in this post, my name is Paul Levine and I am a Commercial Realtor in Southern California specializing in Multifamily Housing. I live and work in the greater Los Angeles area and I have been living here since 1969, a long time ago.

I am used to prices here for Multifamily Housing. The prices in Southern California are outrageous, to say the least. Here, you can buy an Apartment Building and you can pay as much as $1 million per apartment in the better neighborhoods like Beverly Hills, Bel Air, or by the beach in Malibu or Laguna Beach. That is definitely the high end and the normal per unit price for an Apartment Building in "normal" communities can range anywhere from $200,000 to $300,000. There are also neighborhoods where you will pay $500,000 plus per apartment in the better neighborhoods. What I am saying is that the range for an Apartment Building in Southern California is wide and varied.

I was just browsing on "The Magic of Multifamily" website and got culture shock. To give you some examples, I found one apartment complex of 10 units for $55,000 per unit, 48 units for $43,750 per unit, and 6 units for the exorbitant amount of $69,000 per unit. These apartments were in El Paso, Texas, North Carolina, and Albany Georgia.

This is all going someplace and I will continue this article tomorrow. But, let these numbers sink in and play with them today and I will give you my take on them tomorrow. Remember, I was a practicing Certified Public Accountant in Los Angeles for over 50 years before becoming a Commercial Realtor so I might just look at things a little different than most real estate investors.

Prices of Apartment Buildings:

The price per apartment and, therefore, the price per apartment building in Southern California is way out of line from the rest of the United States with a few exceptions. I am not that familiar with prices in New York but I am sure that some apartment buildings in Manhattan can put our numbers in Southern California to shame.

If the price of the apartment buildings is so high you are going to have higher debt service and, therefore, your Net Operating Income (NOI) has to be able to support those payments. And, how is the best way to increase your bottom line, increase the top line or your gross rental income? So now, let's look at rents in certain areas of the country.

In Los Angeles, you can rent a one-bedroom apartment in a good neighborhood for about $2,200 to $2,500 per month. A two-bedroom apartment normally goes for about $2,700 to $3,000 per month. I have written before about higher density is needed in Los Angeles because our population centers extend for many miles going North, South, East, and West from Downtown Los Angeles. As an example, from Downtown Los Angeles to San Diego, about 120 miles, you have non stop population centers. Except for a military base somewhere around Oceanside, CA, it's solid housing. So, we have to build up because we cannot build out. There is higher demand right now that there is supply.

Rents in El Paso, Texas, North Carolina, and Albany Georgia do not compare with the rents in Los Angeles by multiples. That's how we get the NOI up to the amount to pay all our expenses, pay our debt service and leave enough for apartment building owners to put a tidy sum in their pockets for a rainy day, and as the song goes, "It Never Rains In California"!!!

Rents in the Southern California Multifamily Real Estate market: They can sustain the prices for Apartment Buildings due to the high rents.

There are so many families and individuals who desperately want to purchase a single-family residence in Southern California for their primary residence but they cannot. With the housing prices so high they need a substantial down payment that they do not have. They do have substantial monthly and annual income and can afford a high monthly payment for housing but they cannot buy a house. These people are paying anywhere from $3,000 to $6,000 a month in rents for a luxury place to live. This is not unusual at all in Southern California.

Moreover, a new phenomenon has occurred and is occurring in Southern California and the demand for it is so big that companies, construction companies, are opening every day to satisfy this need. Homeowners are converting their 2 and 3 car garages into studio units and renting them out. A 3 car garage is approximately 600 square feet and that is the size of a nice-sized studio apartment or a smaller one-bedroom apartment. I know of an instance where someone who has done this is renting out their converted garage, in a nice neighborhood, for (drumroll please) $1,800 per month!!!!! That was 5 exclamation points!

So, everyone from around the United States who doesn't understand how apartment owners in Southern California can buy and pay for an Apartment Building at the outrageous prices that we have here, there is your answer. As outrageous as the prices are here, the rents are even crazier! It does make sense to own and operate Multifamily Housing in Southern California because the numbers prove it. Remember, I was a practicing CPA for over 50 years before becoming a Commercial Realtor and I've done tax returns and filled out Schedule Es and I have even been amazed at times as to how the numbers work out.

Cap Rates: They mean very little when valuing and analyzing an Apartment Building.

Here in Southern California Apartment Buildings are normally sold at a Cap Rate in the range of 3% to 6% or, very rarely, 7%. But, what does that mean? I told all of you numerous times that I was a practicing CPA for over 50 years before becoming a Realtor and I was an Associate Professor of Accounting for 6 1/2 years as well. What you did not know is that in 1968 - 1969 I was a High School teacher who taught bookkeeping, commercial law, and ALGEBRA!!! So, let’s talk about Cap Rates in an algebraic sense!!!

 When you have a Cap Rate of 5% what you are doing is taking the Net Operating Income and multiplying it by 20 to arrive at the value of the building, 100/5=20. If your Cap Rate is 12% you take the NOI and multiply it by 8.333 times, 100/12=8.333. So the Cap Rate is an NOI multiplier just like you can also value an Apartment Building by multiplying the rent by a factor and that is called the Gross Rent Multiplier or GRM. But, now that I've gone over all of this, I consider it meaningless!!! But, Realtors love this stuff!!!

In Southern California, we get much higher rents than the rest of the United States yielding a higher NOI. Then you have to look at the ownership of an Apartment Building as a BUSINESS and that point is soooo important!!! If you have a higher NOI than you can pay more debt service and still come up with a reasonable return on your investment (ROI). In El Paso, Texas, North Carolina and Albany, Georgia the rents are substantially lower than in Los Angeles (by multiples) so the NOI is much lower and debt service and, therefore, the price of the Apartment building, has to be so much lower to make the return on investment reasonable. The valuation of an Apartment Building has little to do with Cap Rates and everything to do with Return on Investment!!!

 So, when I read the following passage on Facebook the other day, "Someone asked me the other day to find them a property with a 10 cap. I said I can do better. I can get you a 12 cap property, in Wyoming. The problem is the building is half full and the population has almost dropped by half as well. How does your 10-12 cap sound now?" It just meant that you will not get a decent return on investment with the current NOI so don't pay so much for the Apartment Building!!!

Conclusion:

Now, I've walked you through just about all the reasons why it is a good decision to buy and build Multifamily Housing in Southern California and I also hope that I have given you other ways to look at Commercial Real Estate. But, there are more reasons and I'll just name a few here.

 The weather is conducive to building a medium to large Multifamily Complex in 3 years where in Boston, for example, with the harsh winters, it takes about 5 years to build that same building. Time is money and interest accrues every day!!!

 The appreciation is better here than in most of our country. When I was writing about "Net Operating Income" and "Return on Investment" yesterday I never mentioned appreciation. With higher rents and the upgrading of our communities that are going on here, you have a decent, if not really good return on investment on the cash flow alone but then you have to consider appreciation. We have one of the highest, if not the highest, appreciation rate in the country, and when you take 3% of a higher number your result is higher appreciation, as a percentage and as an absolute amount, than just about anywhere else in the country.

Someone wrote to me and put it as a comment to my article that there are drawbacks in owning Multifamily Housing in Southern California and a few of his points were somewhat valid like rent control and other rental restrictions. But, you will have those problems anywhere in the country at some point in time and I consider those obstacles a challenge to overcome just like I considered the Internal Revenue Code a challenge to solve that brought out my creativity when I was a practicing Certified Public Accountant for over 50 years!

So, owning Multifamily Housing or Apartment Buildings in Southern California is not such a bad idea even with our higher prices. Your return on investment is better as is your appreciation. And, when you consider the tax advantages and add them to your cash on cash return on investment, you just about cannot lose by investing here. And, by the way, the photo associated with my post today is my model for Multifamily Housing in Southern California with retail on the ground floor and apartments above.

My name is PAUL LEVINE and I am a Commercial Realtor specializing in Multifamily Housing in Southern California. I can be reached just about anytime at (818) 298-4000 or at "PLevineRealtor@gmail.com". I work with investors and with other Realtors who want to get into the Multifamily Real Estate Market. My credentials are unique and my passion is unsurpassed!!!

The interest rates are going up and the value of real estate will be going into a valley soon.  It happened before and we survived it and it will happen again.  I am 72 years old and I’ve seen it before and, GOD willing, I’ll see it again.  But there is one way to get through it.  You can’t panic when it happens, you have to start planning NOW!!!

If you bought a single-family home as an investment when the market was favorable, then you have a nice asset today.  But what happens if we go into a recession and your tenant loses his job.  If you have one house and it is empty, you have 100% vacancy.  That’s not good.

And, while all this is going on the stock market is taking a dive and your net worth is going down the toilet.  Dividends that you used to rely on to live and eat may be gone because your investments are not doing good and they can’t afford to declare and pay a dividend.

The way to make it through a recession or a fall in real estate prices is not to panic and own a multifamily dwelling.  But assuming that you do not now own real estate you have to start out like this.  If you have some capital then purchase as many single-family homes as you can first.  Leverage your investments because putting a lot down on one house is wrong but putting something down on three homes makes more sense.  Like I said before, if you own one investment home and it is empty, then you have a 100% vacancy factor and instead of making money you are losing money every month.  But if you have three single family homes, then if one house is vacant, your vacancy factor is thirty-three percent and the two remaining rented units will pay for the one vacancy.  Don’t put all your eggs in one basket!!!

Then, after the market turns around and there is real appreciation you should sell the houses and buy one multifamily apartment building.  Your ratio of land to units goes down and it turns out to be cheaper to have one apartment building instead of three or four houses.  Management is also easier as all the units are in one place and are not miles apart.  Either you or a management company can manage the property, keep the rents up and take care of the maintenance that is needed.

Here is the point where I can go into a discussion of the tax law and Section 1031 exchanges but I will save that for another blog.  By the way, I am probably the only realtor in the State of California with over fifty years as a practicing Certified Public Accountant.  An asset that can help you with tax planning and maximizing your profits and reduce your taxes.  And I work with a team of estate planners who can show how to pass the assets in your estate through to your heirs with a great tax benefit.

But let’s get back to protecting our assets and growing your estate.  I read an article recently that said that the better off middle class are renting luxury apartments.  Why do you ask? With housing prices where they are and interest rates rising even the well-to-do, those earning about $150,000 per year cannot qualify for mortgages and the payments on the house.  And you have to add property taxes that, in Los Angeles County, start at 1.25% and go up from there.  Then, in newer developments, there is Mello Roos.  This is like an additional tax to pay the cities back for the streets, sewers and other infrastructure.  They add it on to your real estate taxes and it is NOT deductible on your tax return.  That might bring your tax rate to about 2% per year.

Let’s say you buy a house for $600,000 with a combined tax and Mello Roos rate of 2%, you have to add $1,000 a month to your mortgage payment.  And to round things out you have to pay homeowners insurance.  And if something breaks you don’t just call maintenance from your apartment complex, you have to find someone to fix it and pay for it, and the landscaping costs more money.  So, houses are expensive.  Yes, you have appreciation and ownership, but nothing is guaranteed.  

And, under the new tax law you can only deduct $10,000 in total State and Local Income Taxes.  If you live in California and own a home where your real estate taxes are $1,000 per month you already are losing deductions.  When you add State Income Tax and Sales Tax you are losing deductions left and right.  Your real estate taxes and mortgage interest used to reduce your income tax obligation making your house “pay for itself”.  But that's gone now.  And, don’t even let me get started with mortgages over $750,000 and refinancing but not using the money for home improvements.  You can’t deduct home mortgage interest on mortgages over $750,000 and, if you refinance, you must use the money to improve your property or else it is not deductible.

But if you own an apartment building you are charging rent to offset those expenses, there is no limitation on Real Estate Taxes and Mortgage Interest.  So, you can deduct all expenses against your rental income and then you can deduct DEPRECIATION!  I was an Associate Professor of accounting at California State University Los Angeles for six and a half years.  By definition, depreciation is the systematic allocation of cost of a fixed or non-monetary asset over the period of benefit.  In English that means that you get to reduce your taxable income every year for 41 years by taking a percentage of the cost of the building (not land) against your income thereby reducing your taxes without paying one penny.  By taking depreciation as a deduction you can end up with a loss on your tax return on your rental property to offset other income like wages, interest, dividends, etc. in the early years.  So, your tax is less tax which results in paying the government less or getting back a larger refund.

Now you must be asking yourself, why is he telling me all this?  We are headed for a recession.  Nine out of ten people in the know will tell you that.  When interest rates rise and people cannot afford to buy houses, jobs are lost.  When interest rates rise people cannot afford to buy cars, jobs are lost.  So, investing in apartment buildings is a smart idea.  Also, as rents go up and land values go up the value of your investment goes up and you can always pull out tax free cash by refinancing the property to use to purchase other real estate or personal items.

I’ve seen families get together and invest their money this way.  I’ve seen young men, in their late thirties, amass a lot of equity and money investing this way.  It is a great hedge against inflation and it is one of the best strategies in a recession.  

Now, how do you get started?  When I started out in Real Estate I bought and sold single family residences for my clients.  Then I was presented with the opportunity to sell a piece of land in Sherman Oaks.  I sold a 20,000 square foot piece of property that was originally valued at $2 million for $4.6 million and I sold it to a developer.  We are going to put a fifty plus unit apartment building on the property and sell it for over $30 million.  Having been an accountant for over fifty years I have associated myself with some wonderful professionals.  I work with business attorneys, estate and trust attorneys, loan officers, building designers, building developers, financial planners, etc.  We would arrive at a budget based on your particular financial situation, set up the correct company structure for your project to protect your assets as well as take advantage of all of the applicable tax laws, plan the development, choose the right developer, get financing, build the building and either sell it or hold it.  We would hire a management company to rent out the units and manage the building.

Once we get a certificate of occupancy from the city we would rent the units and manage the building and run it as a business for one year and one day.  You see, if you sell the building right away you have what is known as “ordinary income” and it is taxed at close to 40%.  If you hold on to the property for one year and one day then sell the building you get a “long term capital gain” and pay taxes on the gain at only 20% Federal and some State tax.  Also, during the year that you hold the building and rent out the units you are either making cash flow or reducing your expenses.

Certified Financial Planners would want you to invest with them.  They would invest your money in various funds and investments.  You have a chance of making a decent return on your investment or, on the other hand, you can lose your investment.  In the stock market or other such investments some of your individual investments can go down to pennies or go bankrupt.  In Real Estate, and especially Apartment Buildings, that’s never going to happen.  And, even though it takes some time, you can sell an Apartment Building and cash out any time you want or you can refinance the property and pull-out tax-free cash as I said before.

Lastly, when you own an apartment building or any other real estate and you pass away, the property goes to your heirs at Fair Market Value.  Your heirs can sell the property and realize NO GAIN and pay NO TAXES on the difference between what you paid for the property 40 years ago the present market value.  And that’s been around for a very long time and it’s not going to change any time soon.  How do you think the rich people save taxes?  This is one way!!!

For more information and an education please contact me to help plan your future and your family’s future.  My name is PAUL LEVINE and my telephone number is (818) 298 – 4000.  I am a realtor and associated with Crown Real Estate & Funding, Inc.  We have a full staff of expert Brokers and Realtors to create the team to help you build wealth and cash flow which equals financial security.  Remember, no one has the background I do and I am the team leader.  I’ve told you about the resources I have, the builders, attorneys, tax experience, etc. that no one else has.  We consider each project a challenge and we want to see if we could be more creative each time we get an assignment.  Of course, we are here to meet YOUR needs so we listen to you very carefully so we can help you define and reach your needs, wants and desires.  Most people care about what they want to say to you, to sell themselves to you.  We listen to you because you are the most important person in our lives.  I am UNIQUE and I will work very hard for you!!!