14A — November 23 - December 13, 2018 — Professional Services — M id A tlantic
Real Estate Journal
By Brenda Muller, Asset Preservation, Inc. “Fix-up” costs before sale and 1031 Exchanges P rofessional S ervices
t is common for many Maryland and Virginia real estate investors to
year is added to the adjusted cost basis and are referred to as a “capital expense” and
property or increasing the capacity, strength or quality of the property.
Schedule E Instructions that “repairs in most cases do not add significant value to the
1031 exchanges and how they can help Mid-Atlantic inves- tors acquiring better perform-
m a k e r e - pa i r s , up - dates , and i m p r o v e - m e n t s t o enhanc e a relinquished property in preparation f o r l i s t i ng
A commonly asked question by investors in the Mid-Atlantic region is, “Can I be reimbursed from the 1031 exchange for the costs associated with improving or re- pairing the property immediately before the sale?” The answer is “no, not without generating a tax consequence”. The reason for this is that any exchange proceeds an investor receives from a 1031 exchange are considered “boot” and are generally taxable to the extent the investor has a capital gain tax consequence.
with a real estate agent or broker. A commonly asked question by investors in the Mid-Atlantic region is, “Can I be reimbursed from the 1031 exchange for the costs associ- ated with improving or repair- ing the property immediately before the sale?” The answer is “no, not without generat- ing a tax consequence”. The reason for this is that any exchange proceeds an investor receives from a 1031 exchange are considered “boot” and are generally taxable to the extent the investor has a capital gain tax consequence. However, improvements an investor makes to improve a relinquished property can be added to the “cost basis” of the property. In the most simplistic terms, cost basis is the amount a property is worth for tax purposes. The cost basis changes over time and becomes known as the “adjusted basis.” The adjusted basis can be increased by capi- tal improvements made to the property, and is reduced by depreciation deductions taken during the ownership period and other factors. Generally, the cost of adding capital improvements having a useful life of more than one of return specified in the note. These investments can include a variety of investment vehicles including, but not limited to, bonds, stocks, mutual funds, annuities, REITs, etc. The pro- ceeds can even be invested in conventional real estate down the road. There is a good deal of flex- ibility in the way that a DST can be structured. The client can structure the note for in- come, growth or a combination of the two and, with additional planning, can often be used to resolve estate tax exposure as well, even above the limits of traditional estate planning continued from page 8A
must be capitalized and de- preciated over multiple years. An improvement includes enhancements that add value to the property, increases its useful life or adapts the prop- erty to a new use. Capital im- provements can include room additions, new bathrooms, new roofs, decks, fencing, wiring upgrades, driveways, walkways, plumbing upgrades, and kitchen upgrades. The IRS uses the categories below to define a capital expense which must be depreciated: • Improvements: A taxpayer must capitalize any expense made to improve an invest- ment property. An expense is for an improvement if it results in a betterment to the property, restores the property or adapts the property to a new or different use. • Betterments: Expenses that may result in a better- ment to a property include expenses for fixing a pre-ex- isting defect or condition, enlarging or expanding the strategies. Regardless of the goals and preferences of the individual taxpayer, it is cru- cial that the DST structure be implemented in advance of the closing on the sale of the asset that the taxpayer wishes to de- fer capital gains taxes on, and preferably in advance of a firm sales agreement being reached. Mike Martinelli is a reg- istered representative of Centaurus Financial, Inc., and a member of the Estate Planning Team. Centau- rus Financial, Inc. and the Estate Planning Team are not affiliated entities. As an Estate Planning Team member, Mike Martinelli
• Restoration: Expenses that may be for restoration include expenses for replacing a substantial structural part of a property, repairing dam- age to a property as a result of a casualty loss or rebuild- ing the property to a like-new condition. • Adaptation: Expenses that may be for adaptation in- clude expenses for altering the property to a use that is not consistent with the intended ordinary use of the property when initially purchased or held for investment. Costs that can be deducted as current expenses are amounts paid for incidental repairs and routine maintenance which are not added to the cost basis. Re- pairs are usually one-off fixes that help keep the property in good working condition and habitable. A real estate inves- tor can deduct the cost of minor repairs from the current year’s tax liability, but not from their capital gain tax liability. The IRS clarifies in the 1040 promotes the use of the Deferred Sales Trust ™ or other estate planning tech- niques to individuals as an outside business activity which is unrelated to his/ her affiliation with Cen- taurus Financial, Inc. The Estate Planning Team and the Deferred Sales Trust are unrelated to Centaurus Financial, Inc. and Centau- rus Financial, Inc. is not responsible for nor does it endorse recommendations made by members of the Es- tate Planning Team, includ- ing the Deferred Sales Trust or other tax, legal or estate planning strategies.
property or extend its life.” For more information on basis and adjusted cost basis, read IRS Publication 551, Ba- sis of Assets. For more information about
ing real estate investment properties defer capital gain taxes, contact the author. Brenda Muller is the Mid- Atlantic division manager at Asset Preservation, Inc .
continued from page 12A Reshaping our work space: . . .
exercised when designing the future office space. Is the cor- ner office dead? According to our firm’s own staff, the corner office is still a symbol of success in one’s career. While it is often said that the pendulum swings too far in each direction and history repeats itself, I believe the private office will be with us in the future. However, I also believe the amount of time one is expected to work in that corner office will drastically change. As technology makes every facet of our lives more conve- nient, with that comes an ex- pectancy for convenience in our office space and work environ- ment. Developers can no longer rely on cookie cutter spaces to ensure people fill the offices. We are in a time of innovation, creativity, and combining work and home – and it is on the real estate industry to factor this evolution into all new office space moving forward and to keep up with the times. Stuart Berger, CPA is a partner at Sax LLP and the founder of the firm’s Real Estate Practice.
from 225 feet in 2010. However, I’ve seen a num- ber of critics to this design, and trends actually moving away from this relatively new thought process. Some recent studies have suggested that more and more employees are unhappy with the lack of pri- vacy and the noise that occurs in the open space environment. Many resort to wearing ear- buds during their work hours. › Our Own Findings. We have taken our own poll inter- nally within our firm and posed the question as to what layout ismost desired. To our surprise, the majority of our employees (approximately 50% are Mil- lennials) mentioned wanting amenities, and collaborative areas that promote interac- tion among employees from all levels and departments within our firm, but when it came to their individual workspace, the majority preferred higher cubicle walls for added privacy without interruption. All in all, the ideas behind private office space is rapidly evolving and care should be The firm currently has loans through the 100 Mile Fund and several approved sites on the Camden Waterfront, North Broad section of Phila- delphia and the Rutgers sec- tion of Newark to name a few.
Why you can’t get your prospect to list that property . . .
Procida Funding & Advi- sors, LLC is a direct com- mercial real estate lender and advisory firm provid- ing bridge, construction, mezzanine and equity fi- nancing through its 100 Mile Fund. Procida Funding & Advisors, LLC . . . continued from page 7A
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