RE Journal Winter 2023-2024 by National Real Estate Investors Association

REAL ESTATE JOURNAL

WINTER 2023-2024

2. Staying on Top of Economic Insights & Trends is Paramount for Your Business

to Leveraging Whole Life Policies in Property Investment

3. NREIA Legislative Update

10. Using Senses to Sense Scents Makes Sense

5. Investor Myopia vs. The Big Picture 6. Taxes on IRA Investments: What to Know About UBIT 8. The Synergy of Real Estate and Infinite Banking: A Summary Guide

14. Tax-Smart Real Estate Investing: A Bookkeeper’s Guide

15. Obstacles to Avoid for a Successful 1031 Exchange

Circulated To Over 40,000 Real Estate Investors Nationwide

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RE Journal

Member Spotlight

Vol. 9 Issue 1

How to Report Fair Market Value of Hard-to-Value Assets By Carl Fischer and Maggie Polisano

E Clint Blackburn

lint Blackburn is from smalltown Iowa and has worked in the construction industry since high school. He grew up working in his grandfather’s diesel shop and helping his dad who was a plumber and electrician. His grandfather taught him from an early age how to wheel & deal. Clint says, “we would look through the paper every Sunday for deals on broken down vehicles that we could buy cheap, fix up and resell for a profit.” When he wasn’t with his grandfather, he spent his time with his dad working on wells, wiring grain bins and other various projects. Who would have thought that those skills and a solid work ethic taught to him by those two men would eventually lead him to real estate investing?

very year, the IRS requires that you report the value of all the assets in your tax-advantaged retirement accounts — IRA, 401(k), HSA and ESA. The report should reflect values as of December 31st of the tax year. This valuation of assets is especially important if you are 72 or older and have a non-Roth IRA or 401k account. That’s because the value of the assets in your account form the basis for calculating your required minimum distributions (RMD), the amount you are required to withdraw each year now that you have reached the age of mandatory RMDs. It’s easy to value the traditional assets you find in retirement accounts, such as cash, cash equivalents, and publiclytraded securities (stocks and bonds). For securities, simply look at their values reported by the public exchanges on which they are traded. Same goes for precious metals, which trade at exchanges all over the globe. But owners of self-directed IRAs or

• •

buildings, warehouses. office space and raw land) Real estate debt (mortgages, promissory notes and tax liens) Equity or debt investments in private companies that don’t trade on public markets. Continued on Page 18

What’s Your Plan? By Jeffery S. Watson

ot long ago, I went through a very challenging time. Back in October, I sustained a concussion which really slowed me down. Dealing with that challenge brought me to the question that is the title of this article – “What’s your plan?” Specifically, what is my plan for business continuity if I am temporarily, or even permanently, disabled, or if I were to pass away? Here are some thoughts I want to share as you ask yourself this same question. Just “building an empire” is not a plan. Have you put in writing what

Continued on Page 12

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401(k)s may have a harder time with certain assets. These assets are not traded on public exchanges, so there’s no easily available independent reporting on their estimated value on any given day. Examples of hard to value assets include: • Real estate equity (all types, from single family homes to apartment

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rentalhousingjournal.com

your end goal is? How will you know when you’ve reached that goal? What is your strategy to then move it on to the next generation? After all, accumulating assets solely for your own benefit is an incomplete task. Yes, we want to use our assets to take care of ourselves, but we need to manage them in such a way that they can transition from one generation to the next. Here are some suggestions to help you outline a plan: 1. Define what success looks like for you. 2. Determine how you can Continued on Page 9

Real Estate Journal

Staying on Top of Economic Insights & Trends is Paramount for Your Business By Rebecca McLean, Executive Director, National REIA

hope this update finds you and your family well! Keeping abreast of trends and being briefed about how the changes in the economy may affect your business is just one of many ways you benefit from being a member of National REIA. I wanted to share some interesting economic insights that have emerged recently that may affect how you plan for 2024 as a real estate investor. For other benefits, both old and new, please visit nationalreia.org and check out the many ways we can help you be more successful and profitable in your investing journey. Just a few days ago, the Bureau of Economic Analysis revealed that the U.S. economy expanded at an impressive rate of 4.9% in the third quarter, 2023. This is a significant jump from the 2.1% growth we saw in the second quarter. While we’re still waiting on numbers from other major global players, it appears that the U.S. is outpacing most, except for perhaps India and China. Interestingly, China had a 5% annualized growth rate but is now grappling with economic challenges. We are all waiting for the other shoe to drop as everyone knows that they’ve been propping up their economy even more than we have and an economic crisis is inevitable. A key driver of this U.S. growth is consumer spending, which makes up a huge portion of our economic activity. In September alone, spending increased by 0.7%, following a 0.4% rise in August. This boost is largely attributed to increased spending on services like international travel, housing, utilities, health care, and airline transportation. But let’s jump to October. We’re now seeing some potential challenges on the horizon for consumers. Credit card interest rates are soaring above 20% for unpaid balances. Mortgage rates have hit 8%, auto finance rates are at 7%, and student loan payments are no less than $500 a month. I can’t even imagine what those stats will look like after the major spend for the holiday season is over. But here’s the most concerning statistic; Consumer debts aren’t being paid on time. VantageScore CreditGauge, a credit risk tool developed in partnership with the nation’s three largest credit reporting agencies (Experian, Equifax and TransUnion) reported Oct. 31 that early-stage delinquencies spiked from 0.84% in August to 0.91% in September across all consumer loan products. And we’re seeing this trend extend to mortgage and auto loans as well. Recent data from the Federal Reserve Bank of New York confirms this trend. Household debt has climbed to a staggering $17 trillion, with about $1 trillion coming from credit cards. Notably, mortgages remain the largest debt for many Americans, totaling around

$12 trillion. What may be more concerning is that, after prolonged stability, mortgage delinquency rates are beginning to inch upward again. According to the National Mortgage Professional, the national delinquency rate for September reached 3.29%, marking a 12 basis points rise from August and a 13 basis points year-over-year increase. This shift represents the most significant, and only the second, annual uptick in the past two-and-a-half years. As for auto loans, in September, the percentage of auto borrowers who were at least 60 days late on their bills rose to 6.11% according to a Fitch Ratings report. That marks the highest default level since 1994. A big part of the reason for these defaults is the monthly car payments, which have risen sharply ever since interest rates started climbing. A Financial Times report concludes one out of every five car owners with a loan has a $1,000 monthly car payment. I am curious to see what the fourth quarter will look like when the numbers come out in late January. Some predictions show that the economy will grow by 4 or 5 percent. However, how much will the debt levels of the American consumer grow? With the labor marketing making it appear that anyone interested can find a high paying, flexible job, it can often boost consumer confidence to the point that overspending occurs, whether the consumer can actually afford it or not. This surge in consumer spending—often beyond means—raises concerns,

especially as we approach the peak retail spending season. For us as real estate investors and small business owners, this race to spend can have disastrous results as 2023 turns to 2024. Rent may not be paid on time, ability to finance purchase of a newly rehabbed house might be tougher and paying back any private money loans may become a challenge. If banks begin to be concerned the ability to get conventional loans may lessen. Any change in the economy can radically affect our industry. Let’s stay aware and ready for potential challenges in the coming quarters. For well-informed and well-prepared investors, opportunities always abound! One way is to stay connected with your local REIA for information about the local economy and to National REIA for national trends and data. Visit RealestateInvestingToday.com daily for updates and use the National REIA data portal powered by Homeworthi to see how your area is performing against national averages. Rebecca McLean is the Executive Director of National Real Estate Investors Association.

With National REIAU, we have made learning from some of the best fast, easy and inexpensive. National REIAU delivers great low-cost, high-quality investor training on exactly the subject you want, exactly when you want it.

Learn more by visiting nationalreiau.com 2

Real Estate Journal · Winter 2023-2024

Real Estate Journal

NREIA Legislative Update

Increased Refrigerant Standards We can go through a lot of technical data, but to sum it up ASHRAE (The American Society of Heating, Refrigerating and Air-Conditioning Engineers) standards are being tightened by the current administration and that means that refrigerant will become even more difficult to obtain, and more expensive by 2025. If you are thinking about replacing parts or equipment going into the next year, you may not be alone, and there may be a tighter supply as larger companies seek to upgrade as well. If budgeting allows, start planning on upgrades, especially for older systems. It is highly unlikely that non-A1 refrigerants will be available for many more years, and even then, they will become prohibitively costly.

Bill Tracking There are 9 key types of legislation that National REIA tracks for our members. While the issues are typically focused on housing, finance and small business, it also includes everyone’s favorite subject, Rent Control! This year alone there has been over 4800 bills brought in all 50 states, the District of Columbia and of course in Congress. Of those, many are still in line to pass… Abandoned Housing — 20 Bills Business Licensing — 3,766 Bills House Rehabbing — 203 Bills Housing Preservation — 49 Bills Landlord Issues/Property Management — 225 Bills Property Maintenance Code — 23 Bills Real Estate Inspections — 131 Bills Rent Control — 465 Bills Aside from all the Bills above, just the Department of Energy, the EPA, and HUD have generated another 8,648 regulations and modifications to existing regulations at the Federal level. At National REIA we focused on the 63 from the DOE, 34 from the EPA and 453 from HUD. The new EPA rules alone lowering the amount of lead dust tested for in dust wipe samples sent for lab tests in 2024 will raise the cost of tests from $3-$5/test to $180+/test for an ever-

shrinking universe of lead poisoning… and those cases are not typically from the low threshold situations. The new rule lowers the threshold such that testing has reached a point that laboratories have false positives on blood lead levels and many labs will not be able to perform the basic wipe test due to the new sensitivity requirements.

Rent Control Rent control hasn’t worked anywhere. At least not for the reasons it is initially justified. Even in Minnesota last year, with a 4,000-unit development planned and only 400 constructed, once there was no exclusion for ‘new builds’ the developer pulled the plug on the remaining 3,600 units. Those who understand basic economics, recognize that the loss of 3,600 new units will have a definite impact on the supply and demand facets of housing in the Minneapolis / St. Paul region. While 4k housing units may not have been the silver bullet solution to price growth, the absorption of those units over a couple year period would have signaled to other developers to build as well, and the overall market – and residents – would have benefi1ted from a strong but healthy housing market. Government interference in the market always has unintended consequences. Some time the results are minor. History has shown, New York City for example, that with Rent Control the consequences result in a skewing in the market, a redistribution of benefits and desertion of capital – both in the form of maintenance and long-term development. Sadly, the affordability that is initially sought on behalf of working families does not manifest, with the well-to-do holding and even sub-leasing units for years, while the owner suffers. In New York for example, many of the smaller rental buildings were purchased by legal immigrants working to build a new life in the US. Those properties have become the focus of recent changes in rent increase approval processes. The resulting market distortions are furthering the demise of buildings and holding back what could have been a redevelopment boom when interest rates were low. The results however are often

Real Estate Journal · Winter 2023-2024

discounted by proponents who much like socialists, admit there were problems in the other areas, but they can do it right and this is the best fix for the moment. The moment. That is really the key argument. If municipalities have a longer perspective on their housing and zoning plans, they can help guide development and incentivize balanced growth. Many communities though, refuse to allow housing or “that kind” of housing at some point and as the housing scarcity grows, housing demand, and therefore prices increase. The long-term solution to the housing supply problem must be considered year by year and steadily grown. Houses are not built over-night, at least not ones people would want to live in for very long! As stakeholders in a community, it is incumbent upon us, to be involved with the zoning, and development plans at the local and county level — doing so early on and not just at the point of crisis can help the region avoid the last minute, “we have to do something now” reaction.

Court Action? Legally speaking, Rent Control is entirely different than a mere intrusion in to the business processes via a regulation. In fact, there are cases trying to overturn previous case law about rent control being an actual taking. Yes, that kind of Unconstitutional Taking. As with most of these larger issues, it will take years to wind its way through the courts, but maybe, just maybe, the Supreme Court will consider the true impact of a governmental restriction on a citizen’s ability to charge an amount in the market place for a product that a willing buyer would contractually pay. The inability to engage in market-based sales, and thereby retain the benefit of combined work and risk, leads to little more than the loss of property rights on a path similar to that of socialist and communist countries.

Evictions and Avoidance With inflation a central topic and billions paid out to cover rent during and after the Covid panic, there has been an ebb and flow to the debate. Some regions are focused on the need for money to help people pay rent and

do so in a timely manner to avoid the entanglements of court proceedings and the legacy of problems they create for tenants. Mediation solutions can help when there are non-financial issues involved. Right to Counsel on the other hand tends to add delays to the process, increase court fees and reflects very little assistance to the family involved, other than providing a little more time to find another place to live. Money provided to families helps solve one of the big three issues that are financial stumbling blocks for families living pay-check to pay-check: 1. Auto problems 2. Medical problems 3. Short-term work displacement These three situations cause the majority of rent problems. With over 50% of Americans unable to put their hands on $1,000 in the event of an emergency, these issues can cause a stumble that can be resolved for typically less than a grand. However, with attorney fees ranging from high to astronomical(!) the only benefit from going through the eviction process, and a delayed one at that, is the attorney. It doesn’t help the family. They still have to move, and it will be more difficult with an eviction process on their record, and the housing provider is typically out 2-3 months of rent plus turn-over and re-marketing fees. It’s no wonder attorneys always present Right-to-Counsel as a solution: because they benefit.

Junk Fees With the Whitehouse focused on Junk fees, a potential consumer protection item that most of us would concur could help, the definitions come in to play. The breadth of terms that include junk fees ranges from application fees to late fees and any other fee that is separate from rent. For the rental industry the message is clear, and potentially helpful in that transparency is a good thing. The lease should clearly define every fee that may be included depending on specific actions or inactions, and even getting them initialed could save you heartburn later. Now if only we could get that level of transparency at the pharmacy or the hospital!

Real Estate Journal

Real Estate Journal · Winter 2023-2024

Real Estate Journal

Published quarterly for chapters, associated real estate investor associations, their members and guests.

Editor Brad Beckett brad@nationalreia.org For inquiries regarding Membership, Legislative, REIA organization information or to become a industry partner, call National REIA toll free at 888-762-7342 Fax: 859-422-4916 Hours of operation: 9:00a.m. to 6:00p.m. Eastern time zone Find us online at: info@nationalreia.org www.NationalREIA.org

RE Journal is published by Rental Housing Journal, LLC, publishers of Rental Housing Journal www.rentalhousingjournal.com

Publisher John Triplett john@rentalhousingjournal.com Editor Linda Wienandt linda@rentalhousingjournal.com Associate Editor Diane Porter Advertising Manager Terry Hokenson terry@rentalhousingjournal.com

The articles in RE Journal written by all authors are presented to you for educational purposes only. The authors and the National Real Estate Investors Association strongly recommend seeking the advice of your own attorney, CPA or other applicable professional before undertaking any of the advice or concepts discussed herein. The statements and representations made in advertising and news articles contained in this publication are those of the advertiser and authors and as such do not necessarily reflect the views or opinions of National REIA or Rental Housing Journal, LLC. The inclusion of advertising in this publications does not, in any way, comport an endorsement of or support for the products or services offered. To request a reprint or reprint rights contact Rental Housing Journal, LLC, 4500 S. Lakeshore Drive, Suite 300, Tempe, AZ 85282. (480) 454-2728 - (480) 720-4385. © 2023 All rights reserved.

Investor Myopia vs. The Big Picture By M. Jane Garvey

n a society where instant gratification is the norm, it may be tough to think about long-term planning and the benefits of delayed gratification. But as investors that is precisely what we should be doing. Taking the time to consider the consequences will almost always benefit us in the long run. Myopic behavior – or short-sightedness - often drives people to make impulsive decisions or to take unnecessary risks. To avoid such behavior, you must learn to consider the long-term implications of your actions. One of the most common examples of myopic behavior is the housing provider deciding to rent to a marginally qualified renter. Vacancies are financially painful. So, to avoid the short-term pain of paying the bills without the income from rent, the housing provider makes the gamble to rent to someone that has a high probability of failure. The short-term benefit of no vacancy may lead to the longer-term cost and pain of an eviction and all the loss and damage that comes with it. Experienced housing providers will always tell you to wait for the well qualified applicant. The quick fix rarely is the right choice. Buying an inferior part or tool because it is cheaper is another example of myopic behavior. If the plumbing part breaks, when will it have to be replaced? What is the cost to have it replaced, and even worse, what is the cost to repair the damage caused by the failure? These costs need to be considered in your decision. Cheaper is not always cheaper in the long run. Ignoring small “leaks” in your cash flow is a big mistake. Let’s say you are spending $100 per month more than you could be on your insurance. If you made the needed change to the insurance and invested that newfound cash flow savings at 10% interest, over the course of the next 10 years you would have $20,484.50. If instead you invested it over 30 years you would have $226,048.79. The myopic behavior of not finding the time to fix

Real Estate Journal · Winter 2023-2024

the “leak” can be very costly long term. Survival in the real estate business involves avoiding unforced errors. Ignoring market conditions is one such error. Ignoring governmental imperatives is another. Violating the precautionary advice of long-term investors is yet another. You will need to think long term and be willing to adapt your strategies to survive long term. We have seen investors who seemed to be very successfully rehabbing and reselling property while interest rates were low and buyers were competing for properties. In order to find deals to bring to market, some of these investors started making decisions that were only viable in ideal market conditions. They shrunk their profit margins, started counting on market appreciation, bought houses in undesirable locations, or with undesirable floor plans, cut corners on the rehabs to save money, and other similar things. These myopic behaviors eventually lead to trouble when the market shifts. In some areas of the country the rental property business is under attack. Housing providers are being asked to take risks on potential residents who have a high risk of not being able to meet their obligations under the lease terms. Rents are being regulated via rent control and other measures. Taxes and regulatory expenses are increasing, shrinking profitability. There is myopic behavior in these instances by government as well as the investors that choose to continue their operations in these areas. Legislation that discourages investment may bring a short-term benefit to the current residents, but in the long run housing shortages will hurt everyone. Investors who choose to stay in an area where their business is under attack are like the ostrich with its head buried in the sand. Trouble is upon them, and they are either blissfully unaware, or think that if they can’t see it, it can’t see them. This myopic behavior can be disastrous. In the excitement of learning about investing, cautionary advice from longtime investors can seem discouraging.

Some newbies don’t want to hear it or see it – like the ostrich with its head in the sand. This advice can give you a longterm perspective and will dramatically increase your chances of long-term survival in this business. Navigating the waters of market shifts is best done with some guidance. Join your local investor association and spend some time getting to know the long-time investors. Their wisdom will help you make wiser decisions that do consider the long-term effects. Learning about alternative strategies that can help you adapt to changes in the market is another thing that myopic thinkers ignore. The time to learn is before you need them. Making sure you have back-up plans for your investments is important. Real estate is not as liquid as many other investments, so we need to know how to adapt, and be able to shift our strategy when things aren’t working. Many office, mall, and other commercial properties have major vacancy issues right now. In some areas short term rentals are under legislative attack. The investors who have alternative use plans have a better chance of surviving these shifts. Diversification is another important part of long-term survival. A variety of investments in a variety of property types in a variety of locations will lessen the risks. You should still take the time to regularly look at the continued viability of your holdings and the markets they are in. This approach will allow you to make the shifts needed when problems are on the horizon. Think Long-Term, Act Long-Term, Survive Long-Term and Profit LongTerm Jane Garvey is President of the Chicago Creative Investors Association.

Real Estate Journal

Taxes on IRA Investments: What to Know About UBIT

By John Bowens

hat is unrelated business income tax (UBIT), and do you need to be concerned about this special taxation that your IRA real estate investments may incur? You should be aware, but keep in mind that incurring the tax does not necessarily always equal a negative. It just means that you want to make sure you address the taxation and identify methods to either mitigate that taxation or pay the tax and recognize that if you’re paying taxes, you’re generating a return.

What is UBIT? Unrelated business income tax is when an IRA acquires a debt-financed piece of real estate or invests in a real estate syndication where there’s debt financing associated with the property. It is sometimes referred to as unrelated debt-financed income tax (UDFI). According to the Internal Revenue Service (IRS), “Even though an organization is recognized as a tax-exempt entity, it still may be liable for tax on its unrelated business income. For most organizations, unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. An exempt organization that has $1,000 or more of gross income from an unrelated business income activity must file Form 990-T.” I’m often asked, “If I do incur UBIT, how do I address it?” You would file a 990-T tax return. This is filed separately from your personal tax return. Think of it as an IRA tax return. You can complete this yourself, have your CPA help, or if you have an Equity Trust account that incurs UBIT, we can, in most circumstances, handle the preparation and filing of the 990-T tax return.

Ways UBIT may be incurred There are two subcategories under unrelated business income tax: 1. Your IRA is engaged in an ongoing trade or business 2. Your IRA acquires a property with debt financing (in an IRA, that financing must be a non-recourse loan – you can’t sign a personal guarantee. The only recourse the lender may have would be against the subject property.) The tax is only based on the percentage of the property that’s debt financed. If your IRA acquires a property, let’s say for $100,000, and you borrow 50,000, you’re at 50 percent debt financed. In that instance, 50 percent of your net profit will be subject to unrelated business income tax. Let’s say you put 80 percent down and you’re only 20 percent leveraged. In that example, only 20 percent of your net profits will be subject to UBIT. What if you’re invested in a partnership? Let’s say, for example, you invest in an LLC or a limited partnership that’s being taxed as a pass-through entity and the LLC or partnership owns an apartment building, selfstorage building, or some other type of commercial real estate, and that commercial real estate has debt against it. In that instance, you would still have to address the UBIT. 6

With income-producing buy-and-hold type transactions, like a rental property or an apartment building, there might be depreciation. There are also expenses, and the depreciation could potentially significantly offset the unrelated business taxable income. Team up with your CPA or tax planner and discuss these specifics so you can analyze potential long-term implications if your IRA is engaged in a UBIT-generating activity.

“Ongoing trade or business” – a closer look Another question I often get is about the “ongoing trade or business” category. People say, “I don’t understand this, because for years, my IRA has invested in publicly traded stocks and mutual funds, and I’ve never had UBIT.” But certainly, those publicly traded companies are considered an ongoing trade or business. Those entities are corporations, which have a corporate tax rate, and the income flows through as dividend income. Dividend income, to the IRA, is taxexempt. That’s why when your IRA, 401(k), or other retirement account is invested in the traditional stock market, in most instances (except for master limited partnerships), you don’t incur UBIT. With privately held companies, if they’re structured as pass-through for tax purposes, like an LLC passthrough, or limited partnership pass-through, that income may be subject to UBIT, depending on the nature of the business. For example, let’s say I want to invest in a friend’s carwash, which is structured as an LLC. My IRA has a 10-percent interest in that carwash business. That income is going to pass through and will be subject to UBIT because that would be defined as an ongoing trade or business. If that carwash was structured as a corporation paying corporate tax with income flowing through as dividend income, that would be treated differently, and the dividend income would likely be tax-exempt in the IRA. The other question I frequently hear involves real estate investing. Investors ask, “What if I want to, let’s say, flip multiple houses in my self-directed IRA? Will that be considered an ongoing trade or business?” It certainly could be considered an ongoing trade or business. There are no clearly defined guidelines on how many flips you can do. Can you do two flips? Three flips? Four? It’s not clear. But it’s important to understand if you do too many flips, you could certainly trigger UBIT. There are other prohibited transaction rules to understand as well if you’re going to flip houses in your IRA. Talk to your CPA or your tax planner about how many flips could you potentially get to before you reach a point where you could incur UBIT. Remember: any rental income and interest income is all flowing back into the self-directed IRA.

Weigh the pros and cons Keep in mind that unrelated business income tax, or unrelated debt-financed income tax, isn’t necessarily a bad thing. If you’re paying taxes, that means you’re generating income. Do the math: after you pay the taxes, what is your overall return on investment? Plenty of clients I’ve worked with do the analysis on their own. (Of course, as a directed custodian, Equity Trust cannot provide that analysis.) After factoring in the taxes that they’ll pay every single year, or maybe down the road when the property sells, they still determine that their cash-on-cash return on investment, or their internal rate of return, is still substantially greater than what they could make in other investment activities. The moral of the story: don’t fear UBIT. Embrace it. If you’re paying the tax, that means you’re generating income. Just understand how the tax works.

Special self-directed IRA offer for National REIA members only Equity Trust Company is a national sponsor of the National Real Estate Investor Association (NREIA) and is offering NREIA members and its affiliated chapter members a special introductory self-directed account offer. NREIA members can open an Equity Trust account for a discounted rate of $99 and receive bonuses worth $720 or more: • National REIA GOLD Level membership (includes priority processing and an experienced client service team dedicated to members) for one year • Digital download of #1 ranked book on Amazon - Self-Directed IRAs: Building Retirement Wealth Through Alternative Investing • More exclusive wealth-building education Visit www.trustetc.com/nationalreia or call 844-7329404 to learn more. John Bowens, CISP, is Director, Head of Education and Investor Success at Equity Trust Company, a leading custodian of self-directed IRAs. Visit www.TrustETC. com for more information. Equity Trust Company is a directed custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.

Real Estate Journal · Winter 2023-2024

Real Estate Journal

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Real Estate Journal · Winter 2023-2024

Real Estate Journal

The Synergy of Real Estate and Infinite Banking:

A Summary Guide to Leveraging Whole Life Policies in Property Investment By Jason K. Powers

hard for investors to access funds. However, those integrated with the Infinite Banking Concept have an edge. They can access their policy’s cash value, ensuring liquidity even in lean times. This liquidity advantage allows them to capitalize on undervalued properties when others are cashstrapped, setting the stage for significant future gains.

he dynamic world of real estate offers myriad avenues for growth and profit. But as with all investments, funding and liquidity remain the lifeblood of success. Enter the Infinite Banking Concept (IBC). At its core, the Infinite Banking Concept is about becoming one’s own banker. By harnessing the cash value growth of a dividend-paying whole life insurance policy, investors have a reservoir they can tap into. This capital can be borrowed against and repaid at the policy owner’s discretion, bypassing many of the hurdles of traditional bank financing. When integrated into a real estate portfolio, IBC can prove to be a powerful ally.

Swift Property Acquisition Navigating the maze of traditional bank financing often presents challenges: extensive paperwork, approval delays, and rigorous credit evaluations. For many real estate investors, these hurdles can mean missed opportunities. With IBC, investors can directly borrow against their policy’s cash value, cutting out the middleman. This means a swifter acquisition process, diminished fees, and a flexible repayment timeline that’s tailored to the investor’s unique needs.

Streamlined Rehabilitation & Improvements For those in the world of Fix-N-Flips and Rehabs, securing external funding for such endeavors can be cumbersome, time-consuming, and sometimes expensive. Infinite Banking offers a solution. By allowing investors to borrow against their policy, funds can be accessed efficiently. Once the property is upgraded and either sold or refinanced, the policy loan can be repaid, keeping the investment cycle smooth and fluid.

Bridge the Gap with Bridge Financing The real estate market is dynamic, with opportunities sometimes requiring immediate action. Traditional financing methods can be slow, making it challenging to capitalize on time-sensitive deals. The Infinite Banking model shines in these moments. As a rapidresponse tool, it can act as a bridge loan, ensuring investors have the agility to secure promising deals. Then, once the property is refinanced or sold, the borrowed amount can be returned to the policy, ready for the next opportunity.

Strategic Land Purchases Land is a foundational real estate investment. It offers potential long-term appreciation, especially in growing areas. However, immediate development isn’t always feasible or strategic. Here’s where the IBC becomes invaluable. Investors can tap into their policy’s cash 8

Estate Planning with an Edge

value to finance land purchases, holding onto these assets until market conditions are ripe for development or resale, thus ensuring they don’t miss out on strategic land acquisitions. Remember the unstructured loan component? You’re in charge!

The Cushion of Cash Flow Management Consistent rental income is the necessary for most real estate investors. Still, reality (remember COVID?) often presents challenges like vacancy periods or unexpected major repairs. Such disruptions can strain cash flow, making it tough to meet financial obligations. With the IBC, investors have a financial cushion. They can draw from their policy’s cash value to manage cash flow dips, ensuring that mortgages, property taxes, and other essential payments are met without a hitch.

Down Payments Made Easy A sizable down payment can be a decisive factor in securing a lucrative property deal. However, arranging large sums quickly isn’t always feasible. Cash value from your policy, offers a workaround. By allowing investors to borrow from their policy’s cash value, they can swiftly arrange for down payments, often giving them a strategic edge in negotiations. This not only ensures quicker deal closures but also conserves other liquid assets for different opportunities.

Ready for Rainy Days

Any robust real estate portfolio requires foresight, not just for current investments but also for future wealth transfers. The Infinite Banking Concept offers dual benefits in this regard. First, the death benefit of the insurance policy provides, usually, a tax-free wealth transfer mechanism. Second, the liquidity from the policy ensures that estate-related expenses or taxes can be managed without hastily liquidating properties, ensuring the legacy remains undisturbed. So, in the intricate dance of real estate investment, the Infinite Banking Concept can be a game-changer. By merging the liquidity and flexibility of IBC with real estate’s potential, investors set the stage for sustained success. As with all financial strategies, it’s pivotal to engage professionals well-versed in both realms, ensuring the nuances of policy loans, dividends, and real estate intricacies are harmoniously intertwined. That’s where we come in. Reach out today, and let’s see what the Infinite Banking Concept can do for you. Jason K Powers is a Multi-Business Owner, Real Estate Investor and an Authorized IBC Practitioner. In an exclusive partnership with the National Real Estate Investor Association, Jason is the go-to expert for all aspects of Infinite Banking and Life Insurance. Jason works with clients across the country showing them how to achieve their financial goals by taking control of the banking function in their life and creating financial velocity that can last for generations. Connect with Jason today to explore how the Infinite Banking Concept can empower you to reach your financial goals. For more information, visit www.1024wealth.com/ NREIA.

The unpredictability of the real estate market demands a well-prepared investor. Unexpected expenses, such as sudden repairs or unforeseen legal issues, can crop up, demanding immediate funds. The IBC serves as a financial safety net. Having access to the policy’s cash value ensures that investors can manage unexpected costs without destabilizing their portfolio or resorting to high-interest emergency loans.

Stay Liquid in Lean Times Economic downturns and market recessions are inevitable. During such times, traditional lenders often become risk-averse, like they are right now, making it Real Estate Journal · Winter 2023-2024

Real Estate Journal

What’s Your Plan?

... continued from Page 1

measure that success. List specific things you can do to maintain that success once you have achieved it. 4. Decide now what you want to do with your assets when the time comes to begin transitioning them to the next generation. Have you thought about how your business would continue if something were to happen to you? I heard an interview in which one of my mentors talked about how he has successfully taken his company that brings in nearly a billion dollars of revenue each year and transitioned it to where over 70% of that revenue is no longer dependent on him. That’s important when you have 1,100 employees because if it were all dependent on him and something happened to him, there would be 1,100 employees scrambling to figure out what they were going to do and how they were going to get paid. What are some things you can begin to implement to remove yourself from the day-to-day operations of your business? I was speaking with a legendary property manager and investor named Matt in the Tampa, Florida market about transitioning to the next stage. Property management is something that can be extremely lucrative and rewarding when done correctly, and it’s a skill that every real estate investor should have. At some point, however, you need to move from managing your properties to managing the people who are managing your properties. Having quality management will allow you to capture more cash flow by catching things that might slip through the cracks because you were too busy or too distracted by other projects. Once we have written, identifiable goals in place, there are certain tools that can help us achieve them. First, every adult needs to have a written estate plan that includes, at a minimum, a Last Will and Testament, a Durable Power of Attorney for Healthcare and a Living Will (advanced care directives), and a Durable Power of Attorney which would come into effect if you were 3.

Real Estate Journal · Winter 2023-2024

incapacitated for a short period of time and not capable of managing your business. Another tool for protecting your goals is life insurance. Do you have adequate life insurance in place? It should be used, at a minimum, to provide liquidity to your family and businesses so they have the necessary working capital for an orderly administration of your estate. Remember, most real estate is rather illiquid, and those who will be handling things for you need to have money in their hands to do that. Consideration must also be given to how financial obligations will be paid for the first 6-9 months after you become disabled or pass away. Remember, if you become disabled, your earning capacity may be diminished in whole or in part depending on what type of business you operate and how involved you are in the day-to-day operations. Do you have funds set aside or have disability insurance for that? I’ve heard too often of real estate investors who had a health emergency, and as a result, they had to liquidate assets at fire-sale prices to get the necessary capital to handle their financial obligations. While it’s a good thing they had those assets to sell, it hurts to have to sell the assets they worked so hard to acquire. Another thing I want you to think about is having a plan for maintaining your health. Those of you who know me and see how hard I work and how much I travel may be thinking that I really need to take my own advice on this one! What you may not know about, however, is the commitment I’ve made regarding daily exercise and a disciplined eating program. Do I (and most of us) need to do more? Yes. Do you have a plan for maintaining good health? I hope so. I know I’m enhancing mine. A very important planning tool is having an operations manual for your business. One of the most important things in my office as a notebook labeled “The Brains of the Operation” which gives step-by-step, detailed instructions to anyone who may have to come

in and take over the things necessary to keep my law office and real estate business running. It is a valuable tool for anyone you may be training or for anyone who may have to step in in an emergency. More than once when my assistant has been on vacation, I’ve had to look in that manual to find out how to do things that she routinely takes care of. Along with having an operations manual, you need to maintain what we call our “Artificial Intelligence” file (so named long before ChatGPT was ever talked about). It’s a file in which we store all relevant usernames, passwords, and login information for the many websites we routinely use. If I should lose both my phone and laptop at the same time, that backup file will save my bacon! Obviously, the file needs to be kept in a secure, fireproof location and must be frequently updated. In my opinion, just relying on cloud storage or some digital backup is not good enough. “If you fail to plan, you plan to fail.” (Benjamin Franklin) I hope after reading this that you will take the time to get your plan in place. Jeffery S. Watson is an attorney who has had an active trial and hearing practice for more than 25 years. As a contingent fee trial lawyer, he has a unique perspective on investing and wealth protection. He has tried over 20 civil jury trials and has handled thousands of contested hearings. Jeff has changed the law in Ohio four times via litigation. Read more of his viewpoints at WatsonInvested.com.

Real Estate Journal

Using Senses to Sense Scents Makes Sense By David Pickron

h, I had a friend bring her little dog over maybe once or twice while I lived there.” That’s a direct quote from a recently moved out tenant. Funny thing is, I went to the property the day after she moved out and all of the windows were open… in August… in Phoenix. As I walked in, I caught the overwhelming odor of what seemed skunky but just could not put my finger on it. No wonder she wanted the windows open to air out the place and somehow save her security deposit. When I asked her if she had been smoking or vaping marijuana, she adamantly denied. Did you ever have any pets in the property? Refer to the first sentence of this article to see her answer. I shut the property up and a few days later returned to start the rehab for my next tenants. Sure enough, when I opened the property that had been sealed shut for just a few days, the

smell of urine overwhelmed me. Turns out it was a combination of the nearby dairy and the urine smell that made me think it was initially marijuana. And just this week I met the carpet guys at the property and to no one’s surprise, when the carpets were pulled up, there were urine stains over every square inch of the carpet and pad. That little dog must have had some kind of bladder for just being there once or twice. Now before you think I am anti-pet, I’m not. I have three adult Bernedoodles, Wellington, Winston, and Aspen, that bring me pure joy. And I’m not antitenant either, as I have multiple short, mid, and long-term rental properties that produce a great income and are valued assets. My challenge here lies in the fact that tenants will go to great lengths to avoid any extra expense that comes after they vacate a property. When it comes time to perform a move-out inspection, it’s critical to engage your senses to ensure that you

don’t miss something that could end up costing you thousands down the line. Here’s what I recommend:

Sight If you have a copy of photos from the initial move-in inspection, compare those with the current condition of the property. Things like holes in walls are obvious, but do you remember the paint color that was in the property at time of move-in? Or what appliances were there when they took possession? Was that room pink with stars on the ceiling? If you own multiple properties or if a tenant has been in the home a long time, you may not remember exactly what was in place. I’ve seen tenants break my nicer appliances or fixtures and replace them with cheap ones, hoping I wouldn’t notice. Always, always take pictures of the property before a tenant takes possession so you don’t have to rely on memory.

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Smell As my story above illustrates, the nose always knows. What I didn’t tell you is a week prior to their moving out, I visited the property and it smelled great. The tenant asked specifically when I would be arriving and dolled the place up with air fresheners. Quite literally, if it doesn’t pass the smell test, something is likely wrong at the property. To get the best results, turn off the HVAC system for a couple of days and seal the house up. Smells like cigarette or marijuana smoke, mildew, or pet urine will become more pronounced once the air stops moving.

Sound When I walk into a vacated home, I listen for all types of sounds. Is there an unreported leak somewhere that I can hear like in the toilet? When the HVAC system turns on, does it sound right? Maybe I should inspect the filter to see why the A/C is struggling. Same goes for dishwashers and washers and dryers. Run all the faucets in the home and listen for any issues that might be related to the plumbing.

Touch In the move-out inspection I like to feel for things like drywall repairs the homeowner may have completed. Open the cupboards and make sure they glide smoothly. A lot of homes now have stone countertops, and depending on the stone, it may visually hide gouges or cracks caused by homeowner behavior. I also feel with my feet as I walk the property as unreported water leaks can lead to warped or loose floors that I may not see but can definitely feel. I teach new landlords all the time about the importance of finding the right tenant to be their “business partner” in maintaining and caring for a property. But even the best tenants can and do create problems for us as housing providers when they move out of our properties. Little things are expected, but when it comes to professionally and effectively managing our portfolios, we have to use everything in our arsenal to protect our assets. Using your senses to sense scents (and other issues) just makes sense. Speaking of making sense, require a security deposit big enough to cover carpet replacement as that is usually the biggest replacement item that holds those offending odors. David Pickron is President of Rent Perfect, a private investigator, and fellow landlord who manages several shortand long-term rentals. Subscribe to his weekly Rent Perfect Podcast (available on YouTube, Spotify, and Apple Podcasts) to stay up to date on the latest industry news and for expert tips on how to manage your properties. Members of National REIA can take advantage of special pricing from RentPerfect; the solution for rental property owners and managers for screening & managing tenants. Learn more by visiting www.rentperfect.com or calling 1-877-922-2547.

WWW.NREIA.ARCANAINSURANCEHUB.COM 10

Real Estate Journal · Winter 2023-2024

Real Estate Journal

Real Estate Journal · Winter 2023-2024

Real Estate Journal

Member Spotlight - Clint Blackburn ... continued from Page 1 Right after high school, Clint went to trade school and started doing electrical work for a living. Later, he became a master electrician, got his contractor’s license and then went to work for himself. He bought his first investment property in 2017 and hasn’t looked back. He is an active member of Omaha REIA, in Omaha Nebraska.

Please tell us a little about who you are and what you did before getting into real estate investing: After graduating high school, I worked in my grandpa’s mechanic shop for a short period of time before enrolling in a tech school for electrical technology which led me into the electrical/ construction industry. There I have been involved in wiring of various aspects in the construction world including residential, single family, multi family, retail, hospitals and supermarkets.

Where is your current market and what is your focus or area of expertise? My wife and I operate in the smalltown, rural areas. We are always looking for off-market distressed properties with value-add potential.

How did you get started? I cashed in my small retirement account ($15,000) from my last employer and used that for down payments on my first few properties. Several people told me I was crazy for cashing it out. Most said I was going to regret doing that 10 years from now, but I felt I could better utilize the money in my own business and make more than I would ever get from the stock market.

Clint and the crew of Omaha REIA’s podcast - REIA Radio. Clint shared his background story from straight out of high school into being an electrician to eventually doing real estate full time and all the steps he went through in between. The episode can be found online at RealEstateInvestingToday.com. Describe a typical work week for you as a real estate investor: A typical work week for me, to be quite honest, can pretty chaotic. About 12-18 months ago, we began making a transition by stepping away from the electrical business and devoting more time and energy into growing our real estate portfolio. We currently have 20 plus rental units that we have self-managed up to this point (currently working on transitioning to a property manager) and I am the general contractor on our 2 new construction townhomes. So, between keeping up with maintenance

for the rental units and looking at potential deals that we could acquire and keeping things flowing smoothly with the contractors on the townhomes, it can be quite challenging sometimes. We also have 1 current flip under way, and at least 4 other deals in the works. If we can close these 4 deals, that will put us at about 40 rental units by the end of the year.

How long have you been investing in real estate? Our first deal was in 2017. (as noted above)

Tell us about your first deal: We put 15% down (used my 403b proceeds for the down payment) to buy our first property for $19,000. It was a 2/1, occupied hoarder-house I wasn’t even sure what the flooring looked like. We negotiated with the owner having him remove the current tenant and all of their belongings. When we took possession of the house it indeed did not have any flooring it was bare plywood and completely infested with fleas. After countless bug bombs and thorough spraying we were ready to get cranking on it. I did most of the reno myself. When people saw us working on it, we heard again and again “are you crazy?...have you lost your mind?...this thing is trash, there’s no point in even working on it…

Clint and his wife, Beth, love to travel and enjoy live music. Here they are at Red Rocks Amphitheater in Colorado. 12

you should bulldoze it down.” But just like before, we didn’t listen to any of that noise and kept marching forward with the renovation. We put on new siding, windows, roof, gutters, and flooring. We also did minor plumbing, electrical and drywall repair. When we got towards the end and was finishing up the project, we had various different people stop us to thank us for revitalizing this home. They told us how nice it turned out and wished that someone would have done this years ago as the community much needs quality housing.

How do you fund your investments? We operate off of a line of credit tied to the equity of a couple of our properties to give us the freedom, flexibility and timeliness to be able to jump on great deals when they become available.

Do you have a real estate license? No

What projects are you currently working on? We are currently working on finishing up our townhome project (2 townhomes), which is a disaster relief grant project for low to moderate income housing. I

Continued on Page 13

Clint’s first project from the ground up - SOLD. Real Estate Journal · Winter 2023-2024

Real Estate Journal

Member Spotlight - Clint Blackburn ... continued from Page 12 worked in conjunction with local and state government, as well as FEMA to build low energy/efficient housing for victims of the 2019 flood. This has been a BIG project for me and my first ever new-builds of my career. Working with grant funds with federal and state agencies is a challenge on its own - lots of hoops to jump through, and a lot of lessons learned along the way. We also have a fix and flip in the works and a rental property that we just finished renovations on.

How much time do you put into your real estate education? I am always listening to podcasts anytime I am in my pickup gathering supplies or moving from job to job or listening to them while we’re working on a job. I also go to various real estate/ REIA meetups and actually just got back from a conference. Editor’s note: Clint was featured on Omaha REIA’s podcast last summer. It can be found on RealEstateInvesting.com – just search for “Blackburn.”

Has coaching or mentoring played a part in your success? I don’t specifically have a mentor or have enrolled in any coaching classes. However, through meetups I have made connections and friends with many folks who seem to be always willing to offer a helping hand and help you grow & succeed in your business.

What are your current and future goals? My current goal is to try to systematize and build a strong and reliable team that allows me to work for the business not in the business. That way I can focus my energy toward growing and making things run smoothly & efficiently. Until a few months ago I was literally wearing my tool pouch the majority of the time and I soon learned there is only so much one person can do and that my skills would be better used in other areas. As for my future goals I feel as if it is always a moving target. If you would have asked me four or five years ago what my future goal is I would think, “man, it would be sweet to have 10 rentals.” It’s not like once you get to that point you just quit. You keep going for the next thing. As of now it would be to continue to grow, look into some smaller multifamily properties and try to get things running as efficient as possible so that my wife and I can enjoy some of the freedoms & flexibilities of that passive income.

What has been your top struggle in this business? My top struggle, for sure, has been building and implementing good systems. In the beginning I did not do that as well as I should have and, quite frankly, it has bitten me in the butt and has been a challenge to get everything back on the straight & narrow.

What do you like most about what you do? I’m not sure how to exactly narrow that down as I enjoy most aspects of this business as I stated earlier. I was taught to wheel & deal and look for the valueadd from a very young age from my grandpa. I have always enjoyed building

The Waubonsie Gun Club - (from left to right) Clint, his dad Doug Blackburn, Alex Malcom and Seth Blackburn. The purpose of the Club is to raise money for the Tabor Fire and Rescue (allvolunteer) through an annual fish & chicken fry. The donation allows the organization to purchase much needed supplies & equipment so they can continue to serve the citizens of Tabor, IA. things and being able to look back and be proud of the job or project that you have done. Then once you’ve done a few of these it is very gratifying to have the public or city officials come and tell you how much they appreciate the hard work you’re putting into these communities for a much-needed service. And, lastly it is very rewarding when you see the look on someone’s face, realizing that you’ve been able to help them get a place to call home.

Do you have a tip or advice that you would pass along to other investors?

AFTER ( & BEFORE) - From a BRRRR Rehab

Yes, first and foremost, do not wait to build your systems even if you don’t think you need them at one, two or five units. If I would have built strong systems and continued to hone them in, things would have been much smoother and easier later on down the road.

How important is joining a local REIA to a new investor? I would say to a new investor that being a REIA member is very important. I had no idea that REIAs even existed 18 months ago and since then it has changed the trajectory of my business. I would strongly suggest going to the meetups and putting yourself out there. The odds are that there is someone in the room who has been where you’re at and has had the same struggles you are dealing with or is looking to go in the same direction as where you’re looking. I have found most of the people at our REIA meetings are more than happy to help. It has definitely been a key factor in growing my knowledge skills and business for sure

Do you have any interesting hobbies or something unique that you like to do?

You know, I’m really not that unique. However, I do enjoy hunting & fishing and being outdoors in general as well as traveling with my wife.

Real Estate Journal · Winter 2023-2024

Real Estate Journal

Tax-Smart Real Estate Investing: A Bookkeeper’s Guide By Gita Faust

ookkeepers for real estate investors play an essential role and should help you save on taxes. As we serve the real estate industry, our team wears multiple hats, and we are regarded as their Advisor, CFO, Controller, Consultant, Coach, or Financial Manager. We guide them through the nuisances of real estate investing in the accounting world. As we offer top-notch service, some clients affectionately refer to us as their bookkeeper! We work hard to ensure all the numbers are correct so our clients can save money and be successful real estate investors. Sound financial management can have an impact on your returns. Let’s explore some tax-efficient strategies and how they relate to bookkeeping, accounting, and financial management:

1. Depreciation: Boosting Cash Flow Think of depreciation like the way your toys lose value over time. When you own a property, you can pretend it’s losing value, too, and that’s a good thing! Depreciation helps reduce your taxable income. Tax Preparers play a crucial role in calculating and recording depreciation accurately in financial statements and tax returns. As part of our bookkeeping and accounting services, we diligently track depreciation on the books, reducing the profit amount subject to taxes. Furthermore, you can incorporate depreciation into cash flow projections. This results in improved cash flow, affecting property values and taxable income.

2. 1031 Exchange: The TaxSaving Swap Imagine swapping one of your toys for another without paying any tax. That’s sort of like what happens in a 1031 exchange. Real estate investors can sell one property and buy another similar one without paying capital gains tax immediately. We record the exchange accurately 14

to ensure taxes are deferred correctly for a seamless process. Simultaneously, the Tax Preparer is responsible for the transaction meeting IRS requirements, accurately recording the exchange, and reporting it on tax returns. This entails a strategic plan for the potential tax liability down the road and incorporating it into their investment strategy while maximizing liquidity.

3. Passive Loss Rules: Accounting for Loss Limitations Like you might spend money on toys, real estate investors spend money on their properties, including repairs, maintenance, and insurance. These expenses can often be deducted from the rental income, reducing taxable profits, and may encounter passive loss limitations. The Tax Preparer needs to figure out the tricky rules about passive income and losses, especially when investors have multiple real estate investments that can help maximize allowable deductions. In doing so, you can analyze the impact of passive income and losses on overall financial performance and strategize to optimize their portfolios. It is like putting up a giant puzzle to get the finances right!

4. Cost Segregation: Bookkeeping for Accelerated Depreciation Cost segregation does not always require a formal study. I am correct; when you make improvements like replacing a roof, you must track these expenses in your books. Later on, when you review the report, you’ll find the purchase date and a separate line item for these improvements. Depending on the property’s value and complexity, you may consider opting for a formal cost segregation study. These studies are like a treasure chest for looking for parts (toys) of a property that can be depreciated faster. The key is to record each line item in the books from the study, which will

help you view the breakdown of past and expenses for subsequent years, saving time for the tax preparer. They can reconcile the reports and CS study to the depreciation schedule on the tax return.

5. Real Estate Professional Status: A Tax Advantage One of the qualifications is that you materially participate for 750 hours. If they meet specific requirements, they can be classified as “real estate professionals.” Investors must maintain accurate records of their real estate activities to support their claims. This status can impact increased deductions and reduce taxable income. We all play an essential role in helping you open the door to tax benefits and achieve status. The more detailed the records, the stronger the case for those extra deductions. It’s all about teamwork and meticulous record-keeping.

6. Rental Property Deductions: Accurate Accounting Real estate investors can deduct various expenses related to their rental properties, including maintenance, repairs, and property management fees. Being detail-oriented is in our DNA. One of the most significant mistakes I have seen is investors and other bookkeepers not recording transactions that do not reflect on the bank statement. If you are an investor reading this, you know what they are. Make sure every penny is accounted for to maximize profit and tax deductions. The only way you can achieve this is to track, categorize, and reconcile every day or week. Always check for accuracy by reviewing your reports every week. When you do it right, your financials for each property become apparent and will show your net worth in black and white.

your chosen entity structure, which provides a smooth tax planning and filing experience. You should consult your tax advisor and attorney for the proper entity structure: LLC, corporation, or trust, and for tax planning and strategy. It is a collaborative effort between you, your tax advisors, me, and my team to align with your goal as a real estate investor. Choosing the proper entity structure, such as an LLC or corporation, can impact tax liabilities and reporting requirements. The Golden Rule in real estate accounting is helping you make smart, informed financial decisions, maximize profits, and find ways to save on taxes. So, the important lesson here is that with the right team of bookkeeper, tax advisor, and legal professional, you as an investors can make smart money decisions, earn more money, and pay less in taxes. As a team, you can make your dreams come true! Gita Faust is the founder & CEO of HammerZen, which helps businesses save time & money by keeping track of The Home Depot purchases and efficiently importing receipts and statements into QuickBooks. National REIA members receive discounts on QuickBooks services and software. Learn more by visiting www.hammerzen.com/nreia.

7. Entity Structure: Tax Efficiency in Bookkeeping and Accounting As accounting advisors, we ensure that the financials are maintained within Real Estate Journal · Winter 2023-2024

Real Estate Journal

Obstacles to Avoid for a Successful 1031 Exchange

By David Gorenberg, JD, CES

any investors decide that they want to structure their real estate transactions as a 1031 Exchange, without knowing all of the steps and hurdles they can encounter along the way. But being well-informed before the sale of the first property is critical to the success of a1031 Exchange. Here we will discuss some common obstacles people face in a 1031 Exchange, all of which can be avoided by planning early.

1. Not Using a Qualified Intermediary Some taxpayers believe, mistakenly, that leaving the exchange funds at the title or escrow company is sufficient to establish a successful 1031 Exchange. However, the 1031 Exchange Regulations prohibit the taxpayer from having actual, or even constructive receipt of the exchange funds. This means that leaving the exchange funds with the title or escrow company, with the taxpayer’s attorney, or just simply not cashing the check, all violate the rule against having actual or constructive receipt of the exchange proceeds which nullifies the 1031 Exchange.

2. Using a Disqualified Party as Your Qualified Intermediary The Regulations define a Qualified Intermediary as a party who is not the taxpayer or a disqualified person, who by a series of assignments enters into an exchange agreement with the taxpayer and acts as the party to complete the exchange. A disqualified person includes anyone “who has acted as the taxpayer’s employee,

attorney, accountant, investment banker or broker, or real estate agent or broker” within the preceding two years, as well as family members and other prohibited relationships. When the taxpayer utilizes the services of his attorney to be his Qualified Intermediary, for example, the attorney is disqualified from serving as the Qualified Intermediary, and the exchange would be disallowed.

3. Selecting the Wrong Qualified Intermediary As in most other business settings, not all Qualified Intermediaries are created equal. At a minimum, we recommend selecting a Qualified Intermediary that is a member of the Federation of Exchange Accommodators (FEA), the only national association representing Qualified Intermediaries, and tax/legal advisors who are directly involved in the 1031 exchange industry. We also highly recommend selecting a Qualified Intermediary that has multiple Certified Exchange Specialists® (CES®) on staff. The CES® designation is the only independent, tested designation for 1031 exchange professionals. A Qualified Intermediary that has a team of attorneys on staff is also recommended, as not all exchanges are as routine as they may seem up front.

4. Not Hiring the Qualified Intermediary Before the Sale As mentioned previously, the taxpayer may not have actual or constructive receipt of the exchange funds. Phrased another way, the 1031 exchange must be established and in place at or before the closing of

the first property in the exchange. Vetting and selecting the Qualified Intermediary in advance of the closing is integral to a successful 1031 exchange.

5. Failing to Properly Document the Exchange Some people believe that the sole purpose of the Qualified Intermediary (QI) is to hold the exchange funds. While this is certainly an important function of the Qualified Intermediary, it is not the main function of a QI. For a 1031 exchange to be valid, there must be an Exchange Agreement between the taxpayer and the Qualified Intermediary; the taxpayer must assign their rights in the sale and purchase contracts to the Qualified Intermediary; and the taxpayer must notify all other parties to the exchange of that assignment. The Qualified Intermediary prepares these documents and ensures proper notification to the other parties to the exchange.

6. Trying to Exchange Ineligible or Disqualified Property Virtually every day we receive a phone call from someone who wishes to participate in a 1031 exchange involving vacation homes. Yet the statute is clear that the properties in the exchange must be “held for productive use in a trade or business, or for investment.” Under the Regulations, ‘disqualified property’ is property that was not held for productive use in a trade or business or for investment. Second homes, vacation homes, or other

Continued on Page 16

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LandTrustsMadeSimple.com/NREIA Real Estate Journal · Winter 2023-2024

Real Estate Journal

Obstacles to Avoid for a Successful 1031 Exchange ... continued from Page 15 property that is used exclusively by the taxpayer for their own enjoyment, with no business or investment motive, are therefore not qualified property and not eligible for a 1031 Exchange.

7. Fix-and-Flip Properties As noted above, the properties being exchanged must be “held for productive use in a trade or business or for investment.” Property that was acquired to be improved or rehabbed, and then immediately resold is viewed as inventory, rather than investment property. These so-called ‘fix-and-flip’ properties do not qualify as business or investment property, and are not allowed with a 1031 Exchange.

8. Not Exchanging Equal or Up in Value, and Equity There is a common misconception that taxpayers only need to reinvest the gains or profits on the sale of their Relinquished Properties. Others are of the mistaken belief that they only need to reinvest the cash that was generated at the sale, after satisfying loans and paying closing costs. Both situations will result in the taxpayer being exposed to potential tax liabilities. Rather, taxpayers should endeavor to exchange equal or up in fair market value, and equal or up in equity, and to replace any debt from the Relinquished Property or properties within 180 calendar days after the closing on the Relinquished Property. Failure to comply with the identification rules effectively invalidates the 1031 Exchange.

10. Failing to Consider a Reverse Exchange The IRS approved the concept of so-called “reverse exchanges” over twenty years ago. Yet many advisors and even more taxpayers are unaware of the concept,

and the incredible power that they provide. When real estate markets are incredibly hot, many taxpayers are fearful that they will not be able to find quality Replacement Property within the identification period, or to complete the purchase within the exchange period. Enter the reverse exchange. With a reverse exchange, the taxpayer acquires the Replacement Property before the sale of the Relinquished Property. The process is a little more complicated, but in a situation where both the Relinquished and Replacement properties are rental properties generating cash, the taxpayer has the potential to double their cash flow during the exchange period.

11. Partnership Issues Taxpayers often acquire properties together with other investors. When multiple investors pool their resources and acquire real estate inside of a limited liability company (LLC), that LLC is a entity – a taxpayer unto itself. The individual taxpayers do not have independent rights to perform 1031 exchanges, or not, beyond the confines of the LLC. If they wish to exchange independently of one another, they should plan for that well in advance of the sale of the property. Concepts to accomplish this include “drop and swap” and “swap and drop” are discussed in more detail here. They should consult with their tax and legal advisors, and plan carefully to maximize their compliance with 1031 Exchange rules, especially the concept of “held for investment.”

12. Settlement Statement Issues Some settlement agents do not fully comprehend the significance of the Assignment (discussed in number 5, above) on the 1031 Exchange. The Assignment effectively inserts the Qualified Intermediary as the seller of the Relinquished Property and the buyer of the Replacement Property. It is by virtue of these assignments that the taxpayer ‘exchanges’ the

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Relinquished Property for the Replacement Property. Because the taxpayer has assigned their interests in the underlying real estate contract, the settlement statement should identify the seller of the Relinquished Property and the buyer of the Replacement Property as ‘Accruit as Qualified Intermediary’ for [taxpayer’ name]. Further, non-qualifying expenses would ideally be handled outside of closing and can be identified as ‘POC’ on the closing statement. Additionally, overfunding the purchase of the Replacement Property, resulting in cash flowing back to the taxpayer, could result in a taxable event for the taxpayer. Each line item on the Settlement Statement should be scrutinized by the taxpayer and their tax/legal advisors to ensure compliance with the 1031 Exchange rules. As you can see, there are many opportunities for taxpayers to create headaches for themselves, or foot fault into non-compliance issues with a 1031 Exchange. As always, taxpayers are encouraged to discuss their plans with their tax and legal advisors before they embark on the path toward the sale of an investment or business use property, and to engage the services of a Qualified Intermediary, such as Accruit, before the first closing that will effectively start their 1031 Exchange. The material in this article is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice. David Gorenberg is a third-generation real estate investor, an attorney and Certified Exchange Specialist®, and serves as Director of Education for Accruit. Members of National REIA can take advantage of special pricing from Accruit. Learn more by contacting David directly at 215.770.6354, or by visiting www.accruit.com.

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Real Estate Journal

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Real Estate Journal

How to Report Fair Market Value of Hard-to-Value Assets ... continued from Page 1 Private Debt

So how do you submit an accurate value of these hard-to-value assets? Let’s look at how to do it, one asset class at a time.

If you have loaned money to a private company or individual, the debt can be valued in similar fashion to a real estate promissory note. The value of the debt is the remaining principal balance left owing, plus any accrued or unpaid interest outstanding. If need be, a thirdparty appraiser, valuer, or business advisor can offer an expert opinion of the value of the debt which should be acceptable. If you have a self-directed IRA or solo 401(k), reporting to the IRS the value of hard-to-value assets may feel like an extra layer of burden on top of an already burdensome relationship between you and the government. But as many happy retirees can attest, the ability to control your retirement strategy and enjoy index-beating taxdeferred returns can make the extra hassle well worth it. The preceding article is not intended as, nor should it be considered, advice of any kind. It for educational purposes only. Please consult qualified financial and tax specialists. Members of National REIA can save up to $784, including a free consultation with the founder, one year of VIP customer service, and the opportunity to set up a new account for only $1. Plus, there are no annual fees until your first investment. You’ll also receive one free expedited transaction processing and two complimentary outgoing wires for your real estate deals. Visit https: www. iraasset.app/nationalreia for more info.

Real Estate Equity Publicly traded REITs and real estate mutual funds are easy to value. Privatelyheld real estate, REITS, partnerships and funds are another matter. The value of these holdings are set by what a buyer on the open market is willing to pay for them. If you have not listed the property for sale recently, how do you determine its value?

Single-Family Homes, Townhomes and Condos If the real estate is a single-family dwelling, you have an “easy out” for estimating its value. The IRS will always accept a certified appraisal. Three estimated values from a reputable real estate data aggregator, averaged, may be acceptable when the IRS updates their documentation based on today’s technologies. You probably know some of the more popular companies in this niche — Zillow, Trulia, Realtor.com, Redfin, etc. Each of these companies tracks data on nearly every type of single family residential real estate in the country — even if it is not currently for sale. They provide an up-to-the-minute estimate of the property’s value, based on data like recent sales of similar dwellings in the same neighborhood, city or town, and from property tax records. Zillow famously calls this a “Zestimate.” As any good REALTOR will tell you, these estimates are not necessarily a completely reliable indicator of what the home will sell for, since estimates don’t take into account condition of the dwelling or the value of added amenities, such as a finished basement or remodeled kitchen. As long as you average estimates from three sources, the asset’s value should comply with the terms of your retirement account. If the IRA or 401(k) is only a partial owner of the property, take take the average of the three values and multiply them by your percentage ownership interest. For example, if your selfdirected IRA holds a 25% interest in a property, you will report one quarter (25%) of the averaged value as the asset value within the IRA/401K. Government property taxing authorities may also prove to be accurate sources of FMVs dependent on the methods and acceptable standards.

Harder-To-Value Properties Commercial properties like multifamily dwellings, apartment complexes, office buildings, retail and mixed-use spaces, industrial facilities and real estate ventures in which the IRA or 401k is a participant don’t have as online estimates of value. The same goes for unique or hard-to-classify property, such as parcels of raw land or historic properties on the national register. For real estate ventures in which the retirement account is a partial owner, the sponsor of the venture or general/ 18

operating partner usually issues some form of valuation, such as a statement of net asset value, in the case of shares owned by the IRA or 401k. In the case of more directly-owned hard-to-value real estate equity interests, you may need to acquire an opinion of value from a licensed real estate appraiser or broker. Note that this doesn’t have to be a fullscale appraisal, with all the costs and burdens that come with it. It just needs to be a formal opinion of value by an established professional qualified to make such an appraisal. The caveat is that the appraiser or broker you use has to be an independent third party, with no personal or business interest in the property other than being hired to opine on its value.

LLCs and Partnerships If the retirement account has invested passively in a syndicated LLC or partnership, the sponsor of the syndication is required to submit Form K-1 to each investor. This tax form includes, among other things, the value of the investor’s ownership interest. The retirement account administrator may accept this form as validation of the asset value within the retirement account. Please note that the values declared on the K-1 may not take into account depreciation or other factors, so we always recommend seeking advice from your financial or tax specialist.

Real Estate Promissory Notes If the IRA or 401(k) owns the mortgage note on real property, valuing this asset is usually fairly easy. The value is the

principal balance owed, plus any accrued or unpaid interest. If the note is serviced by a third-party company, ask them for a statement. If all else fails, you can solicit the opinion of a third-party appraiser or qualified financial professional to estimate the value of the note. Since valuations are what a buyer would expect to pay at the time of the valuation, some notes are often sold at a discount, so the true valuation may be less than the unpaid balance and accrued or unpaid interest. Consult your financial or tax specialist.

Carl Fischer and Maggie Polisano are the founders and principals of CAMA Self-Directed IRA, LLC (dba CamaPlan). CamaPlan is a national, self-directed tax advantaged plan administrator company headquartered in Ambler, PA.

Private Equity If the retirement account owns stock or some other equity interest in a private company — whose shares are not traded on a public stock exchange — there is no daily public statement of the value of that equity position. Sponsors or general partners of these types of investments usually provide estimated valuations, share prices or net asset values. In the absence of an independent audit, valuations like these should merit close inspection of the basis used for valuation. In the case of a poorly-supported opinion by the investment sponsors or operating/ general partner, you should solicit the opinion of a third-party expert. Who should that expert be? It depends on the size of the business and the industry. Certain accountants who specialize in the industry or type of business may be qualified to offer an opinion of value that the IRS will accept. You might also try a certified valuer or appraiser, a business advisor, business broker, or mergers-and-acquisitions specialist. Real Estate Journal · Winter 2023-2024

Real Estate Journal

Real Estate Journal · Winter 2023-2024

Real Estate Journal

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Real Estate Journal · Winter 2023-2024