INVESTMENT PROPERTY NEWS

VOLUME 13
THE DEPRECIATION GAAP AND  REITS
        Have you ever tried to explain the depreciation on your tax return to a loan officer at the bank?  If so you can see the accounting problem faced by REITs. Most publicly traded companies adhere to the rules known as GAAP.  Under GAAP procedures depreciation would severely depress the stated earnings of the REITs. For that reason REITs express their earnings as FFO or Funds From Operations.  This adds depreciation back into the cash flow.  It also causes confusion for investors, because the investors are used to GAAP.
        In order to move closer to GAAP a new method has been developed called EBSD.  That stands for Earnings Before Structural Depreciation.  This method adds back the durable items that are depreciated over 30 years or more.  It leaves things with shorter depreciation cycles as an expense.
THE COURT SLAMS THE DOUBLE WHAMMY
        Formerly, when a violation of EPA laws occurred, the state would file an action and the feds would also file an action.  The process is called “overfiling”. Under the Resource Conservation and Recovery Act, the EPA is allowed to delegate authority to the states to enforce hazardous waste regulations.   The court has said “no fair”.  If the feds have delegated the authority to the states to regulate, they have also delegated the responsibility for enforcement.
USING REAL ESTATE TO BUILD AND PRESERVE WEALTH.
        In the last several issues we have discussed acquisition and portfolio strategies. Now let’s say it is time to take the money and run.  You have everything tied up in real estate and you just don’t want to do that anymore.  Here are 5 exit strategies for people who have had successful real estate investment careers.
        #1 Sell everything, pay a whole bunch of taxes, buy a new investment vehicle and go on from there.
        #2 Sell the properties, taking back mortgages, pay taxes on the installment sale method. This lets most of your investment dollars keep working.  This creates a self-liquidating investment.  You either need to die before the income runs out or have a new investment plan to keep your net worth growing.
        #3 Sell the properties that you are actively managing.  Use a 1031 exchange.  Buy very solid net leased properties that require little or no ongoing management.  This method provides permanent income and a residual for your estate.  Capital gains taxes are deferred at least until you die.  A good estate plan can preserve the wealth after your demise.
        #4 Sell the properties that you own.  Use a 1031 exchange to buy resort properties or residential properties good enough that you are willing to live in them.  Naturally your intent must be to keep them for investment purposes.  Intent, of course, is subject to change.  Change your intent on the properties, one at a time.  Live in the property where your intent changed for at lease two years and sell it using the principal residence exclusion to avoid most or all of the capital gains tax.  If you are married you can avoid taxes on $500,000 on each sale.  If you are single you can avoid taxes on $250,000.  It may be worth getting married if you have a lot of property.
        # 5 Keep your property.  Hire a really good Asset manager.  You need more than a traditional property manager if you want to just walk away from your property and play.  You need someone who cares about long-term preservation and enhancement of value.  This may even be a good time to sell a part interest in the portfolio to someone who will make a commitment to a long-term strategy.
SEGREST INTERNATIONAL JOINS ONE WORLD REAL ESTATE NETWORK
        In an effort to gain better market access for our customers, Segrest International, Inc. has joined the ONE WORLD REAL ESTATE NETWORK.  For more information visit our website at….www.1wre.com
THE IRS HAS MADE RULES FOR REVERSE EXCHANGES.
    They are pretty much what you would expect…. The reverse of a regular Starker exchange.  Instead of identifying a replacement property and buying it, one identifies a relinquished property and sells it.  The time periods are the same.
Special thanks to Karen Duncan Masters for grammatical review.

This Page last updated 2/28/01