RENT Magazine discusses the latest investing, legal, screening, and tech trends in the rental industry. Contributors include attorneys, tax experts, investors, and real estate influencers. Stay in the know and read RENT Magazine for FREE.
WINTER 2023
Syndication Company Gary Lipsky
Philanthropist Kaylee McMahon
Investing Program Ashley Wilson & J Scott
Book Sam Liebman
Book Rob Beardsley
Investment Advisor Pamela Goodwin
Broker Lisa Cozzi
Book Jason Kogok
AAOA’s Best of 2022 Awards
Investment Course Michael Blank
Influencer Destiny Roxas
Podcast Charles Dobens
Syndicator Matt Picheny
Attorney Garrett Sutton
Property Manager Andrea Hardaway
TV Show Glenn & Amber Schworm
Mortgage Expert Brian Sacks
Educator Steve Rozenberg
Lending Expert Julie Anne Peterson
Land Expert Mark Podolsky
Land Expert Cheryl Sain
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THE OFFICIAL PUBLICATION OF THE AMERICAN APARTMENT OWNERS ASSOCIATION
AAOA.COM
TEAM
Editor in Chief Robbie Cronrod Staff Editor Nancy Abrams
CONTENTS
Marketing Manager Alexandra Alvarado Contributors Alice LaPlante Brad Barth, Esq. Adrian Smude Amanda Han, CPA Andrea Hardaway Anthony Russell Ashley Wilson Bob Voelker Cody Rudolph Courtney Shier Cynthia Schmidt Daniel Sharabi Daniel Teitelbaum Dave Mencel David Evans Dr. Michael Threatt
06 11 16 21
WHAT TO DO WHEN A GOOD TENANT GOES BAD (AND HOW TO AVOID IT)
IRS CRACKS DOWN ON LANDLORDS USING PAYMENT APPS TO COLLECT RENT
RENT CHANGES IN RENTOMETER’S TOP 4 MOST ANALYZED CITIES
FIVE STEPS TO AVOID A FAIR HOUSING LAWSUIT IN 2023 THE CORPORATE TRANSPARENCY ACT: THE FINAL RULES ARE IN – NEW REQUIREMENTS AHEAD WHY YOU SHOULD CONSIDER INCLUDING A 721 EXCHANGE IN YOUR DST 1031 EXIT STRATEGY OPTIONS
Dwight Kay Ed Pluchar
Elizabeth Campbell Garret Sutton, Esq. Gita Faust Glenn and Amber Schworm J. Scott Jason Kogok Jon Simpson Julie Anne Peterson Kathelene Williams, Esq. K’Dia Brooks Lauren Lieb Leslie Margolies, Esq. Lisa Cozzi Nancy Abrams Norm Spivey Pam Goodwin Rebecca Peterson Ryan Hoover Sam Liebman, CPA Scott Varney Shiral Torres Terrie Schauer, PhD Terry Painter The Rentometer Team Tom Wheelwright, CPA William Whitehouse
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36 30 34 48 50
CELEBRITIES ON THE MOVE
AAOA’S BEST OF 2022
ELIMINATE THE NEED FOR 1031 EXCHANGES USING A COMPLEX SPENDTHRIFT TRUST HOW DEMAND FOR IOT-ENABLED TECHNOLOGY IS TRANSFORMING RENTAL PROPERTIES
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Welcome to 2023! The new year is a time to plan for an improved future. This issue focuses on your financial health and long-term strategies to take your business to the next level. As 2022 ended, AAOA scoured the nation for real estate experts, from investors to authors to podcasters, and awarded those at the top of their game in 20 categories AAOA’s Best of 2022 Award. Read on to learn investments the government will pay you to make, how to invest in short-term rentals, and rental market predictions from 27 real estate pros. Our experts also discuss how to increase your NOI, security deposits tips, and estate planning strategies including Complex Spendthrift Trusts and 721 and 1031 Exchanges. Property management issues, such as upgrading your internet tech, utilizing payment apps for rent collection, and using your website to generate more leases are covered in depth. Also, discover what to do when a good tenant goes bad. Legal questions addressed include 5 mistakes to avoid in small claims court, the Corporate Transparency Act, and changes to Los Angeles’ transfer taxes. Thank you for reading RENT. We hope that 2023 is professionally and personally fulfilling for you!
PREDICTIONS 55
2023 REAL ESTATE INVESTING
66 71 77 74
SUSTAINABILITY: CONSIDER YOUR INTERNET TECHNOLOGY
5 MISTAKES TO AVOID IN SMALL CLAIMS COURT
3 INVESTMENTS THE GOVERNMENT WILL PAY YOU TO MAKE IN 2023
BOOST YOUR NOI IN A TOUGHER HOUSING CLIMATE OF RISING UTILITY COSTS AND SOFTENING RENTS HOW TO USE YOUR WEBSITE TO GENERATE MORE TRAFFIC AND NEW LEASES
82
87
WHY ARE SECURITY DEPOSITS SO MISUNDERSTOOD?
92
HOW TO MAKE A LONG-TERM STRATEGY OUT OF SHORT-TERM RENTALS APARTMENT OWNERS BEWARE: LOS ANGELES PASSES TAX MEASURE ULA WHERE THERE’S A WILL… AN ESTATE PLANNING GUIDE FOR REAL ESTATE INVESTORS INSURANCE OUTLOOK FOR 2023: RENTAL AND MULTIFAMILY PROPERTIES
97
100
105
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PAGE 5
It’s easy to describe a good tenant. They pay their rent on time, respect your property, and are good neighbors. In other words, they do not turn your positive cash flow into a negative loss. Unfortunately, no matter how diligent you are when selecting a new tenant, a person’s circumstances can change, throwing them into a negative position. A sudden job loss or lengthy illness can transform a formerly perfect tenant into a tenant that begins costing you money instead of adding to your income. But how do you find such a paragon of virtue? And what can you do if a tenant goes bad? WHAT TO DO WHEN A GOOD TENANT GOES BAD (AND HOW TO AVOID IT)
THE NIGHTMARE OF EVICTION When thinking about the negative consequences of a bad tenant, a landlord’s first thoughts naturally turn to removing them from the property. Let’s look at how a bad tenant can turn your investment dreams into a nightmare, starting with the dreaded eviction. From legal fees and court costs to property damages and lost rent, the cost of an eviction ranges from $3,500 to $10,000. The numbers quoted in this article are based on the national average for monthly rental rates. Court costs and legal fees will vary from city to city and state to state.
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THE COST OF AN EVICTION RANGES FROM $3,500 TO $10,000.
AVERAGE EVICTION COSTS
Locksmith $150 Legal fees $500
Lost rent (3 months) $4500
Court costs $50
Debt collection success rate* 17%
Property turnover costs $1750
* If you purchased LeaseGuarantee protection when the lease was signed, you will collect the amount of your judgment up to the amount of the contract. More on this later.
Keep in mind that you are not only out the back rent owed to you. The tenant will continue to avoid paying once you begin the eviction process, which can take months to complete. They may even retaliate by damaging the property.
Other fees include processing paperwork, bank fees, and tenant screenings. For landlords that employ property management companies, this also includes the property management fee.
WHEN CAN YOU EVICT?
Most states are extremely strict when it comes to the laws of eviction, so it is particularly important that you work with a legal expert in the field. It should be noted if the tenant wins in court,
they can continue staying at the property and depending on how your attorney’s fees clause is written in your lease, you may be liable for their court filing and attorney fees too.
5 Common Reasons to Pursue Eviction:
WHAT IS JUST CAUSE? In some cities and states, you cannot terminate a lease, even if it has expired, unless you have “Just Cause”. Just Cause eviction ordinances are a form of tenant protection designed to prevent arbitrary, retaliatory, or discriminatory evictions by establishing that landlords can only evict renters for specific reasons. For example, California’s Tenant Protection Act and New Jersey’s Anti-Eviction Act limit when landlords can terminate a lease, with only a few exemptions. In New York City, the Just Cause eviction requirements only apply to rent-controlled units, but proposed legislation may change that soon. Portland, Oregon, requires landlords to pay renters’ moving costs if they are evicted without cause or are forced to move because of a rent increase of 10 percent or more. And there are more cities and states that may pass Just Cause ordinances in the future.
1.
Persistent non-payment of rent
2.
Violations of the terms of the lease
3.
Damages to the property and its contents by the tenant
4.
Illegal drug activity
5.
Ignoring requests to vacate the property
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5 WAYS TO REDUCE OR PREVENT THE COST OF A BAD TENANT Thoroughly screen your rental applicants 1 The biggest mistake a landlord can make is thinking they can save money by not running a comprehensive tenant credit report and background screening. With the current increase in application fraud, it is not enough to just use your intuition or a basic report to select a new tenant. For a nominal charge, which you can pass on to the prospective tenant as an application fee, you can quickly weed out the very undesirable applicants and home in on the ones who honor their financial obligations, have not been evicted in the past and who do not have a criminal record. Don’t be fooled by an applicant who arrives at your property in an expensive car and dressed in designer clothes. They can have all the money in the world and still not pay their bills. AAOA’s Gold tenant screening package can show you their debt obligations, payment history, true identity, previous addresses, and more which may paint a different picture. DON’T BE FOOLED BY AN APPLICANT WHO ARRIVES AT YOUR PROPERTY IN AN EXPENSIVE CAR AND DRESSED IN DESIGNER CLOTHES.
2
Get LeaseGuarantee
LeaseGuarantee is a unique program that covers rent, damages, legal fees, and costs owed by a tenant to their landlord in the event a court awards a judgment in favor of the property owner. The LeaseGuarantee contract, which is valid for one year and covers all individuals on the lease agreement, can be paid for by the landlord, a qualified tenant or both and the protection is renewable. Every AAOA credit report includes the LeaseGuarantee Analyzer which will tell you if your applicant qualifies for the program and how much the protection will cost for that individual.
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3
Consult with an attorney
Filing an eviction incorrectly can cause you significant losses, especially if your rental is in a tenant friendly state. In some cases, a small mistake can mean having to start the eviction process over or getting countersued by your tenant. Be sure to consult with an attorney. For quick questions you can use a low-cost legal chat service such as JustAnswer, to chat with an attorney in your area.
IN SOME CASES, A SMALL MISTAKE CAN MEAN HAVING TO START THE EVICTION PROCESS OVER OR GETTING COUNTERSUED BY YOUR TENANT.
Offer a cash-for-keys deal
This method involves the landlord offering a few hundred dollars of cash to the tenant to move out and acts as an incentive for tenants with cash flow problems. Paying the tenant this cash will be less costly than eviction and can save you a great amount of stress. Use AAOA’s free cash-for- keys agreement to get started.
5
Use free or low-cost marketing services
To minimize expenditures and get your unit rented out as quickly as possible consider using:
• ApplyNow, the free marketing link available to everyone through AAOA. Anybody looking for a new rental home can access it from your social media, website, or digital listing to begin an application. They can pay for the credit report and background screening online and can submit important documents, such as their paystubs and ID.
• Free or low-cost rental listing services such as Craigslist or Zillow • Incentives such as free parking or a temporary rent discount • Social media posts • Newspaper ads • Printed signs
FINAL THOUGHTS Savvy landlords rely on thorough screening of all potential renters to avoid significant income loss and the aggravation that comes with renting to a bad tenant. If a good tenant goes bad, they have a LeaseGuarantee in place and can act quickly with the advice of legal experts to pursue an eviction or cash for keys deal. And when the tenant is finally out, they know how to quickly find a new one.
Remember that residential tenancy laws generally favor the tenant, so make sure that you do as much due diligence as possible up front to prevent future problems. Always keep in mind the true costs of renting to a bad tenant and conduct your due diligence with a comprehensive AAOA credit report and background screening.
NANCY ABRAMS Assistant Editor American Apartment Owners Association (866) 579-2262 nancy@aaoa.com
Nancy Abrams has enjoyed a long career in real estate marketing throughout Southern California and Las Vegas. She formerly represented 19 Merrill Lynch Realty branch offices, property managers The Roberts Companies, new home developers, including master planned communities Peccole Ranch and The Valencia Company and shopping centers for Sandy Sigel of NewMark Merrill.
PAGE 9
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PAGE 10
Payment apps are all the rage these days thanks to their ease of use and convenience. Venmo, Zelle, Cash App, and PayPal are among the most popular apps, and some landlords use them to collect rent. If you haven’t thought much about the tax implications of using payment apps, now is the time to start. The IRS has begun cracking down on payment apps in a big way. So, what does this mean for rental property owners? If you use payment apps to collect rent, you might find yourself in the crosshairs of the IRS. IRS CRACKS DOWN ON LANDLORDS USING PAYMENT APPS TO COLLECT RENT
HOW THE IRS IS COMING AFTER PAYMENT APP USERS Before 2022, only payment app users who did more than $20,000 or 200 transactions in a given year would receive a 1099-K. This is rare for a small business, as most transactions typically go through credit cards, ACH, or other means. In 2022, Congress amended the tax rules so that payment app users who do more than just $600 in transactions will now receive a 1099-K. Goods and services providers all over the country, such as independent landlords, freelancers, artisans, and food truck owners, will now be required to report even a small amount of taxable income to the IRS.
PAYMENT APP USERS WHO DO MORE THAN JUST $600 IN TRANSACTIONS WILL NOW RECEIVE A 1099-K.
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Zelle is a true peer-to-peer payment app; funds transfer directly from one checking account to another. Venmo and PayPal, on the other hand, require accounts and act as a "middleman" between users. Because of this peer-to-peer functionality, Zelle has no obligation to report your transactions to the IRS because they aren't technically a "third-party settlement organization." Don't get too excited, though — Zelle doesn't report your income, but that doesn't mean the IRS won't come looking for it. Rent payments are taxable income, and when collected through a payment app, they still need to be reported in a 1099-K. Landlords using Zelle to collect rent will need to find, fill out, and submit a 1099- K and any other necessary tax forms without Zelle's help. To make matters worse, Zelle has no built- in functionality to see your transaction history or to tag certain transactions, like rent payments. If you want to see how much money you sent or received through the app, you'll have to request a statement from your bank and sift through it manually. ZELLE TAXES: SINK OR SWIM, THEY DON’T CARE EITHER WAY
Quick Recap of Zelle’s policies
• Zelle is "hands-off" when it comes to your taxes, for better or worse. • They will not report transactions to the IRS. • They will not issue you a 1099-K. • They have no way to track or organize your transactions in-app.
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Venmo does a slightly better job at trying to help landlords report their taxable income. But there are still several things that could be improved regarding tax reporting and business functionality. To start with, Venmo has restrictions that discourage users from making business transactions with each other unless they have a verified business account. VENMO TAXES: THEY’LL HELP, BUT YOU’LL PAY FOR IT Venmo Personal vs. Business Profiles Does a Venmo Business Profile Save the Day?
A landlord using a personal Venmo profile to collect rent payments violates Venmo's User Agreement, and the company can review and deny any payments they find. Venmo's Business Profile can help you get around some issues by automatically tagging every payment you receive as "goods and services." But business profiles are only available to some and come with additional fees. To date, a Venmo Business Profile will charge 1.9% + $.10 per transaction. (Source: Venmo Business Profile article)
If approved for a Business Profile, you can start accepting tenant payments. Venmo will categorize that rental income and provide you with a 1099-K. So, if you’re willing to jump through a few hoops, Venmo is pretty good at tracking money that comes in. But what about the money that goes out for expenses? That’s a different story. Venmo doesn’t categorize expenses very well, and there are limits to how much you can send out in payments (if Venmo doesn’t decline them outright). Plus, if you wanted to connect to accounting software like QuickBooks — you’re out of luck. Venmo doesn’t play nice with integrations, so there’s no way to connect your account with whatever software you use to track expenses, catalog receipts, or manage customer information.
A VENMO BUSINESS PROFILE WILL CHARGE 1.9% + $.10 PER TRANSACTION.
Quick Recap of Venmo’s policies
• Venmo will report business transactions to the IRS. • They will issue a 1099-K, but only if you have a Business Profile. • You must submit paperwork and be approved for a Business Profile. • Venmo doesn’t integrate with bookkeeping software (i.e., Quickbooks).
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You might use your Venmo app to send $100 to your nephew for his birthday and then turn around and collect a $100 pet deposit from a new tenant. Unless you’re meticulous about noting every transaction and keeping separate personal and business bank accounts, you’re likely to miss something — or worse, risk commingling funds. CONCLUSION: PAYMENT APPS AREN’T BUILT FOR BUSINESS
The ability to accurately track and report ALL of the transactions in your business is out of reach for most payment apps. These limitations expose rental property owners to increased tax liability and even a tax audit. Instead of trying to “duct-tape” your payment app together with an Excel sheet, a handful of bank statements, and a tax pro, you should probably find an all-in-one platform for rental property finances. For example, Azibo’s free platform was built from the ground up with the “everyday” property owner in mind. It comes out of the box with built-in tutorials to help soften the learning curve and includes automation that reduces the number of steps you’d normally take to complete a task.
Here is a quick recap of what to look for in a rental property management app:
• Online rent collection. • A tenant ledger showing what’s been paid and what’s still owed. • A system for tagging and organizing income and expenses separately. • Tax document preparation on autopilot (including the 1099K).
CODY RUDOLPH
Cody Rudolph is a real estate investor and digital marketing expert who writes about real estate investing, marketing, finances, software, and more at CodyRudolph.com. This article was featured on Azibo’s website, the free all-in-one financial platform for landlords and real estate investors. Save time, stay organized, and achieve passive income with tools such as online rent collection, landlord tax prep, and accounting software, landlord insurance, rental applications, and much more. To learn more visit Azibo.com, email info@azibo.com, or call (855) 920-9907.
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METHODOLOGY
SUMMARY In this rent report, we analyze how apartment rent prices have changed year-over-year from Q3 2021 to Q3 2022 in Rentometer’s top four most analyzed cities.
• Geography: The scope of this report is Chicago, IL; Denver, CO; Los Angeles, CA; and San Diego, CA.
• Property type: One, two, and three-bedroom apartments with any bathroom count.
• Analysis: Average rents were analyzed year-over-year for each city.
• Data: New rent data collected at the beginning and end of each quarter, excluding outliers below $500 and above $10,000.
ANALYSIS Rentometer’s data and analysis for the selected cities is presented below: Q3 Apartment Rent Changes in Chicago, IL
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Q3 Apartment Rent Changes in Denver, CO
Q3 Apartment Rent Changes in Los Angeles, CA
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Q3 Apartment Rent Changes in San Diego, CA
TAKEAWAYS
Average rent prices increased for all bedroom types for each of the cities analyzed from Q3 2021 to Q3 2022. Chicago had the largest year- over-year rent increase of 22% for one-bedroom apartments. San Diego had the largest year-over- year rent increases for two- and three-bedroom apartments of 36% and 37%, respectively.
As always, thorough due diligence and assessment of current market conditions is critical to making successful real estate decisions. Whether you are setting your rent or evaluating an investment property opportunity, we recommend identifying sources of reliable market information and contacting local professionals familiar with your target rental markets.
This article was contributed by the Rentometer Team Visit rentometer.com to analyze rental addresses and neighborhoods today. Rentometer uses proprietary technology and data to provide a thorough rent comparison analysis in seconds.
PAGE 18
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PAGE 20
One of the most important questions all real estate investors should ask themselves is “What is my long-term strategy?” In the case of Delaware Statutory Trust (DST) investors, exit strategies come into play once the investment period has concluded, or gone “Full Cycle.” WHY YOU SHOULD CONSIDER INCLUDING A 721 EXCHANGE IN YOUR DST 1031 EXIT STRATEGY OPTIONS
When an investment goes full-cycle, investors need to evaluate the entire spectrum of options available to them, including:
WHAT IS FULL CYCLE? Full Cycle is a term used to describe a DST property that is purchased on behalf of investors and then after a period of time, is sold on behalf of investors.
• Selling the investment and triggering a significant tax event
• Entering into a 1031 Exchange (Delaware Statutory Trust or other eligible like-kind property, such as NNN property)
• 721 Exchange into Sponsor’s designated investment (REIT for example)
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PROVIDING INVESTORS OPTIONS FOR THEIR DST 1031 EXIT STRATEGIES Kay Properties has helped thousands of clients invest in more than $30 billion of DST investments since its founding in 2010, so they understand how important exit strategies are for investors and offer clients multiple choices for their investment exit strategies. Some firms tell their investors the REIT avenue is the only exit strategy available for their DST investment and fail to mention that there are other exit strategy options available. Even worse, other firms don’t inform their investors at all that their DST investments will automatically be converted into a REIT investment, creating a so-called “forced conversion.” With Kay Properties, every option is presented up front with full disclosure to allow clients to completely understand the business plan for each DST investment. Investors can decide for themselves what exit strategy they want to exercise based on their own individual circumstances. KAY PROPERTIES HAS HELPED THOUSANDS OF CLIENTS INVEST IN MORE THAN $30 BILLION OF DST INVESTMENTS THE 3 MOST COMMON EXIT STRATEGIES FOR INVESTORS Each of the exit strategy options below have potential advantages and disadvantages for investors, so each investor should consult their real estate attorney or Certified Public Accountant (CPA) before making an investment decision.
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Option 1: Cashing Out Because of tax consequences, this is usually the least appealing option for investors. However, there are times when investors opt to sell their DST 1031 investments and simply cash out, deciding to pay the associated tax liabilities that can quickly add up.
This final tax bill for a lot of investors may be very large, convincing many to seriously consider the next two exit strategies: the 1031 exchange or a 721 exchange.
Option 2: 1031 Exchange
A 1031 exchange (also known as a like-kind exchange) is the most popular and therefore most familiar exit strategy for investors following a DST investment full- cycle event. Because section 1031 only defers the gain that would otherwise be recognized in a taxable sale, many real estate investors do not sell their replacement properties. They continue to exchange it and continue the deferral by exchanging over and over. In this way, investors enter a series of exchanges, sometimes completed over decades. This is commonly known as a “swap ‘til you drop” strategy and has proven to be an effective strategy for building real estate wealth over time and creating an estate planning tool.
Option 3: 721 Exchange Option
Another powerful tax deferral tool that is lesser known by even experienced investors is called a 721 exchange. The IRC Section 721 offers investors an additional exit strategy outside of selling or entering into another 1031 exchange.
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Along with tax deferral, other potential benefits of a 721 Exchange Option include:
How a 721 Exchange Works After an investor invests in a
Delaware Statutory Trust property, and the property goes full cycle, investors can choose to participate in a 721 exchange. This means the DST investment will be absorbed by a larger Real Estate Investment Trust Operating Partnership. Operating Partnerships are the entities through which REITs typically acquire and own their properties. Once the DST property is absorbed into the REIT, the investor’s interest will get converted into Operating Partnership Units (OPs). This is all done on a tax- deferred basis utilizing the IRC Section 721 exchange.
• The ability to realize the economic benefits of the REIT’s entire property portfolio (including distributions of potential monthly operating income, potential capital appreciation and property diversification*) • Liquidity options by partial conversion of OP Units to REIT shares (investor can “peel off” what they need and pay the taxes on just that amount)
• The ability to fully divide OP Units for estate planning among their heirs
• The ability to provide heirs with a step up in tax basis, just as they would have been able to with their individual property.
The main caveat to the Section 721 exchange is that once an investor proceeds with the exchange, they lose the ability to continue 1031 exchanging and deferring taxes. They now only have the option to convert their Operating Partnership Units to REIT shares and pay their capital gains tax. Therefore, investors who are in the midst of estate planning and know that upon their passing, their heirs will receive a step up in tax basis, which will eliminate the capital gains tax, often consider the Section 721 exchange. Which of these 1031 exchange alternatives is best? Every case is specific, so it’s best to consult a professional who can recommend the best 1031 exchange options based on the investor’s unique situation. Contact Kay Properties (855) 899-4597 or info@kpi1031.com for expert guidance.
DWIGHT KAY Founder and CEO Kay Properties and Investments (855) 899-4597
Dwight Kay is the Founder and CEO of Kay Properties and Investments, LLC. Kay Properties is a national 1031 exchange investment firm. The www.kpi1031.com platform provides access to the marketplace of 1031 exchange properties, custom 1031 exchange properties only available to Kay clients, independent advice on sponsor companies, full due diligence and vetting on each 1031 exchange offering (typically 20-40 offerings) and a 1031 secondary market. Kay Properties team members collectively have over 400 years of real estate experience, are licensed in all 50 states, and have participated in over $30 Billion of 1031 investments.
Disclaimer : This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing. IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation. There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed. Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. Securities offered through FNEX Capital, member FINRA.
PAGE 24
The Corporate Transparency Act was enacted in January 2021 to combat the contribution and circulation of illicit funds in the United States. Many policy makers believe that this will deter criminals and their criminal acts. However, the effectiveness of this Act is yet to be seen. The Corporate Transparency Act requires both companies and beneficial owners to submit a report to the Department of Treasury’s Financial Crimes Network (FinCEN). Both requirements are discussed below using an example. THE CORPORATE TRANSPARENCY ACT: THE FINAL RULES ARE IN – NEW REQUIREMENTS AHEAD
“Larger Pockets, LLC” is a profitable property management company founded by Brandon, David, and Tony. The three of them each agreed to own 1/3 of the LLC’s membership interests. Rob, a friend of theirs, came aboard later. While he didn’t own any membership interests, he agreed to be the manager of Larger Pockets. Each of the four men have different backgrounds and different areas of expertise. This wide range of available knowledge has resulted in Larger Pockets’ success. On top of employing 18 employees, the company generated over $6 million in revenue in the past year. David recently found out from a friend that Congress had passed the Corporate Transparency
Act. Nervous about what impact it would have on Larger Pockets, he went to the other three partners to voice his concerns.
• How would it affect their business?
• How would they have to report personal information to the government?
• What penalties would they face if they failed to comply?
The answers to each of these questions follow in this article.
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WHICH COMPANIES ARE REQUIRED TO FILE?
BENEFICIAL OWNERSHIP REQUIREMENTS So, who exactly is a beneficial owner of the company? The Act lists two criteria, each being sufficient on its own to meet the Act’s definition: 1. The first criteria being that the owner owns or controls at least 25% of the reporting company’s ownership. 2. The second criteria being that the owner exercises “substantial control” over the reporting company. This begs the question, what constitutes having “substantial control” over a company? It can encompass many different forms. It can mean serving as a company officer, having the power to appoint or remove members, making decisions for the company, and exercising “substantial influence” over the company’s important matters. In addition, the government can also look at other characteristics not listed to determine if an owner has “substantial control” over the company. Clearly, this definition is not entirely definite. Because Brandon, David, and Tony each own 1/3 of the LLC, they automatically meet the 25% requirement. They must report as individuals. On the other hand, Rob does not own any interest in the LLC. But because Rob serves as the manager and is thus a company officer of Larger Pockets, he must still report.
Under the Act, companies must file if they are either formed by filing a document with the secretary of state or similar tribal office, or formed in a foreign country that’s registered to do business in the United States. The Act also states many exemptions, most notably the “large operating companies” exemption. The requirements for being a “large operating company” include:
• Employing more than 20 full-time employees
• Accruing more than $5 million a year in gross receipts or sales
• Operating from a physical office in the U.S.
If your business meets these three criteria, you are exempt from filing.
While Larger Pockets meets two of the three requirements of a “large operating company,” it only employs 18 people. Thus, the exemption doesn’t apply to them. Larger Pockets must still report to FinCEN.
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WHAT MUST BE REPORTED There are two reports that need to be submitted to FinCEN.
FIRST, COMPANIES MUST REPORT FOUR THINGS. THESE INCLUDE:
SECOND, BENEFICIAL OWNERS MUST REPORT FOUR THINGS. THESE INCLUDE:
1. The name of the beneficial owner 2. Their birthdate 3. Their residential street address, and 4. A “unique identifying number” (a passport or a driver’s license). An image of the passport or license is also required.
1. The company’s name and any trade name or DBAs (if applicable) 2. The business street address 3. The formation jurisdiction, and 4. A “unique business number” (this can be a company’s EIN number from the IRS).
For companies formed before January 1, 2024, they must report this information before January 1, 2025. For companies formed after January 1, 2024, they must report this information within 30 days.
Because Larger Pockets was in existence before January 1, 2024, these reports are due by January 1, 2025 . Here, Larger Pockets would have to report all four things as the company. On top of this, Brandon, David, Tony and Rob would each have to report all four things as beneficial owners—a total of five reports, all for one business. For businesses with more people having substantial control, that number is even higher.
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PENALTIES FOR NOT FILING
Let’s say that Brandon has been traveling for work and has been away from home for over a month. Like many Americans who forget about the numerous federal reporting requirements, he forgets to report as a beneficial owner. After coming home, he finds out that he owes $10,000. The government grants no leeway in this situation. Brandon must cough up the 5-figure fine. What’s the point of passing a federal law if there are no penalties? The Corporate Transparency Act has its fair share of them, and they are steep if you don’t report. Fines can be up to $500 a day after the reports are due and can even accumulate up to $10,000. Even worse, you can be sentenced to prison for up to 2 years for intentionally failing to comply.
CONCLUSION
The Corporate Transparency Act has far-reaching effects. Millions of businesses and “beneficial owners” will have to comply. Will Congress’s aims actually work? Or will they impose an additional burden on many business owners across the country? The Corporate Transparency Act seems unlikely to be repealed. Fortunately, Corporate Direct can prepare your report and submit it to FinCEN. Click here for a free 15-minute consultation with a specialist.
ONCE THE ACT TAKES EFFECT, EVERYDAY AMERICANS WILL FACE SEVERE CONSEQUENCES FOR NOT COMPLYING.
GARRETT SUTTON Attorney, Best-Selling Author, and Robert Kiyosaki’s Rich Dad’s Advisor
Corporate Direct (800) 600-1760
Garrett Sutton is an attorney and author. He has written a number of books for entrepreneurs and real estate investors, including Loopholes of Real Estate and Start Your Own Corporation. His newest book, Veil Not Fail, deals with the most overlooked facet of asset protection, protecting the corporate veil against legal attacks. Garrett’s firm, Corporate Direct, sets up and maintains LLCs and corporations in all 50 states.
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As we enter a new year, it makes sense to take a moment and reflect on what we have accomplished and begin to set goals for the future. Part of this should include an overview of your fair housing practices. This article will share five quick steps to help you get started toward having a fair-housing-friendly 2023. FIVE STEPS TO AVOID A FAIR HOUSING LAWSUIT IN 2023
Step 1: Stay Up to Date on New or Changing Fair Housing Laws
Step 2: Review Your Policies and Procedures
As we all know, fair housing laws can and do change. It is essential that every property management professional is aware of how these changes may impact them. In addition, you also need to remember that there is more to fair housing than just federal laws or oversight. You also need to stay current on state and city/municipal levels. Doing your own research is possible but can be time-consuming. Subscribing to AAOA’s free newsletter or your local fair housing organization is an efficient way to stay up to date, or you can consult an attorney that specializes in fair housing.
As stated above, fair housing laws are ever-evolving. As a result, an excellent and often necessary best practice is regularly reviewing your policies and procedures. Ask yourself: Are they up-to- date? Could they be considered too broad or restrictive? Do they follow the law? Your policies and procedures do not need to be complicated or lengthy. But they do need to be clear and follow the laws that pertain to them. Again if you are unsure, consulting an attorney is always a good idea to ensure compliance.
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Step 3: Update Your Documentation and Forms
When was the last time you reviewed your forms? Are they still one-size-fits-all or pretty generic? While these definitely can be used, they can leave you a little more exposed to mistakes or oversights. As we know, not every request requires the same information. For example, a request for an assistance animal is going to require more information than a request for an accessible parking spot. Having forms that are specific to the many different requests we come across will help expedite the process and get you the right information you need while creating consistent documentation should a question or fair housing claim ever happen. To get the most updated, state-specific forms, use AAOA’s legal forms which you can download here.
Step 4: Ensure Fair-Housing-Friendly Marketing and Advertising
Marketing and advertising continue to be a challenge for the property management industry. Why? While, of course, we want to attract that perfect resident to our property, we need to do it in a way that is fair, equitable, and inclusive. Marketing and advertising can take on many different shapes and forms. From advertisements around the community and social media to the types of photos and decorations in our leasing offices, just to name a few. Whatever outlets we choose, caution is needed to establish a standard of being diverse and accessible to everyone to avoid even the smallest appearance of discrimination.
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Step 5: Invest in Fair Housing Training and Education
Of course, we can’t forget about targeted fair housing education and training! Without this, you are just asking for trouble. Every individual in your organization should have access to education and training that at least covers the basics of fair housing. Currently, there is a wide variety of training options available to help fit each individual’s learning style. From webinars and online self-directed learning, to—finally—the availability to rejoin in- person education sessions. All of these can aid in staff having a thorough understanding of fair housing laws and help avoid potential problems. Visit AAOA’s On-Demand Webinars page to view webinars on tenant screening, emotional support animals, and more fair housing topics.
CONCLUSION
These five steps serve as a high-level overview to help you quickly identify any potential gaps. Naturally, there are more granular items that need to be addressed. Keeping that in mind, we encourage everyone to continue to stay current in our dynamic industry through ongoing training and education and wish everyone a fair- housing-friendly 2023!
THERE IS A WIDE VARIETY OF TRAINING OPTIONS AVAILABLE TO HELP FIT EACH INDIVIDUAL’S LEARNING STYLE.
KATHELENE WILLIAMS Attorney and President The Fair Housing Institute
Kathi Williams is one of the founders of Fair Housing Institute. FHI is the accomplished vision of Kathi who views its educational courses as the best method housing providers can use to accomplish compliance and avoid litigation. Kathi is also a partner in the Law Firm of Williams Edelstein Tucker, P.C. providing defense and preventative representation for the housing industry in all civil rights matters. During the many decades Kathi has been advising her housing provider clients, she developed a unique understanding of the most effective methods of communicating fair housing best practices through training. Click here to watch Fair Housing Educational Videos.
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DEFER CAPITAL GAINS Without Doing a 1031 Exchange
Quite often, investment property owners feel very stuck. They’d like to sell their highly appreciated property and use the funds to pay o debt of other properties or simply invest in another financial vehicle and retire, but if they sell, they are faced with a steep tax bill.
Great News! There are multiple ways to defer capital gains taxes! Join our webinars and learn more about your options.
REGISTER FOR A FREE TAX STRATEGY WEBINAR
PAGE 33 Schedule a Consultation | Visit Our Website | Call Us: 1-888-977-1222
CELEBRITIES
ON THE MOVE
Lizzo After years of renting, Lizzo has bought a 5,300-square-foot modernist home built in 2019 on a Beverly Hills property once owned by her friend Harry Styles. Set on a third of an acre in an exclusive guard- gated community, the residence boasts 3 bedrooms, 3 baths, two powder rooms and a sound-proof movie theatre. Lizzo can relax outdoors in a 58-foot infinity pool that extends under the 1,000-square- foot master suite. Materials such as oil-rubbed walnut, soapstone and other natural materials add to the home’s warmth.
Adam Sandler
Adam Sandler has added to his growing real estate portfolio with the purchase of a 1947 traditional ranch- style home measuring 1840 square feet on one-quarter acre in posh Pacific Palisades, California. Joining the $40 million in luxury properties the actor already owns in Florida, Massachusetts, West Hollywood, Brentwood, Malibu and Calabasas, the residence closed at $4.1 million. If Sandler is planning to replace the 3-bedroom, 2-bath home with new construction, the sale included blueprints for a 7,600-square-foot, two-story house with a basement.
Melissa McCarthy
Melissa McCarthy and her husband, Ben Falcone, have established an East Coast presence with the purchase of a newly built penthouse in New York’s Little Italy neighborhood. Listed for $7.35 million, the 2,400-square- foot residence offers 3 bedrooms, 3.5 baths and a 1,200-square-foot landscaped terrace with outstanding NYC views. The 20-unit building, named the Grand Mulberry, will also be the home of the Italian American Museum which is expected to open Fall 2023. The couple additionally own two properties in Toluca Lake, California, one of which they rent out while the other is their main home.
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CELEBRITIES
ON THE MOVE
Tom Brady If you are in the market for a luxurious residence on the Florida coast, just $12,499,999 will get you the deed to Tom Brady and Gisele Bündchen’s Davis Island mansion. The custom-built, 6,551-square- foot waterfront home, located near downtown Tampa, includes six bedrooms and six baths with breathtaking views, and a convenient private dock. Overlooking Hillsborough Bay, the home comes complete with a wine cellar, elevator and rooftop terrace as well as a pool, spa and a large deck for dining and lounging.
Cher
Maybe you’d rather have a sweeping view of the Pacific Ocean and a climate-controlled room designed to hold 100 wigs. Priced at $85 million, Cher’s 13,200-square-foot, guard-gated mansion sits on 1.7 acres in Malibu and took five years to build. The 7-bedroom residence, designed in the Italian Renaissance style, offers arched windows and doors, carved panels and bronze doors from India, an 18th- century Venetian balustrade and Moroccan lighting fixtures along with limestone and marble imported from France and Italy. The property also features an infinity pool, gym, tennis court and theater as well as a guesthouse.
Dr. Dre
Dr. Dre’s Malibu mansion, only 35 miles from the rapper’s childhood home in Compton, offers all the luxurious amenities one would expect from a property listed at $20 million. Spanning 8,843 square feet of living space on a 7,000-square-foot lot on Carbon Beach (aka Billionaires’ Beach), the tri-level oceanfront residence features six bedrooms and seven bathrooms. The home, which is located just feet from the surf, boasts a gym, music studio and a generous master suite that includes a large sauna, an impressive fireplace and that priceless panoramic ocean view.
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As 2022 ended, AAOA scoured the nation for the real estate professionals who are at the top of their game. We established 20 categories from investors to authors to podcasters and discovered the authorities in each field who exemplify the Best of 2022 in their category. We are proud to present to you the results of our search… AAOA’S BEST OF 2022
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