Ask Realty Times - January 21, 2005 - 1/21/2005 - Mortgage Loan Refinance Debt Equity

Ask Realty Times - January 21, 2005
by Peter G. Miller

Since I live in California and the real estate market there is extremely expensive, I would not be able to purchase rental properties that would be able to provide a positive cash flow. I have done some research and have found rental real estate in Texas very appealing. Is this actually a good idea considering the fact the I will be living in another state?

Answer: First, we thank you for your service.

Long-distance investing is normally not attractive because real estate is essentially a localized activity. To get the best properties you want to know as much as possible about local trends, trends best followed by living in an area.

You can certainly hire a local broker to locate and manage properties in another state. However, for the entry-level investor there is great practical value in self-managing one-to-four unit properties, dealing with tenants, making repairs, etc.

Perhaps look at two-to-four unit properties in California. If you live in one unit you may be able to finance the transaction with no money down through the VA loan program. Such properties would give you a hands-on opportunity to learn about property management plus rental income to offset monthly costs. VA eligibility information can be obtained from your base housing officer and on the VA website.

As well, why not take the basic class required to become a California real estate salesperson? Such classes offer great information regarding an array of real estate issues, including title, financing and brokerage. Once you pass you would then be qualified to take the salesperson's test and have the option of a new career in real estate.

Question: How far above a property's normal land footprint area does ownership typically go? Fifty feet, 100 feet, or what?

Answer: In theory, property rights extend infinitely above a parcel of land and such rights have real value. Think about buildings constructed over railroad tracks or a condo on the 26th floor of a tall building, many hundreds of feet into the sky. Such "property" exists because the airspace it occupies can be described, measured, titled and financed.

In practice, air rights may be limited by public needs, such as the right of an airliner to safely fly over someone's property.

Question: We recently purchased a vacation home. We have no plans on renting the property, it's only for our personal use. We spend an average of three or four days a week there, longer in the summer and less in the winter. We have made minor improvements to this waterfront property but the value has already risen.

If we decide to sell our primary residence (we have lived in the primary for seven years) my husband and I can take the $500,000 capital gains tax break. Regarding the non-rental second home, do we need to live in the vacation property for two years to reap the same benefit? Does any of the time spent there on weekends count towards the two-year aggregate time necessary to claim tax relief? If we sell both homes simultaneously and use the funds to purchase one primary residence would we benefit in any way?

Answer: You get one principal residence at a time -- the place where you live, vote, work, etc.

As the IRS explains: "To exclude gain, a taxpayer must both own and use the home as a principal residence for two of the five years before the sale. The ownership and use periods need not be concurrent. The two years may consist of 24 full months or 730 days. Short absences, such as for a summer vacation, count as periods of use, but longer breaks, such as a one-year sabbatical, do not. The taxpayer also must not have excluded gain on another home sold during the two years before the current sale."

It's the last sentence that gets to your question. You can take the write-off no more than once every two years unless exceptions apply.

What exceptions? It may be possible to get some capital gains relief if a property has been used for less than two years as a principal residence if a new job is more than 50 miles from an old one, an owner dies, health issues arise, etc. For details see IRS Publication 523 and speak with a tax professional.

Question: I have a horse farm in Kentucky that's for sale. It's priced at $1.9 million. It would be a great second home for someone who wants to get away from city life. Beautiful area, beautiful setting. What brokers are available with the type of clientele that will spend over $2 million on a farm?

Answer: You believe your property is worth $1.9 million because like properties have presumably sold for similar amounts. That means there are brokers in your community who know how to market such properties, so it would be useful to review past local sales or current properties now for sale and speak with the brokers involved.

Question: Is there a forum in which I may register a complaint about a particular real estate agent?

Answer: If you have had an experience with a salesperson which you regard as unprofessional, then it would be appropriate to speak with the individual first and then the individual's manager or broker. If you remain unsatisfied, you have a right to file a complaint with the state real estate commission, the entity that licenses real estate professionals. A list of state commissions can be found at ARELLO.com.

Question: I am a newly licensed agent, and want to find a real estate company with the best mentoring program, closing the highest number of sales, and providing most leads and great splits, (I have found one by luck, but not in my area). How do I go about researching information like this?

Answer: You speak with lots of people now in the business, meet with brokers and office managers and have lunch with the teachers who helped you pass the basic licensure exam.

This column is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal services or other expert assistance is required, the services of a competent professional person should be sought.