Inland Informer

Upcoming Changes in Capital Gains Tax

2008-11-13T06:15:22Z

What is Capital Gains Tax? When a taxpayer sells assets that have been held for more than a year and one day (366 days) the taxpayer is subject to capital gains taxes.

The rates are currently as follows:

Long Term Capital Gain – Since 2003, the rate for Long Term Capital Gain has been 15% (lowered from 20%) for taxpayers in the 25% income tax bracket or higher. For taxpayers in the lower income tax brackets (10% and 15%), the rate has been lowered to 5% from 10%.

In 2008, the 15% rate has remained the same; however, the 5% rate has been reduced to zero! In order to qualify for this rate, a married couple may make no more than $65,100 annually or $32,550 annually for single filers.

These rates are scheduled to remain through the end of 2010 as outlined in the Tax Increase Prevention and Reconciliation Act of 2006. In 2011, the capital gain rates are scheduled to return to the previous rates of 20% and 10%. Although these rates are scheduled to increase to 20% in 2011, many experts believe the future tax rates will be changed more significantly due to the outcome of the recent Presidential Election. President-Elect Obama has stated that he is in favor of increasing capital gains tax to 25%.

State Rate – In addition to the Federal capital gains tax, each state has individual capital gains rates. In some states, there are no capital gains taxes (tax rate is determined by the state in which the real estate is sold). It is advisable to check with one’s own tax advisor to determine the appropriate rate.

Depreciation Recapture – There is also a 25% tax rate also known as Depreciation Recapture. This rate applies to the portion of real estate that has been depreciated.

In the interim, we will have to standby until Congress addresses the issues surrounding capital gains. Whatever the proposed tax changes may be, one of the best ways to successfully navigate around capital gains tax is simply to utilize a §1031 Tax-Deferred Exchange.

Compliments of:
Whitney Brennan
www.ncs1031.com

5 Real Estate Investment Strategies for Success in a Volatile Market

2008-11-08T00:26:30Z

Solutions Create Opportunity
Solving problems for distressed investors will create prime investment opportunities. Look for ways to provide workouts for distressed investments. As loan terms mature, many properties will be unable to cover the debt service associated with new loans. Financing criteria has changed dramatically and will surprise many investors as they look to re-finance. Large “vulture” funds are being formed for the sole purpose of raising capital to profit from distressed institutional grade investments. On a smaller scale, attentive investors can capitalize on opportunities by providing solutions in their local market.
Cash is King
Investors who have been disciplined and kept a healthy amount of liquid assets are now in a favorable position.Kelly Hugh, a well respected real estate economist says “There is such a volume of capital out there. I have three pictures I use in my talks, one is of Niagara Falls, one is the Sahara Desert and the third is the Hoover Dam. The argument is that for a long time we had a Niagara of capital, now people think we have a Sahara but we don’t. It’s a Hoover Dam. It’s all sitting back there. The question is; when does it get released?”

Those investors who can move quickly and provide interim resolutions will come out ahead
Change Strategy from Growth Investing to Value Investing
In recent years past, investors had a buffer that alleviated bad investment decisions. Rent growth and appreciation seemed to remedy any ill-advised acquisitions.Now with rent growth and appreciation absent, property owners are forced to find new ways to produce the yield desired. Strong asset management combined with tenant retention will help drive yield in existing properties. New acquisition investments can take advantage of the upward trend in CAP rates.
Avoid Lowering Rents
Commercial real estate values are tied to the income the property produces. As retailers are struggling we will see more and more vacancies in the market. Existing property owners should strive to minimize down time and re-tenant quickly. Up-front incentives such as free rent and tenant allowances will help entice new tenants while maintaining your property value for the long-term.
“Buy into Fear, Sell into Greed”
There is no arguing we are in a slowing market, however investors that seize the opportunity can turn this into a wealth-creation market. While the masses are standing on the sidelines there are unbelievable opportunities for a knowledgeable investor.

Happy 10-31 from Commercial 1031 Group

2008-10-31T20:17:07Z

Changes for 1031 Exchange/Homeowner’s Exemtion

2008-09-28T19:50:48Z

A popular loophole to avoid paying capital gains taxes on sale of residential investment properties is coming to a close at the end of this year. Previously an owner has been able to convert an investment property into a primary residence and later sell it to take advantage of the Homeowner’s Exemption under Section 121 of the US Tax Code. The owner could exclude up to $250,000 ($500,000 for married couples filing jointly) of gain realized on the sale of a primary residence if the taxpayer had owned and occupied the property for two years out of the five year period preceding the date of sale.

New Rule

The rental use is now considered a ‘non-qualified use’ for exclusion from gain. The owners (sellers) will only get a prorated amount of the gain to qualify for exclusion. Gain is allocated to non-qualified use by dividing aggregate years of non-qualified use by total years the taxpayer owns the property.

Example: Assume a couple has a $600,000 gain on a house they have owned for 5 years. For the first 3 years the couple rented out the house and then moved into it using it as a primary residence for 2 years to meet the 5-year ownership requirement. They would have no exclusion for 3/5 or $360,000 of the gain on the sale. They can only take $240,000 of the §121 residential exclusion. This change prevents taxpayers from moving into their vacation home or rental property for only 2 years and then obtaining the entire exclusion upon sale.

Exception

This prorated formula applies only to non-primary (“non-qualified”) residential use that occurs before the property was last occupied as the principal residence of the taxpayer. This is a significant distinction. Conversion of a primary residence to a rental does not preclude use of the full §121 exclusion.

Example: A taxpayer buys and lives in a home for 2 years. They move out and rent the home for 1 year. The taxpayer is entitled to claim the entire §121 deduction. It also appears that the former provision allowing the taxpayer to utilize §1031 to defer any gain over and above the §121 exclusion remains intact.

Effective Date

Nonqualified use periods preceding January 1, 2009, are ignored. A taxpayer who placed a property into rental service in 1997 and converted it into a primary residence on 1/1/09 would be entitled to the full exclusion if they used it as their primary residence for 2 years prior to selling it.

As always, please consult our tax specialist and legal counsel for full details on how this could affect your specific tax situation. Special thanks to Starker Exchange services for details on this change.

Fall 2008 Commercial Real Estate Market Overview

2008-09-10T05:00:49Z

Coldwell Banker Commercial has just released a national overview of the commercial real estate market for Fall 2008. This report gives a good summary of the major indicators and trends that are affecting our local market. Click here to download the report as a PDF file.

Commercial Real Estate Fall 2008 Market Overview

Kootenai Medical Center Plans to Expand

2008-08-08T00:03:43Z

The Spokesman Review is reporting on a planned expansion for Kootenai Medical Center in Coeur d’Alene. The expansion is currently projected to cost $30 million and is slated to add 52,000 square feet.

Here’s The Dirt: Kootenai Medical Center to expand

Keeping Nationwide Store Closures in Perspective

2008-07-23T03:22:29Z

The International Council of Shopping Centers estimates nationwide retail store closures will total 144,000 in 2007, a 7 percent increase from 2006. Although this a large number, in 2006 123,000 new stores opened and 139,000 closed. New store opening have helped soften the effects of nationwide store closures.

There is no arguing that retail is presently a troubled sector with consumer confidence dropping and consumer disposable spending in negative double digits for 50 straight weeks. The confidence confidence index serves as an important bellwether of consumer spending, which accounts for two-thirds of the U.S. economy and an essential economic driver for the retail sector.

Nationwide retail properties reported a vacancy rate of 7.8 percent in the Reis Inc. second quarter 2008 survey. Locally we have seen a number of store closures , but nothing close to other troubled markets around the United States. Starbucks recently posted the final list of approximately 600 company-operated stores in 45 states scheduled to close beginning this month through next March. Our MSA has only one store scheduled for closure, the Starbucks located off Market and Garland in Spokane.

Commercial Property Prices Still Gaining

2008-07-03T17:01:07Z

A recent article in National Real Estate Investor gives insight on Standard & Poor’s March GRA Commercial Real Estate Indices. Overall, national commercial property prices have risen over 5% from March 2007 to March 2008. The strongest performing region in the month-over-month indice was the Pacific West region. For more details, click on the link below.

Commercial Property Prices Still Gaining

Local Real Estate & Development News Roundup

2008-06-27T22:57:47Z

Deer Park looks to awaken - Spokane Business Journal

City approval of office tower is appealed - Spokane Business Journal

Big project planned in Rathdrum - Spokane Business Journal

Bankcda consolidating offices - CDA Press

Lounge aims to fill swanky void - Spokesman Review

Judge OKs county track purchase - Spokesman Review

Big projects eyed near raceway - Spokane Business Journal

Parker Toyota reconsiders expansion - Spokane Business Journal

Crown West plans project at SBIP, but sees slower growth - Spokane Business Journal

PARD will not take appeal to state supreme court - Daily Evergreen

In the News - A Flight to Quality

2008-06-10T23:04:32Z

Mike King from our team was quoted throughout the following article from Inland Business Catalyst Magazine. The article gives an overview of our local commercial real estate market. Let us know what you think.

Inland Business Catalyst Magazine - A Flight to Quality

A Flight to Quality

Written by Linn Parish

Commercial real estate markets continue to stay hot as many tenants seek better space.

While a lot of water-cooler talk currently focuses on recession fears and slumping home sales, much of the Inland Northwest commercial real estate sector is flying high.

“You hear a lot about the national problems in real estate and credit markets. We just don’t see that in Spokane in the commercial market,” says Dave Black, CEO of NAI Black Inc., of Spokane. “Local banks are still lending, and the commercial market is still moving.”One factor that’s causing the market to soar is a flight to quality.

The term flight to quality refers to a trend in which tenants who historically have occupied less-expensive space move into nicer digs.

“People are looking to upgrade, moving from Class C space to Class B and from Class B to Class A,” says Mark McLees, a real estate agent with NAI Black. “Some also are looking for the historical look, and a number of tenants are willing to put in money for tenant improvements.”

In downtown Spokane, large spaces—those with 10,000 square feet of floor space or more—are difficult to find, says Craig Soehren, sales associate at Kiemle & Hagood Co., of Spokane. Also, the inventory of buildings available for owner-occupants to buy is small, limiting options for some companies, he says.

A spring 2008 commercial space vacancy survey is expected to be completed this month. The survey is conducted twice yearly by Auble, Jolicoeur & Gentry appraisal firm in conjunction with NAI Black, Kiemle & Hagood and Goodale & Barbieri Co.

In the most recent vacancy survey, from last fall, the total office-vacancy rate in the Central Business District was 13 percent. McLees says the vacancy rate likely will stay in double digits through 2008 but it likely will be close to 10 percent later this year.

The current conditions are causing rental rates to escalate.

“Rents are definitely going up,” Soehren says. “There’s a lot of pricing shock in the marketplace. For tenants who are used to paying low rents, there aren’t that many options anymore.”

As of last fall, the average annual rental rate for recently leased Class A space downtown was $20.28 per square foot, comparable to what it has been for four years. Experts say, though, those rates are going up this year, and they expect them to continue to increase.

Currently, Black says, rental rates are substantially lower than the per-square-foot cost of new construction. He says the inventory of available office space will continue to constrict with little new development until rental rates rise and come more in line with the cost of new construction.

That dynamic is perhaps most apparent in Spokane Valley. There, tenants have absorbed a lot of the vacant office space in recent years, and a relatively small amount of new space has come on the market, Soehren says. Consequently, vacancy rates continue to fall in that market.

The most recent survey shows a 12.5 percent vacancy rate in the Valley, down considerably from a vacancy rate of 21 percent a year earlier.

One project that currently is under way, however, will add a large amount of office space to the Valley. Spokane developer Walt Worthy has started work on a 250,000-square-foot office structure just east of the Interstate 90-Sullivan Road interchange. That structure is expected to be completed later this year, and when it comes on line, it will add 10 percent to the total inventory of office space in the Valley.

In Coeur d’Alene, the office market remains tight, with little inventory of space for larger prospective tenants, says Mike King, associate broker at Coldwell Banker Schneidmiller Real Estate.

“At times, it can be difficult to find the right configuration for tenants,” he says. “If we work with a large corporation, it’s usually a build-to-suit.”

Coldwell Banker Schneidmiller Real Estate teamed up with Auble, Jolicoeur & Gentry for the first time last fall to conduct a commercial-space vacancy survey for Kootenai County.

That survey showed an office-vacancy rate of slightly more than 2 percent. King says he expects the vacancy rate to remain that low through this year. Many of the office developers in that market wait until they have tenants committed to the planned space before breaking ground on a building.

Northwest Place, a three-story commercial building at 1450 Northwest Blvd., recently was completed, and all of the second-floor and third-floor office space is leased out already. Some retail space on the ground floor is still unspoken for, King says.

Retail activity varies depending on the part of the region.

“If there is one part of the market we’d be concerned about, it’s retail,” King says. “That’s something that people are being cautious about.”

He says some national tenants are slowing their expansion pace, but developers are “being smart about it” and scaling back their development plans.

Last fall’s survey showed a retail-vacancy rate of 8 percent in Kootenai County.

While the retail market has cooled in general, some pockets in Kootenai County remain hot. King says rumors persist that some huge retailers will announce plans later this year for new superstores near the new Cabela’s store in Post Falls. Rumors involve companies like Wal-Mart Stores Inc. and Lowe’s.

In Spokane County, retail activity remains strong in downtown, though some say interest in other parts of the market has slowed.

The vacancy rate in downtown retail last fall was almost 7 percent.

McLees says, “That keeps declining rapidly, and I wouldn’t be surprised if that’s at 4 or 4.5 percent by the end of the year.”

While some say retail-space interest has tapered off in parts of Spokane, there still are some big players looking for a presence here, Black says.

“The tenants that aren’t here want to be here,” he says.

The retail vacancy rate remains low on Spokane’s North Side. As of last fall, only 200,000 square feet of space out of almost 4.4 million square feet was available, giving it a vacancy rate of 4.5 percent.

The similar-sized Valley retail market had a higher vacancy rate. Of its 4.4 million square feet of retail space, about 600,000 square feet was empty, giving the Valley a vacancy rate of 13.6 percent.

The North Side’s average annual rental rate for recently leased retail space was $18 per square foot, substantially higher than recent annual rate of $13.74 per square foot in the Valley.

On Spokane’s South Hill, which has a retail market that’s about a quarter the size of the Valley and North Side’s markets, the vacancy rate was 3.5 percent. The average rental rate for recently leased retail space on the South Hill was about $17 per square foot.