This is located in the North Dallas area. Each side has 3 bedrooms and 2 bathrooms. You can see the garages. 20% down will yield, give or take, about 6-9.5% cash on cash — given today’s interest rates. Most are in such demand — Investors and tenants — that they frequently sell before they’re even built. They’re just as frequently rented before the dust clears after escrow closes. Sweet, eh?

In fact, one of these just closed last week. Our client was amazed when he learned the new first tenant was moving in about three days later. Woulda been sooner, but the tenant had to wait for the weekend to move.

The Amenities

Here’s a shot of what has consistently attracted tenants to this neighborhood. Though the address is absolutely one coveted by many in the general Dallas/Fort Worth MetroPlex, once they see the amenities, their main concern is being accepted as a credit worthy tenant. This pool area is just one of many superbly designed amenities.

Compare this to the usual motel-like pools offered as ‘amenities’ in many so-called upscale developments. They only wish they could offer something this cool and spacious.

What you see here is the community kitchen tenants can use for whatever event they may be hosting. We’ve all seen these in various developments in our own hometowns, right? Are they equipped with two huge fridges like this? Not freakin’ likely. Combined with the adjacent dining area, a very nice wedding and/or reception, or New Year’s Eve party would rock. I know a couple folks who own catering companies. One of their most common challenges is a far too small kitchen for a far too large crowd. Not here.

This next one is of the dining room area contiguous to the kitchen. You can easily see how it’d be perfect for pretty much any social gathering you’d ever wanna put on.

What an inviting ambience — a very adaptable environment. You can’t see the fireplace in this shot — but it’s there and obviously adds to the mood of any gathering when the weather is cooler. Most of the great rooms provided by developments we’ve inspected around the western U.S. have been mundane at best, and claustrophobic at worst. As you can readily see, that’s simply not likely in this room.

There are 3-4 other rooms of pretty good size, just down the hall from the kitchen pictured above. Here’s one of ‘em. Besides the normal stuff, baby showers, birthday parties and the like, it’s perfect for seminars, business conferences, club meetings, or whatever else we could come up with. These rooms have a capacity of around 130 or so. Notice, as in the other rooms, how high the ceilings are. Some may say that’s of little or no consequence, but to someone who speaks around the country, and attends various conferences on a more or less regular basis, it matters — big time.

The next couple shots are literally unique to my experience. The first one is of the computer room. A dozen or so computers with printers etc. for the residents to use at their will. What is so cool about it is how many kids use it to do their homework, print it out if necessary, then adjourn to the real reason they walked over there in the first place. I suspect the kids go there, not cuz they don’t have their own ‘puters at home, but cuz their friends go there too. The second pic is of the — I kid you not — video game room. No, not makin’ it up. The ‘wallpaper’ you see is not only not boring, but soundproofing. See the black leather chair? It’s a gaming chair — with all the controls required to play whatever game you’ve loaded.

Are you freakin’ kiddin’ me?! Where was that room when I was in school?

Please — I dare ya — tell me you’ve seen a weight room like this in any place not considered a slam dunk luxury development. I’ve been to dozens over the years, and the only ones that rivaled this one were condos on San Diego’s coast or in comparable locations. This is far and away the best workout room I’ve seen since I’ve been takin’ clients outa state. That’s almost seven years. I love this gym.

Look what they put up at the pool for the kids! Gotta think a half hour to 45 minutes max, and your rugrats will be ready for some ‘quiet time’. I can see their eyes when they first spy this incredible setup — probably turned into banana cream pies. When I was young, only special carnivals and such places had stuff like this. Tell me you wouldn’t sneak on it yourself, pretending to show your kids how it’s done.

Note: Remember — click the pictures to get a full size shot. They’re worth it.

About 10-20% of my clients actually fly to wherever I recommend they invest. Those who have made that choice recently, and have decided to check out North Dallas, have come back completely blown away. They’ve not seen amenities like what they were shown by my team. Much like they do when tenants take a look-see, the place sells itself. Numbers are fine and dandy, but seeing is believing.

Hey you! I need a fix. Please, gimme a call, OK? Try 619 889-7100 and you’ll find me. Have a good one.

Sometimes we get too close to a thing, and wonder how anybody could look at two things and not see huge differences — if they indeed exist. My mistake, if you’ll allow me to self-diagnos, is (using baseball analogy in Lani’s honor) akin to me constantly makin’ the point that Major League Baseball (MLB) is vastly superior in quality of play than is seen in the Rookie ‘A’ Ball League in East Toilet Seat, Montana. Problem is, if the reader isn’t either a baseball fan, or would like to be but has no context in which to compare, merely reading about it doesn’t quite do the job.

I get it — mea culpa.

Jason Robins called me earlier this year about improving the current Plan he and his wife, Marianne had in place for their retirement. Though that Plan and their current Purposeful Plan is more involved than just this portion of it, here’s what they’re doing with Jason’s rental property.

It’s a single family residence in Washington (state) which has produced roughly $2-300 monthly cash flow, though Jason admits some months it’s a whole lotta break even. To their credit the house was kept in as close to excellent condition as possible. Jason is a salesman who pretty much makes his living on the road, while Marianne is a long time banking pro, very good at what she does. Here’s a picture of the rental.

Oh, did I forget to say it’s 85 freakin’ years old?! Hellllllo San Diego real estate investment property owners.

In a nutshell, it’s about 760 square feet with two bedrooms and a bath. It sports original fir ‘n oak floors, and a decent sized 1-Car detached garage. The neighborhood is better than decent, as it was worth braggin’ about in the listing — always a good sign. It sold for the low $200’s, less than $210,000 once it was re-roofed as part of the sales contract. He netted enough, give ‘r take to acquire a couple Texas duplexes — he may add a bit to make it happen.

Here’s a picture of one of ‘em — if only one side.

His equity to value ratio on his Washington house rental was roughly half or so. He’s puttin’ 20% down on a two of the above pictured duplexes, located in two separate locations of the Dallas/Fort Worth ‘MetroPlex’. His cash flow will approximate $5,000 a year for each — a total of $10,000 annually. This is based on today’s interest rate (Hat tip to Chad Emerson) which is 5.25% — 30 years fixed rate.

Here’s how the numbers look when the two properties are combined.

Gross Scheduled Income — $61,200
Vacancy/Oper Expenses — $24,480 Includes Professional Management
Net Operating Income — $36,720
Annual Debt Service — $26,506 5.25%/30 years/fixed rate
Annual Cash Flow — $10,214

Their tax shelter has improved significantly also. The Washington house delivered about $5,000/yr in. That figure should now be enhanced by $10,000 a year or so. Remember, he’s doing a tax deferred exchange so he’s bringin’ his ‘old’ basis with him. Any new depreciation is generated by the amount of new debt he acquires — X the percentage allowable for the improvements of the property into which he traded. Land isn’t, for the most part, depreciable. (Surely you can infer that’s a whole ‘nuther post, right?)

They’ll be taking the cash flow along with a modest $500 a month, and adding to the monthly payment of one of the duplexes. This will result in that loan being eliminated completely in just over 8.5 years. Then they’ll take the increased cash flow and the same $500 a month to finish off the other duplex.

Here’s how that’ll play out.

Balance at the point the first duplex is paid off — $169,870. The cash flow from the newly free ‘n clear duplex is $18,360/yr — or about $1,500 a month rounding down. This duplex’s annual cash flow is $5,000 or about $400 a month rounding down. Add the $500 a month previously used against the first duplex and they’re now applying an additional $2,400 to the month payment.

Let’s see what happens and how quickly.

In just over 4 years (49 months) that duplex is also completely debt free. In other words, in just under 13 years they will have engineered an annual cash flow of nearly $37,000 — a large minority of which will be tax sheltered for quite awhile.

Show me where you can put in about $110,000 +/- today, add $500 monthly to it for less than 13 years, and end up with over $3,000 a month in income. Since they both make decent income at their jobs, and don’t live according to the ‘Keep of with the Jones’s’ philosophy, that $500 extra outgo a month won’t be a problem. Furthermore, if they wish, they have other significant assets which would easily provide them the option of making this happen slightly earlier.

Let’s look at the differences both now and in the future — comparing keepin’ the status quo vs making the move to the Texas income properties.

Cash Flow

Stay = Max of $3,600 yearly.
Trade = About $10,000 yearly.

Tax Shelter

Stay = $5,000 a year.
Trade = An additional $10,000 a year.

Future Retirement Income — Oh sure, NOW yer payin’ attention.

Stay = About $8,400 a year — none of which will be tax sheltered.

Trade = $37,000 a year — much of which will be tax sheltered for about the first 14 years of retirement.

Let’s see here…

There is one huge benefit they’ll be giving up, which has been causing them many anxious nights. They won’t be able to drive by their new units.

Don’t ya just feel their pain?

You can do what they’re doin’. It starts with a call — 619 889-7100. You’ll be helpin’ me with my daily fix. Have a good one.

I found the lowest priced duplex in the zip code (91942), $300,000 — and did some quick, down and dirty numbers. I then compared those bottom line scratchings to what we’re able to offer in various markets in Texas — mostly the Dallas/Fort Worth MetroPlex.

The La Mesa Duplex

It’s 57 years old, not a fixer, and in a neighborhood in which I’d let my only daughter live — which she does. There are two 1-Car garages attached to the building, which is two stories. Both units are two bedroom/one bath affairs with 800 square feet. They also sport laundry hookups. The interiors shown in the pics are well painted, and clean. I’m gonna grant them $1,100 rent for each side, which is the most this neighborhood will command. That’s $26,400/yr. Even though the repair & maintenance of this duplex will easily be far more than a new one (Duh), to make things exceedingly ‘fair’ I’m gonna use the same percentage for vacancies/operating expenses on each duplex.

The Texas (MetroPlex) Duplex

Brand new — $255,000 — three bedrooms/two baths a side. 2-Car attached garages for each unit. Current, not projected rents, are $1,275/mo. — $30,600/yr.

We’ll use a 20% down payment, with an 80% loan with 5.375% fixed rate interest, amortized over 30 years.

Note: I’m gonna use vacancy/operating expenses of 40% for each to make the math easy.

La Mesa Duplex

Gross Scheduled Income (GSI) — $26,400
Vacancies & Operating Exp — $10,560
Net Operating Income (NOI) — $15,840
Annual Debt Service (Pmts) — $16,127
Annual Cash Flow — ($287)

Texas (MetroPlex) Duplex

Gross Scheduled Income (GSI) — $30,600
Vacancies & Operating Exp — $12,240
Net Operating Income (NOI) — $18,360
Annual Debt Service (Pmts) — $13,708
Annual Cash Flow — $4,652

It took about $66,000 including closing costs, etc., to close the La Mesa property, and about $55,000 to do the same for the Texas property.

Look at the numbers — look at the pictures. Ask yourself what real estate investor would chose the old duplex with the I Love Lucy kitchen, 1-Car garages, and vastly inferior return. Then ask yourself if you did choose to stay local with the La Mesa duplex, what will your cash flow be as the operating expenses rise due to ever increasing repair and maintenance costs — though that would hafta be about 23rd on the list of reasons you wouldn’t pick La Mesa, right?

Now you know why I keep pounding real estate investment property owners in places like San Diego, Palo Alto, and most of the West Coast, to Get Outa Dodge! Even with the massive market correction the West Coast has endured, you’re payin’ 20-30% more for property half a century older than you could have — for income far below what you could have — and with built-in functional obsolescence from Day 1.

Is the ability to ‘drive by your units’ worth that much to ya? Really?!

But wait!! There’s more!!

Tomorrow I’m gonna lay out a concrete plan for the owner of the La Mesa duplex. We’ll assume they’ve had it since Moses’ son died, and we’ll see what’s possible — comparing the two scenarios — keepin’ it OR trading it to Texas. It’ll be more fun than one BawldGuy should be allowed to have in one post.

Meanwhile, back at the ranch — call me already, will ya? You can reach me at 619 889-7100. Have a good one.

One of the things ‘Connie Marie’ wanted to do, was consult with a financial planner to see how much of her funds might be invested in stocks, mutual funds and the like, and how much in real estate. The point of this quest was to discover if diversification would be an issue. As I said already, Connie is one very smart lady, helped further by her occupation, which is banking. She’s no stranger to financial goings on to say the least.

Here’s the gist of our conversation.

There’s a reason I’ve only worked with two financial planners in over 40 years. Though most of them are good folk, dispensing honest info to their clients, they’re blind to real estate cuz it’s not on their shelf — they can’t make money tellin’ their clients to get some. On the other hand, it’s been our policy at Brown and Brown since inception, about 33 years ago, that our advice would always be based solely upon what was best for the client — whether it benefits us or not. That often results in either no business for us, or business for someone else who has a product more beneficial to our client’s particular needs. It’s the right thing to do.

Frankly, about half the time our advice to investors is not to do anything — they’re fine for now.

Those who call with self-directed plans, often wonder, as Connie did, what the long term factors are for real estate vs stocks and various mutual funds. Here’s what I told her in a nutshell.

1. Even as a real estate guy, I tell folks the truth — Wall Street can do wonders for a portfolio if you know exactly what you’re doing. The key, in my opinion, is what happens when things turn sour? The average 55 year old American worker with a 401k has less than $60,000 in their plan. They better have a rich uncle — or know someone who understands real estate income property.

2. With real estate, downside scenarios don’t hafta mean disaster. With stocks? Well, try losing 30-50% of value quickly and see what yer left with. It ain’t funny. If your Plan’s real estate investment was paid for in cash, you’re still cash flowing very well, even if rents went down and vacancy rates rose. Stocks? Their dividends were pretty anemic when times were good. If you put 35-50% down at acquisition, and had been using the cash flow (plus any other ‘In-Plan’ cash flow to whittle down the loan balance), you’re just that much closer to retirement income as a reality. Stocks/Mutual Funds? Hardly.

3. When your Wall Street assets drop in value, the following 1-3 years or longer are spent on the equity growth treadmill. All you’re doing during that time is playing catch up — that is, if the market allows it. Little or no income, and zip, zero, nada progress towards your ultimate goal of a secure retirement income. For those readers investing in your own name in real estate, you already realize that a cash flow property still cash flows when values fall — cash flows that are nicely tax sheltered, not a small thing. Stock dividends? Naked to the tax man.

4. The diversification argument falls on deaf ears here. I’ll quote Warren Buffet who’s been saying this for decades: “Diversification is for those who simply don’t know what they’re doing.” Your self-directed Plan exists for one Purpose: To generate a magnificently abundant retirement income. Ask yourself — How many retirees do you know first hand who’ve retired well on the income from their Wall Street investments? (Crickets)

5. Of the two, only real estate can grow its own equity through enough cash flow to retire any debt you may have taken on at acquisition — without penny number one in appreciation. Your real estate can, and will, not only grow your original cash investment to 3-7 times it’s original amount, but it can and will generate the amounts of cash flow you’ll need upon your retirement. Again — without a penny of appreciation…ever. Show me a stock that’ll match that statement. (Crickets getting louder)

When done through either Roth IRAs or Roth type Solo 401s, the result is even better, as the ultimate payouts at retirement are tax free. Ask your buds where they’d be today if their 401s at work had instead been self-directed IRAs or Roths? If they’d started 8-10 years ago they’d either be free and clear, or a few short years away, depending upon the strategy they were able to afford.

Thanks for the inspiration Connie Marie.

I hope this was helpful. Gimme a call, cuz as usual, I need a fix. 619 889-7100. Have a good one.

BawldGuy Axiom: Figuring return on disappearing capital is oxymoronic. Treating appreciation as anything but a luxury is akin to walkin’ in an unmapped minefield.

If you’re a real estate investor with property in places like San Diego or Palo Alto, California — you know what I’m talkin’ about — painfully so. Those who’ve moved their capital and/or equity to places like Texas — Dallas/Fort Worth MetroPlex and Austin are my favorites — have not only stopped hemorrhaging investment capital, but have actually enjoyed rent increases the last 12 months. No, really. Increases.

Let’s make your own Back To The Future movie.

Whether on your own or through a 401k/IRA of some sort, you were pretty happy at one time with your mutual funds. I say mutual funds cuz that’s what well over 80% of folks do according to multiple Wall Street analysts. Over the last 20 years BEFORE the meltdown, those poor people were ‘enjoying’ returns of just under 4.5% annually — hardly retirement numbers, unless the plan was to retire at 86. To add insult to injury their kinda sorta growing stock portfolio then took a hit of 40% — virtually overnight.

Go ahead now and hop into the DeLorean. Get it up to 88 mph and land in 1994 or so.

Take the same $50-60,000 you had back then and get the duplex in the post linked to above. Instead of having approximately $150,000 post meltdown, you’d have about $250,000 AND $1,500-2,000 in monthly income, much of it tax sheltered.

Think about that.

Now think about where you’d like to be in the next 16 years or so. Remember the main theme here: The duplex investor started with less than $55,000 and ended up with an equity of $250,000 — PLUS a sweet annual income, much of which won’t be taxable for over a decade into his retirement.

You have a self-directed IRA? A Roth maybe? You can get this done there too. And if it is a Roth, you can grab the cash flow sans income tax as it comes in, as long as you’ve followed the rules regarding age, etc.

Readers: It’s all about adapting to the curve balls life throws our way. Those who make the strategic and tactical adjustments in a timely manner will not only survive, they’ll thrive. It’s all about having a Plan and doing things on Purpose.

Sound familiar?

You may contact me at 619 889-7100 as I’m in need of my daily fix. Have a good one.

It amazes me how many times investors opt for local properties when they have empirical evidence showing they’ll do way better in a region a state or two away. It just doesn’t make sense. This is especially true when technology keeps us so informed, usually in real time. Living in Iowa and investing in another state isn’t anything like it was 30 years ago. Back then an investor had the phone and snail mail.

BawldGuy Axiom: The most apathetic player in any Purposeful Plan for retirement is your capital. It cares not how, why, or where you use it.

Today an Atlanta based investor can own several small properties in Boise, Dallas/Fort Worth, Kansas City, pretty much wherever, and with email, faxes/scanning, and websites be very well informed in almost real time. Pictures can be sent, conferences with management can be held, and decisions can be made while you’re on the 12th tee for Heaven’s sake.

Don’t let your equity stagnate in a local market just because you feel so comfortable. Your money doesn’t know where it is. It doesn’t get cold or lonely. What it does is grow or stagnate. If you’re in a region giving you a lot of nothing right now (and the foreseeable future) give serious thought to getting your equity outa Dodge and into a more stable, growing region. Whether you’re growing or not you keep having birthdays, right? Right.

Now, I ask again. Do you want a local $10 or a far away $20? The money doesn’t care. Your retirement does. Call me and let’s talk about your retirement — 619 889-7100. Have a good one.

For the record, San Diego is not, by any stretch of the imagination, the Lone Ranger in this. It’s true for California in general. Look at where you live. Is the median price of a home affordable for the typical family? No? See, it’s a matter of degree. San Diego is ecstatic cuz their median home price is now under $400,000! What’s your region’s median price? If it’s much over $200,000 the regular folk are beginning to be crowded out. If that’s the case, your 1-4 unit residential income properties are already becoming less attractive.

Enter what appears to be a paradigm shift — in fact two .

Since we can all remember, real estate investing has been a local exercise. You decided to invest, picked an attractive location and property, then pulled the trigger. For regular folks the option of investing outa town, much less in other states, clearly wasn’t on their menu.

Paradigm Shift #1

San Diego is no longer a slam dunk region in which to invest, especially for retirement. The factors needed to produce a minimum acceptable capital growth rate are plainly out of the picture now. When a down payment of 35-45% is required to simply break even on a 1-4 unit property, it’s time to look elsewhere. Also, there’s the problem of an already aged (as in way to old) product. Pick whatever San Diego neighborhood you prefer, and the youngest properties will still be 20-30 years old. In fact, many of the areas traditionally most attractive to investors are old by definition. Why would you buy a 30-60 year old duplex, put 35% down, then have operating expenses higher than the national norm due to age? Also, and this is crucial, the price to income ratio, regardless of age, is vastly inferior to many regions with better economic futures.

For instance, Boise, Austin, Dallas/Fort Worth MetroPlex, Kansas City, and a few other regions offer much younger (sometimes new) properties for 50-65% or so of San Diego’s (Or say, Palo Alto) prices — but for about the same rental income.

BawldGuy Axiom: When analysis clearly indicates one property, or one region is inferior to another, either believe your analysis or ask yourself why you did the numbers in the first place. The facts are the facts.

Paradigm Shift #2

Just as the world is much smaller than it was 50 years ago, the same is now true when it comes to buying and selling real estate. Real estate investors can now buy, sell, refinance, and exchange real estate in multiple states without leaving their living rooms. It’s a matter of understanding what’s possible, what’s available now on your menu. Once you grasp the potential you have at your disposal, your horizons will expand very positively.

BawldGuy Takeaway: A real estate investor’s insistence on remaining in their own relatively expensive backyard, is now an inferior option when compared to newly available alternatives around the country. You needn’t be ‘area bound’ any longer. Your menu has expanded.

Give me a call at 619 889-7100 or email me. Together we’ll figure out what your potential is. Have a good one.

Growth is the name of the game, capital growth especially, as it relates to investing in real estate for your retirement. The #1 factor in any region’s economic growth is always about jobs — now and in the foreseeable future. Job growth generates population growth which then becomes a dynamic formula for long term success.

I encourage San Diego income property owners to pay close attention. While watching, mentally compare our investment/business atmosphere to those of Texas. Then ask yourself why you’re not already in the process of moving your equity there.

When you’ve finished watching and pondering, give me a call at 619 889-7100. We’ll figure out if your situation merits a move at this time. Have a good one.

They found the general area of Dallas doing astoundingly well vs the rest of the country. Counting everything, the year ended in May showed that area of Texas, known locally as the MetroPlex, was the most resilient real estate (housing) market in the nation. Told ya so.

San Diego? They’ve tumbled another 19% over that same period. I kept poundin’ the drums last year, hoping against hope real estate investors in areas like San Diego, (Hello, Northern CA, Phoenix, et al.) would look at the data and follow my advice — Get Outa Dodge. It’s not too late. The ever popular ‘Window of Opportunity’ is alive and well — along with very cool investor interest rates.

Warning: Dealing with lenders these days is more than a giant pain in the butt. They’re now checking to see if you were in fact the real author of that fifth grade book report on Iowa: Corn Farmers to the World you turned in back in 1967. If they find that the rumor your buddy Steve did it for you was in deed true, there could be higher costs involved.

My good buddy and lender Tom Vanderwell told me earlier today about a meeting he had today in which more new Fannie/Freddie guidelines were passed out. Tom works for a large national bank in Michigan. Anywho, seems most of the new rules are meant to antagonize more than anything else, but the long and short of it is, the 30 day escrow might be a victim.

Example: Every single tax return will be double checked with the IRS itself. Let that percolate a moment. Every single applicant for a loan will have their tax return(s) verified for accuracy directly with Internal Revenue. Gee, that won’t delay things much, right? Yeah sure, like ordering that diet Coke with your double bacon cheeseburger ‘n fries makes a whale (pun intended) of a difference in your waist size over time.

If you own San Diego income property, or anywhere like San Diego, we should probably talk. Your status quo can be improved far more than you may realize. My cell number is 619 889-7100. Have a good one.

Think buying income properties, allowing them to grow in value over time, then exchanging them — tax deferred via 1031 — for the next 30-40 years is the ticket to your dream retirement? Think again 1031 Cult Breath. Here’s the wicked little surprise that’ll be awaiting you on the first April 15th upon retirement.

Think of a gigantic teeter-totter you’ve lovingly constructed during those 3-4 decades of investing and tax deferred exchanging. One end is heavy laden with tons of retirement income. Pat yerself on the back — great job. The other end of the teeter-totter is loaded with the $4.93 a year of depreciation you have left, due to a huge lack of Planning when it came to tax shelter for all that retirement income.

Oops.

A relatively recent change in tax law involves the taxing of ‘used depreciation’, called ‘Recapture’ at a different, read, higher rate than capital gains. You can pay 24% on the accumulated depreciation you claimed on your tax returns during the ownership of any particular property. You shrug, saying OK, whatever.

Here’s whatever — this tax is on a ‘paper’ event. This isn’t like capital gains taxes for which the taxpayer usually has cash from which to pay said capital gains tax. Nooooo — This tax will come from whatever money you happen to have on hand. So if yer a do-it-yourselfer, be aware of this potentially nastiest of surprises.

Finally, in the last couple decades I’ve been the bearer of bad news on this specific fact of real estate investment life about a dozen times or so. A couple of those times I was told BEFORE it was too late. Here’s the scenario. You bought a property eons ago, and now find yourself with a couple boatloads of equity. You decided to pull out a largish portion of that equity in the form of a new loan. You take the lion’s share of your new found, absolutely tax free (not deferred) cash to buy more property, pay off your Beemer, and write two tuition checks for a couple youngsters carrying your DNA.

A month later you decide it’s time to trade that property, as you’ve become aware of some superb duplexes in the Dallas/Fort Worth area. You sell the property, quickly turning it into a tax deferred exchange — following the rules at every turn. You close the exchange and are very pleased with the results. Then you fill out that irritating form your CPA sends you at some point every year around Halloween or thereabouts, which asks all kinds of questions in anticipation of that year’s tax return, due next April. Then you get the phone call. Your accountant says you may have an itty bitty problem, and by the way, why didn’t you keep him/her in the loop during the exchange?

See, you paid $200,000 originally, then borrowed $400,000 shortly before you did the 1031. You’re intent was pure — refinance to purchase more investment property, pay off your car loan, and get your kids through another year of college. Problem is, the IRS employs a very cynical group. They may send you a staggering tax bill for capital gains received via that very same loan you put on the exchange property just before you did the exchange dance. Why? Simple — You took the ‘tax free’ cash out via the new loan (here it comes) ‘…in anticipation of executing a tax deferred exchange for the sole purpose of avoiding the capital gains taxes for which you would’ve generated had you taken that same cash out of the exchange proceeds’. Have fun finding that wad of cash.

Oops.

Now to be fair, I’ve seen clients and other investors do exactly this and not pay taxes. Why? Who knows? My theory’s always been that it’s something most investors don’t do, at least on purpose, and it just doesn’t get picked up by those reviewing your return. But still, who knows? Not me. But like Clint Eastwood said, “Ya feelin’ lucky?”

Everybody have a wonderful July 4th weekend, and stay safe. Keep this post in mind when you call me the first of the week. 619 889-7100. Have a good one.