The Questions Many Real Estate Investors Simply Don’t Know To Ask
Posted @ 8:36 pm - Filed under 1031 Exchanges, BawldGuy Axiom, Depreciation, IRS, Investment Lessons, Selling Income Property
BawldGuy Axiom: It’s not the answers to the questions you ask that get you. It’s the answers to the questions you never knew to ask that can end up haunting you for years. Put another way — You can’t know what you don’t know. Duh
Today had a pretty happy ending. An agent called me out of the blue. I’ve never met them, but they’d been reading my stuff here and over at BloodhoundBlog.They had just one question, which led to a boatload more, as usual.
She said — “My client is selling one of their rental properties, a triplex, for a sizable loss — about $50,000 give or take. It’s in escrow and scheduled to close on or before August 5th — next Wednesday.”
Their numbers seemed to jive with the set of facts she then had given me. But hard earned experience has taught me to ask the seemingly unrelated questions, as those answers, if they raise red flags, often lead to a complete change of horses in the middle of the escrow stream.
I asked one question: “Did your client exchange into the property in question?”
She didn’t know. I told her to hang up, get the answer, and call me back with the pertinent facts if the answer was yes. You already know the answer, right? It was indeed acquired through a tax deferred (1031) exchange. In fact, from the facts they passed on to me, the gain deferred back then was well over $200,000 — not including any depreciation recapture — from then or now.
Holy Tax Bill, Batman!
The actual numbers were of course not precise to say the least, but I was able to give her a very rough idea of what the consequences were likely gonna be.
The so called ‘loss’ was gonna disappear in the consuming heat of the earlier deferred gain. The long and short of it is, a tax bill that will surely top $30,000 before any depreciation recapture is added to the mix, which of course it will — and at a higher rate too.
The happy ending? They’re converting the sale into an exchange, which will avoid the very nasty surprise awaiting them. It wasn’t their preference, but they’d much rather do that than write that kinda check. They eschewed the other option of canceling the sale outright, as the buyer had performed as agreed, and as the agent said, the seller told her that wasn’t an option. Good for them.
Over the years, this script, or something similar has played itself out more times than you might expect. Again — you can’t know what you don’t know — which means you can’t get critical answers to questions you simply don’t know to ask. It’s often a tragic Catch 22 for real estate investors.
The solution of course, is to find someone who not only knows the questions, but most of the answers as well. If they know all the answers, run, don’t walk to the nearest exit. Nobody knows all the answers.
Let’s talk and find out if there’s a happy ending in your near future. Call me today at 619 889-7100 and we’ll get started. Have a good one.
This entry was posted on Thursday, July 30th, 2009 at 8:36 pm and is filed under 1031 Exchanges, BawldGuy Axiom, Depreciation, IRS, Investment Lessons, Selling Income Property. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.