Posts by: leechen

How the New GOP Tax Law Affects Owners and Investors of Real Estate

December 28, 2017 Business planning, Real Estate, Small Business, Tax Planning Comments Off on How the New GOP Tax Law Affects Owners and Investors of Real Estate

Real estate has always been a major step in achieving the American dream and so there was plenty of concern within the industry that major changes in the taxes affecting owners and investors of real estate would negatively impact the industry and the tax benefits of owning real estate.   While the final tax changes are expected to diminish the tax benefits for some owners such as:  homeowners who take out mortgages above $750K, homeowners using home equity lines of credit, or homeowners in certain markets with high state tax, the overall impact on real estate, in our opinion, is likely to be nominal.   Below is a summary of the current laws and changes to the tax laws affecting owners and investors in real estate.

State and Local Tax:

Prior Law:

Individuals who itemize their deductions can claim deductions for specific state and local taxes including real property taxes, state income taxes, and sales taxes.  Property taxes incurred in connection with a trade or business can be deducted from adjusted gross income without the need for itemizing.

New Law:

Individuals who itemize (which will likely decrease in light of the increase in standard deductions) are allowed to deduct up to $10,000 ($5,000 if married filing separately) for any combination of (1) state and local property taxes (real or personal), and (2) state and local income taxes.  Prepayments on state income taxes in 2017 for future tax years may not be deducted.

However, state, local and foreign property taxes or sales tax may be deducted when incurred in carrying on a trade or business or for the production of income (reported on Schedules C, E or F).

Conclusion:  Generally worse for Taxpayers who itemize and pay high state and local taxes.

Mortgage Interest:

Prior Law:

Individuals may deduct mortgage interest up to $1M ($500K if married filing separately) of home “acquisition indebtedness”  (secured debt to acquire, construct or improve) on their principal residence, and one other residence of the taxpayer which can include a house, condo, cooperative, mobile home, house trailer, or boat.

Individuals with Home Equity Lines of Credit (HELOCs) were allowed to deduct interest paid on up to $100K ($50K if married filing separately) of a Home Equity Line of Credit.

New Law:

For homes purchased after December 15, 2017, the deduction for 1st home mortgages would be limited to interest paid on mortgages up to $750K ($375K for married filing separate) and is not limited to only your principal residence.  For refinances, the refinanced loan will be treated the same as the original loan so long as the new refinanced loan does not exceed the amount of the refinanced indebtedness.

The deduction for interest on Home Equity Lines of Credit has been eliminated which applies retroactively.  However, the new tax law did not modify the definition of “acquisition indebtedness” and so interest on a Home Equity Line of Credit that was used to “construct or substantially improve” a qualified residence continues to be deductible.

Conclusion:  Worse for Taxpayers since the qualifying indebtedness was reduced from $1M to $750K for debts incurred after December 15, 2017, and indirectly due to the increase in standard deduction plus the elimination of deductions of home equity lines.

Depreciation of Real Estate:

Prior Law:

The cost of real estate “used in a trade or business” or “held for the production of income” must be capitalized and deductions made over time through annual depreciation deductions over 39 years (for non-residential) and 27.5 years (residential) using straight line depreciation.

Certain leasehold improvement property, qualified restaurant property and qualified retail  improvement property can be depreciated over 15 years.

New Law:

Same recovery period for residential rental real estate and non-residential.  However, the previous exceptions for qualified leasehold improvements, qualified restaurant property and qualified retail improvement have been modified and consolidated so that they each must meet the definition of a “qualified improvement property” which is then depreciated over 15 years.

Conclusion:  Nominal change

Capital Gains:

Current Law:   Capital Gains rates apply to any net gain from the sale of a Capital Asset or from Qualified Dividend Income.   Capital Gains and Qualified Dividend Income are subject to rates of 0%, 15% or 20%.  Any net adjusted capital gain that would otherwise be subject to the 10% or 15% income rate is not taxed.   Any net adjusted capital gain that would otherwise be subject to the rates between 15% to 39.6% income rate are taxed at 15%, and amounts taxed at 39.6% income tax rate are taxed at 20%.

New Law:  No change in structure, except that the income tax brackets are modified and the amounts subject to these rates will be indexed for inflation based on the Chained Consumer Price Index (C-CPI-U) beginning the end of 2017.  For 2018, the breakpoints would be as follows:

Under $77,200 (married filing jointly) or $38,600 (single) of income, no capital gains

15% Rate:            From $77,400 married filing jointly ($38,700 for single)

20% Rate:            From $479,000 married filing jointly ($425,800 for single)

Conclusion:   Generally better for investors due to the new tax brackets and indexing for inflation.

Exclusion on Gain on Sale of Personal Residence.

No change.  The rule allowing for an exclusion from capital gains in the amount of $500K married ($250K single) for sale of the personal residence used as such for two out of the last five previous years remains.

1031 Exchanges:

Current Law:  No gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged for like kind which is held for productive used in a trade or business or for investment.

New Law:  For transfers after 2017, gain deferral allowed for like kind exchanges of real property only, but real estate held primarily for sale (i.e. flips) would not be eligible.   This applies to exchanges completed after December 31, 2017.  However, so long as the relinquished property is disposed of prior to December 31, 2017, the non-recognition provisions of the prior law applies.

Purchasing Homeowner’s Insurance- Strategies & Pitfalls

December 13, 2017 Asset Protection, Business planning Comments Off on Purchasing Homeowner’s Insurance- Strategies & Pitfalls


People who have read Mark Kohler’s Lawyers are Liars know that our philosophy with respect to asset protection is the “multiple barrier approaches” to put as many barriers as you can between you and someone who would sue you.  For owners of real estate, one of primary asset protection barriers is your homeowner’s insurance policy.

No insurance policy will cover all risks under any circumstance, and so it is important for owners of real estate to request, understand and procure the right policy for their situation.   Unfortunately, getting the right policy tailored your situation may not as easy as just calling your insurance agent and getting whatever they recommend, but requires a careful understanding and analysis of risks that can be protected by insurance, but most importantly making sure your policy actually covers those risks.  Your insurance agent should assist you in deciding on appropriate coverage, but remember that you, not the agent, knows this property the best and so it is your job to communicate the risks and perils on the property to the agent.   Some guidelines that can help maximize coverage include the following:

Tip 1. Make sure you are Dealing with a Licensed Insurance Company or Agent.Both Insurance Companies and Agents are generally licensed by the state and their information can be found online at the insurance department for the state.   Most state insurance departments have resources online to assist you in purchasing the right insurance and make sure that the person or company you are dealing with specializes in that specific area of insurance.

Tip 2. Understand What Type of Risks and Coverage You Need.Every property is different and may entail different risks.   The type of insurance will also depend on whether the property is used as a personal residence, long term versus short term rental, or a condo.    In general, homeowner’s insurance is designed to protect against risks that are outside the control of the owner, such as rain, wind, fire, vandalism, pipe bursting, falling objects, theft caused by breakage of glass, etc.   It generally does not cover risks that are within the control of the owner or occupier, such as flooding caused by drain stoppages, mold, toxic materials, pests, damage or injury resulting from deferred maintenance, intentional criminal acts, etc.  Flood and earthquakes generally require a separate policy. A typical homeowner’s policy will generally classify coverage for (1) Dwellings or other structures, (2) Damage to Personal Property, and (3) Liability coverage.   Knowing what you are specifically looking for in the form of coverage BEFORE you shop for insurance will help ensure that the actual coverage you buy matches your expectation.  An insurance agent will typically gather some specifics about your property and (if your lucky) also have a conversation with you regarding appropriate coverage, and based on that alone will make a recommendation of coverage most likely generated from a computer. The insurance agent will rarely have seen the property nor have any idea of any unique risks existing on the property and so it is your responsibility to discuss any unique risks on the property.

For example, for coverage for “Dwellings,” you want to know, from as reliable a source as possible, the estimated cost to repair or replace the structure with like kind and materials in the location where the property is located.  Construction costs vary depending on the location and the actual costs are often higher than what most people think.  Make sure you understand terms used by your insurance company such as the difference between “Actual Cash Value” versus “Replacement Cost” or “Guaranteed Replacement Cost,” with the understanding that insurance companies may define these differently.  For Personal Property, you want to make sure that important items of personal property are covered, how much they are actually worth, and create an inventory or snapshot of your personal property.

Most people are unaware that homeowner’s policies also provide coverage for personal (not business) liabilities that occur outside of the home.  For Liability Coverage, especially for rentals, you need to be very precise as to what your expectations in terms of what are the most horrible things that could cause significant injuries on the property what the appropriate amount of coverage would be.    Create a list of all the risks and perils that are important for the property (e.g. pools, dogs, trees, neighbors???) so that you can address these with the insurance agent.   Also, understand or ask how the deductible amount or other discounts such as alarms or other safety features will impact the premiums.   Consider what the differences in premiums would be if you increased the coverage especially if you have higher net worth as the premium increase for added coverage may not be as much as you think.   Look online for tips from state insurance departments websites such as insurance.ca.gov, or consumer-oriented websites like www.insuranceconsumers.com   for issues and topics that can help you understand what risks and perils you should be aware.

For condos or other common interest developments, there is often a master HOA policy from the homeowner’s association which generally covers the common walls, areas, and roof.  There may be separate policies for earthquake and flood.  Obtain copies of these policies and consider contacting the insurance agent to inquire about any gaps in coverage. The master HOA policy typically does not cover your interior condo unit and so a separate HO-6 is recommended to cover risks occurring from the “walls in.”  Since condo units often have shared walls, make sure you understand how risks occurring in these shared walls, in particular, water damage will be covered as this type of damage is often tricky to determine who should be responsible in the event of a loss.

For landlords (whether long term or short term), there are different policies depending on the use of the property and so make sure you get the proper policy for your specific use of the property. If you change the use of the property, for example, a personal residence to a long term rental, or into a short term rental, you’ll need to get a different policy to cover the different risks involved with the different use of the property.

Tip 3. Keep Detailed Notes of Your Communications with Insurance Representatives and Confirm, Confirm, Confirm. Although the nature of the relationship between the insurance agent and insured could vary depending on laws of the state and whether they are working for the insurance company or an insurance “broker,” you want to be very clear with your insurance representative as to what coverage is important to you, and any specific requests or expectations of coverage should be made or confirmed in writing to the insurance representative.  Ask and confirm with the agent in writing any specific exclusions from the policy.  In other words, if the agent makes a representation of coverage to you that is important, send a confirmation of that representation in writing (e.g. email, fax, etc.) so that a record exists confirming your expectations.  Better yet, ask the agent for a copy of the policy beforehand.  Most agents won’t volunteer this but any agent that has been doing this for any amount of time should have this handy.   Keep copies of everything, including advertisements and marketing as that information could be relevant in a coverage dispute.   If you’re not sure about the type or amount of coverage you need, ask the insurance agent for their opinion and confirm this opinion in writing.  An insurance agent who makes a representation to you concerning coverage could be bound by that representation even if it doesn’t appear in the policy so it is important to document all communications with the agent to hold them accountable for what they say.

Tip 4. Read Your Policy. I’m not talking about the 1-2 page “Declarations Page” that is only designed to show proof of coverage, but 20-30 page insurance “Binder” or “Policy” that contains the details of the actual coverage and exclusions.  No one really enjoys reading insurance policies and don’t be surprised or embarrassed if you don’t understand what you are reading.  It is a well known fact that insurance companies intentionally make their policy language difficult so as to create ambiguities as to their coverage responsibility.    Nevertheless, don’t let the first time you read the policy to be when you need to file claim.   Get ahead of it beforehand which will give you the perfect opportunity to ask questions and to clarify coverage with the insurance agent before a claim arises (See #2 above).   Be assured that if a claim is ever made, the adjusters and defense attorneys will be combing through the policy language with a fine toothed comb to try and evade responsibility.   If you do ask questions about the policy language, don’t be surprised if the insurance agent initially doesn’t understand what the policy says either as that is quite often the case, but make sure you get an answer to your questions in writing.

Tip 5. Coverage for an LLC.For those of you who own rental property in an LLC, check with your insurance agent as to what they would require to add the LLC as an additional insured.  Some companies will simply add the LLC as an additional insured in addition to the owners.  If your insurance agent tries to sell you a different policy such as a commercial policy, consider getting a second opinion, and again, do not rely merely on the verbal assurances of your agent, but confirm it in writing.   If you have a mortgage, be aware that some lenders may periodically ask for proof of coverage, and so there are possible due on sale implications for adding an LLC as additional insured.

Getting the right insurance coverage should be one of your front line defenses in your overall asset protection strategy.  Doing your homework beforehand, exercising proper due diligence during the process, and making sure there is a paper trail of your dealings with the insurance company will help ensure that there will be coverage in the event of a loss.

Five Benefits of the Solo 401K

November 6, 2017 Retirement Planning, Tax Planning Comments Off on Five Benefits of the Solo 401K

For many Americans, saving for retirement is like exercising or eating healthy, we know we should do it but most of us don’t.   In fact, a survey published by the Washington Post reported that over 70% of Americans are not saving enough for retirement and a study by the US Government Accountability Office reported that as many as half of American households 55 or older have NO retirement savings at all!   A recent Merrill Lynch report estimates the average cost of retirement to be nearly $750,000 but this obviously depends on your standard of living and life expectancy.   With advances in technology increasing our lifespans, we need to plan accordingly in order to have what we need in retirement.

The Solo 401K is the ideal vehicle for small business owners with no full time employees to save for retirement through its generous contributions limits which can offset your taxable income.  If your small business generated a profit this year and you are looking for a nice year-end tax deduction, the Solo 401K may be the perfect solution for you.  We have compared the other available retirement options for small businesses and the Solo 401K consistently wins hands down.  Some of the benefits include:

1. Tax Savings: In 2017, the employee contribution limit is $18,000, or $24,000 if you are 50 or over.  Compare this with the contribution limit of $5,500 for IRAs.   In addition, the business itself can do an employer match up to 25% of the employee’s W-2 compensation.  For an example, let’s assume you have a net income of $100,000 in your s-corp business and you took $35,000 as your salary.  Your contributions (traditional) and tax savings are as follows.

Employee traditional 401K Contribution                                 <$18,000>

Employer Match at 25% of $35K                                                <$8,750>

Total Solo K Contributions                                                            $26,750

 

Tax Savings (approx. 25% federal):                                           $6,700 (approx.)

Plus State Income Tax Savings Depending on State

For a calculator that allows you to determine your contribution levels based on your income, refer to this website, check your business entity type (sole prop LLC, partnership, s-corp) and it will calculate the solo K contribution amounts.

2. The Ability to Self Direct: The solo 401Ks established by KKOS  allows you to self-direct your retirement account which means, with very few exceptions, you can invest in virtually any type of investment you want.  Rather than be stuck with the investment options that Merrill Lynch or Charles Schwab offers, with a self directed 401K, you can invest in “what you know.”    Do you want to be a lender and get a fixed rate of interest through your 401K?  Or perhaps purchase a rental property if your interest is real estate?  Maybe a startup company in an industry you have an interest.  All of these options are possible with a self directed 401K.

3. No Third Party Custodian: By contrast to an IRA which requires a third party custodian, the 401K owner in a solo 401K can acts as his/her own trustee.  The other options to self-direct is through a self-directed IRA, however, in a self-directed IRA (without an IRA/LLC) all of your transactions needs to be processed through the third party IRA custodian.  Some clients have reported that they were unable to secure a deal due to the delays of having to go through the third party custodian.  On the other hand, with a solo 401K, you, as the trustee of the 401K, have the freedom enter into transactions or make investments on behalf of the 401K thereby eliminating the expense and delay of involving a third party custodian.  You’ll also have a checking account and “checkbook control” such that you can sign checks or send wires to make investments or to pay expenses. With freedom, of course, comes responsibility and so you must be intimately familiar with the rules and restrictions for self directing your 401K to avoid penalties and taxes with the IRS.

4. You can take a Personal Loan from your 401K: With an IRA, there are  very limited circumstances where you can use money from the retirement account for personal reasons and because of these restrictions, using IRA money for personal purposes is not a viable option.  With a 401K, you can take a loan of up to $50,000 or 50% of the value of the 401K, whichever is less, and use those funds for any purpose.   401K loans must be in writing using a compliant 401(k) participant loan note and, must provide for, at a minimum, quarterly repayments within five (5) years.  However, for individuals who need quick access to cash, the 401K loan is usually a much better options compared with those available for IRAs.

5. No UDFI Tax:   When you leverage your investment in an IRA with borrowed funds, any income that is received that is attributable to those leveraged funds is subject to Unrelated Debt Financed Income Tax (UDFI).   For example, if you buy a $100,000 rental property through your IRA, but 50% of the purchase price was from a non-recourse loan, 50% of any income from that investment will be subject to this UDFI tax.    By contrast, there is no UDFI tax for 401K investments arising from debt on real estate.   So any income you generate from that $100,000 property in your 401K would grow tax deferred even though you only really used $50,000 of retirement funds to generate the income.   That’s having your cake and eating it too!

In order to qualify for a solo 401K, you must have a small business that generates business income (sorry, rental properties alone generally do not qualify as a small business).   The 401K must be established before the end of this year in order to obtain the tax benefits for this year.   For those business owners who are looking for year-end tax strategies to lower your taxes, the solo 401K may be the perfect fit.

For more information on how the Solo 401K works, take a look at our 1 hour solo 401K webinar available here.

Creative Planning Options with a Revocable Living Trust

October 17, 2017 Business planning, Estate Planning, Uncategorized Comments Off on Creative Planning Options with a Revocable Living Trust

Estate planning is something most know they should do, but most American adults simply haven’t gotten it done.  In a survey available from AARP,  60% of American adults do not have an estate plan.  The number gets even higher for some minority populations.  In most cases, this is simply due to procrastination that “I just haven’t gotten around to it.”  Many people that I speak to as a lawyer simply don’t understand the consequences of passing away without an estate plan.

One of the primary reasons for a Trust is to avoid probate, which is a court supervised process for the distribution of a decedent’s assets (especially real estate) when a person dies without a trust.  However, the revocable living trust affords many creative planning opportunities that generally cannot be accomplished without a comprehensive estate plan.  Many individuals who have not consulted with a professional estate planner do not know the creative strategies that can be accomplished through a trust.  Examples of some creative planning opportunities include:

Planning for the Disabled

In general, eligibility for certain need based government benefits such as disability or SSI have restrictions based on income and assets.    Many people mistakenly assume that if they have a child or other dependent that is disabled or who otherwise relies on government benefits, that they should disinherit these disabled dependents in order to ensure that the dependents continue to qualify for disability benefits.  Disinheriting a dependent entirely just so they can continue to get disability represents a fundamental misunderstanding of the available options and often times simply indicates bad planning.  A “special needs trust” is a special type of trust that can allow a dependent to potentially receive funds and benefits from the trust without interfering with government benefits.    These types of trusts require very precise terms and conditions so that any benefits from the trust do not disqualify the dependent’s eligibility for the particular government benefit to which the dependent is or may be eligible.

Asset Protection for the Beneficiaries (Your Kids/Heirs)

A trust can provide significant asset protection for children who have difficulties handling money or who are otherwise high risk.  Most states allow trusts to contain “spendthrift” provisions which can restrict the ability of creditors of the beneficiary from reaching the beneficiary’s interest in the trust.  In general, a creditor can only reach assets from a debtor which the debtor himself/herself can reach.  Different states may have different rules and there may be exceptions for certain types of creditors (for example, claims by a spouse for alimony or child support may not be protected by a spendthrift clause).  In addition, the protection of the spendthrift provision general applies only to the beneficiary, not the original creator (i.e. the grantor) of the trust.  However, the spendthrift provision could be an effective planning tool to provide for your beneficiary without risking that the trust could be subject to that beneficiary’s creditors.

Planning for Blended or Non-traditional Families

Lets face it, our conception of the family unit from generations ago is constantly changing and evolving.   Many of us are now raised in blended families, or by individuals who were not our blood parents, or live in various types of family arrangements.  In most cases, the law has not evolved in recognition of these different family arrangements.   A primary purpose of the revocable living trust is to dictate how your loved ones will share in your legacy.  With a Trust, you can help ensure that certain individuals do (or don’t) share in your legacy.    Otherwise, leaving this decision up to the laws of the state could result in people you care for being cut off from your estate.   The most common example is someone who divorces and remarries but has children from the original marriage.  In many states, if that person passes without an estate plan (will or trust), the estate passes to the surviving spouse and the children from the first marriage are cut off.   Proper planning using the revocable living trust will help ensure that the people you wish to benefit will actually receive those benefits.

Planning and Supporting a Legacy

A trust is a very flexible document and can be drafted in different ways to support the ones you love but not allow the assets to be wasted.  Do you want to provide support to a grandchild, but not have it affect their eligibility for financial aide for college?  Do you want to help a child start a business, but not unless he/she first gets a college degree?   Do you want to assist your children to buy their first home, or finance their wedding?  A revocable living trust allows you to set terms and conditions for your generosity to ensure that your gift is used the way you wanted it to be used, and for nothing else.

Of course if you’re one of those people who feel that “I can’t take it with me so I’m going to spend it all now,” then perhaps these planning opportunities are not for you.  But for those who wish to leave a legacy behind for your loved ones (or loved causes) future and want it protected and preserved for this purpose, the revocable living trust can provide infinite possibilities to secure your legacy.

Til Death Do Us Part – Marriage and Asset Protection

August 15, 2017 Asset Protection Comments Off on Til Death Do Us Part – Marriage and Asset Protection

The question of whether a spouse can be held liable for the debts of the other spouse is often asked from married  (or to be married) couples, but the answer is not uniform and depends largely on  the laws of the state where you reside.

MOST STATES – COMMON LAW TREATMENT

The large majority of states that are NOT one of the nine “community property” states discussed below operate under the “common law” system, derived from Great Britain.  In these common law states, the liabilities of married couples are generally determined under the “title” theory, meaning whichever spouse is on title for the asset owns the asset, and whichever spouse was responsible for incurring the debt is solely responsible for that debt.  Spouses in common law states are generally not jointly liable for debts unless they both are involved in procuring the debt as a “joint debt.”  As a result, if a married individual in a common law state alone incurs a debt, the creditor would generally be limited to recovering from that individual’s assets only, and no recovery could be made from assets titled in the name of that individual’s spouse.   On the surface, this would encourage married couples to segregate their finances so that valuable assets are held in the name of the spouse with lessor risk, and corresponding debts in the name of the spouse with higher risk.  However, these rules are very state specific and, of course, moving your assets around when a creditor is already on the horizon raises fraudulent conveyance concerns, and so any asset protection planning should be done before the need arises.

Some common law states create an exception to the “title” rule for debts that are deemed for “necessities” or for “family expenses.”  In those states, spouses may be jointly liable for debts that are necessary for the family such as education, household, or medical debt even if the debt was obtained by one spouse only.   States also vary in how broadly they define debts deemed to be “necessities” or for “family expenses,”  and so it is important to understand how your state defines these terms to understand under what circumstances a creditor can attach the assets of a both spouses for the debts of only one.  Other states impose joint liability if the liability was created when a spouse was deemed to be acting as an agent of the other spouse, and so anyone concerned about spousal liability would need to familiarize themselves with the rules unique to their state.

TENANCY BY THE ENTIRETIES

In states that recognize “tenancy by the entireties,” assets owned jointly by the spouses as “tenants by the entireties” are deemed to be owned by the couple as a whole, and not owned by each spouse individually.   In these jurisdictions, a creditor of one spouse is generally unable to attach property owned “by the entireties” unless the other spouse also joined in the creation of the debt.   Therefore married couples in states that allow “tenancy by the entireties” often hold valuable real estate in this manner which can provide effective asset protection against creditors of just one of the spouses.   Again, these rules are not uniform as some states may find that a debt entered into by one spouse is nevertheless a joint debt if the non-debtor spouses knows, benefits, consents or ratifies the debt.

COMMUNITY PROPERTY

In the nine community property states (CA, AZ, TX, WA, ID, NV, NM, WI, and LA) which derives their marital property law from the Spanish system, each spouse in a marriage is deemed to own a ½ interest in assets that are deemed community property.  Since each spouse has a half-interest their individual debts could be attached and satisfied by a creditor against their 1/2 interest.  Therefore, by contrast to the common law system which relies heavily on “title,” the key component in community property states is not who owns the property, but how the property is characterized.   For these reasons, experts generally agree that community property states are more creditor friendly than their common law counterparts.  For example, assume a couple consisting of a primary wage earner and a homemaker.  The wage earner purchases a house during marriage using wages from employment, and takes title in the wage earner’s name only.  The homemaker then gets into a car accident which is not fully covered by insurance.  The resulting liabilities would obviously depend on the specific state but generally, in a common law state, the house could be protected from the homemaker’s liabilities because title is held in the wage earner’s name only, whereas in a community property state, ½ of the house could be exposed because the property would likely be deemed community property which the homemaker owns a ½ interest.   Therefore, marriage in a community property state could effectively expand the potential assets that creditors of either spouse can reach to the extent a married couple acquires assets characterized as community property.

Since exposure of assets in community property states depends on characterization, there is an incentive for married residents in community property states to consider marital property agreements that alter the characterization of assets (i.e. pre-nuptial or post-nuptial agreements).   The procedural requirements to form an enforceable marital property agreement, and the extent to which such agreement will protect your assets will depend on the laws of the state.  Therefore, consulting with an expert who understands these nuances in the respective state is essential to ensure that any asset protection goals are maximized.

Any married individual concerned about asset protection would be well served to understand the specific rules in your state governing the exposure of your assets to creditors, what tools exist in your state to mitigate your exposure to spousal liability, and how to utilize these tools in a manner that maximizes your protection in the event of an unforeseen liability.   Most important is the need to engage in this planning before it is actually needed as any planning done when a creditor is already in the fray may be vulnerable to attack as a fraudulent conveyance.

Legal Tips for Wholesaling Real Estate

July 18, 2017 Business planning, Real Estate Comments Off on Legal Tips for Wholesaling Real Estate


Many real estate investors regard wholesaling as a way to learn how to evaluate deals and develop your real estate network.  It is also a method to profit from investing in real estate without requiring significant up front capital.  Wholesaling is a strategy whereby the wholesaler enters into a purchase contract with a seller of real estate and then assigns the purchase contract to another third party who will typically rehab the property and flip it for a profit (at least that is the goal).

Although most investors regard wholesaling as involving less risk than, for example, the flipper who is rehabbing and selling the property, there are always risks in any transaction, and so the purpose of this article is to identify some of the common legal issues to look out for in your wholesale deals.  This article is not designed to teach you the strategies for being a successful wholesaler, such as how to find properties, how to approaching homeowners, etc., but instead, focuses on some of the legal aspects of wholesaling that investors should be aware.

Licensing Issues:  Be aware of potential licensing requirements for your state:  Different states define the scope of activities that require a license differently and so you should be aware of what activities are regulated by your particular state and act accordingly.  For example, California generally defines a real estate broker as someone who sells, buys or negotiates for another with the expectation of compensation.  If your activities in California meet these elements, then be advised that you may need to be licensed as real estate agent.   Any questions regarding state licensing requirements should be directed to an attorney with knowledge of the requirements of that state.

LICENSING ISSUES

Understand the Rules & Procedures Governing Real Estate Transactions in your State:  Many states have unique laws, forms or disclosure requirements for real estate purchase transactions.  For example, in California, a seller is required to provide a transfer disclosure statement and if the property is in foreclosure, there are additional required disclosure requirements.  Failure to abide by the rules that are required in your state could cause legal issues down the line in your transaction.  You don’t want to have a seller or your end buyer come back later raising an issue with the transaction that could have been avoided had you followed the proper procedures for real estate transactions in your state.

DISCLOSURE & TRANSPARENCY

Be Transparent as to your Role in the Deal:  If your intent is to wholesale the property during escrow, the homeowner should be well aware in writing that your intent is to assign the deal to a third party for profit, and the contract language should give you a unilateral right to assign without requiring the consent of the homeowner.  Most standard form purchase agreements you get from realtors do not have this language and so an amendment or specially prepared form may be necessary.   On the buyer’s side, you should be very clear in your written agreement with the end buyer as to what you will be responsible for and what will be the responsibility of the end buyer.  For example, are you going to do an analysis of after repair value (e.g. running comps and estimating repair costs)? Run title?  Do an inspection?  What happens to your earnest money deposit once you assign the contract to the end buyer?   Your agreement should clearly specify in detail what your specific obligations are in the deal, where your obligations in the deal ends, and what the end buyer is expected to do to close the deal.  It is better to have these details on who does what expressed clearly in writing rather than rely on assumption.    Most importantly, you should include language that fully releases you from any further obligations or liabilities in the deal to ALL parties once you complete the assignment to end buyer.

CONTINGENCY CLAUSES 

Make Sure Your Contingencies are Clear.  This should go without saying, but depending on the specifics of the particular deal, it is important to properly set the expectations early for all the parties involved.   I typically advise clients who wholesale properties to have a good understanding of what their potential end buyers want in a deal in terms of location, spread, contract language, due diligence items, etc.  I also encourage individuals wanting to pursue wholesaling to develop relationships with rehabbers as early as possible, preferably before getting a property under contract, so that they have a good idea of whether they will be able to successfully complete the assignment as intended.    It is highly recommended to have your team of professionals such as realtors, contractors, appraisers, etc. in place to provide accurate feedback as you analyze the merits of your deal.  Finally, have an attorney’s fees clause in your agreements so if you have to pursue legal action to enforce the agreement or your contingency clause, you preserve the right to seek your attorney’s fees.

Of course, making sure you are covering yourself legally is just one detail for successful wholesaling.  Finding the right properties, learning to negotiate with homeowners, and developing a network of professionals to assist you during the wholesaling process are all necessary aspects for successful wholesaling, but making sure that you are covering your bases legally will help ensure that your wholesale deals proceed smoothly with minimal possibility for conflict.

The Realities of Litigation

June 27, 2017 Business planning, Law, Litigation Comments Off on The Realities of Litigation


For most people involved in a dispute, declaring the words “See you in Court!!” can seem like the perfect threat or even feel therapeutic at the least. Some even presume that by stating “I’m going to sue you” is like declaring nuclear war against the other side and the person or company that wronged you will certainly want to ‘settle’ because you have scared them with a lawsuit.

However, people who have actually been participants in litigation soon realize that there is no such thing as “inexpensive litigation,” and many individuals, fueled by the passion of a person scorned, proceed hastily to the courthouse seeking vindication or retribution without having a full understanding of the realities that they are getting themselves into.

Certainly, one of the great hallmarks of our society, and what separates the American system from many others around the world is an independent judiciary. But again, the media frequently oversimplifies what is actually involved in the legal process with its sole focus on sensationalizing the outcome thereby conveying a misleading impression of the actual litigation process.   Here are a few misconceptions I frequently encounter with clients about the litigation process include the following:

  1. Are you ready for the PROCESS? Unless you are in small claims, you generally don’t just file a lawsuit and then get to see Judge Judy the very next day. Media usually focuses on “trials” only, but ignores the months (usually years) of pre-trial procedure needed to get to that point.    Litigation usually begins with a “Complaint” which begins the “pleading” phase where the parties set forth their allegations and responses in defense. Sometimes there could be challenges to the pleadings through the motion process, which add additional expense and delay. Once the pleadings are done, then the parties have the opportunity to require other parties to the lawsuit to answer questions, produce documents, or take testimony of witnesses (the “discovery” phase). It should come as no surprise that parties to litigation are not always so eager to provide information that may hurt their case, and so the discovery process can often take months or years with parties jockeying in court over who should get what.   Assuming the parties have completed discovery, that does not necessarily mean you go to trial.   Trials only occur when there are actual factual or legal issues in dispute which requires a judge or jury to determine, and the reality is that most lawsuits do not go to trial. Although the cost of litigation varies depending on the location and issues involved, what I usually tell clients is the cost to go through these procedures to litigate a normal civil matter from Complaint up to but not including trial, doing a minimal amount of work, can easily run between $50,000 to $100,000. Preparing for and conducting a trial can substantially increase these costs and so unless you’ve retained an attorney on contingency, the expense and delay litigation is definitely an important consideration for most litigants.
  2. Does the Opposing Party have Assets to Satisfy Your Claim?  Usually this is the first question I ask a client contemplating litigation, and many times it is question the client hasn’t considered. It makes no financial sense to pay tens to hundreds of thousands of dollars on a case if the defendant has no money.  Although I’ve had my share of clients walk into the office wishing to sue “on principle” or “just to make a point,” these moral considerations usually get thrown out the window very quickly once we begin to discuss the costs that will be incurred to get them to where they want to be.   So unless the opposing party has significant, identifiable assets that may be exposed in a lawsuit, or there is sufficient insurance to cover the claim, many potential litigants find themselves having no remedy for their claim because the opposing side is essentially “judgment proof.”
  3. Do you realize how unpredictable litigation can be? This should go without saying, but I spoken with plenty of people contemplating a lawsuit express confidence that a judge or jury would find them in the right. In litigation, it is less about who is wrong or right and more about what you can prove. Court decisions are ultimately made by people who come from all types of backgrounds and from all walks of life, and attorneys in high stake cases often employ professional “jury consultants” and perform “mock trials” to gauge how a jury will likely view their case. Despite all the money that is spent on attorneys, consultants, experts and the like, even the best attorneys with the greatest of resources lose cases, and most of us have probably followed cases in which we were surprised by the outcome. From a legal perspective, the reason there are trials is because there are issues of law or fact in which “reasonable people can differ.” If every issue in a case was a “slam dunk,” then there would be no need for a trial.

For these reasons and more, I consider litigation to be the option of last resort. Although the media likes to portray litigation and trials as dramatic and full of suspense (which it certainly can be), they leave out the cost and the time consuming process.

Consider interviewing several litigation firms before embarking on your lawsuit and make sure you weigh all the pros and cons of a long draw out lawsuit. It doesn’t mean litigation shouldn’t be a tool, threat or productive option in your dispute, but just go into the process with your eyes wide open.

What You Should Know about Administering a Family Member’s Estate

May 23, 2017 Estate Planning, Law, Retirement Planning Comments Off on What You Should Know about Administering a Family Member’s Estate

Most of us will, at some point in our lives, be called upon to administer the estate of a departed family member or loved one. While it may seem like an honor to have been entrusted with this responsibility, the reality is often it is a thankless, time consuming job, and even more so if there are disagreements and disputes among the heirs or beneficiaries of the deceased.

Being asked to shoulder the responsibility of administering a decedent’s affairs while still mourning their loss can be challenging. The precise rules and procedures that apply will depend on whether the decedent had a trust that was fully funded, whether probate will be necessary because the either decedent did not have a trust or did not fully transfer all relevant assets into the trust.

It will also depend on which state laws apply as well as the value of the estate. Keep in mind that it is impossible to provide an all-encompassing checklist that applies to each family situation and the procedures may vary greatly depending on if the decedent had a will or a trust. However, here are some general guidelines to keep in mind, some of which may or may not apply depending on the situation:

  1. Seek Professional Advice.   This is something you may only do once in your lifetime and Google is not going to give you all the answers you need.  Also, keep in mind you do not have to go at this alone. Depending on the value of the estate and its complexity, you may want to employ the services of professionals such as attorneys, CPAs, appraisers, etc. to assist in navigating your responsibilities. Typically this would entail an estate attorney, a CPA knowledgeable in estate and income taxes, and a financial advisor, although additional professionals may be needed depending on the situation. Usually, these fees would be paid from the decedent’s estate and so there should be no financial disincentive to seek help if needed. There may be certain actions, decisions, procedures or deadlines that need to be met in a timely manner, which could impact the ability of heirs or creditors to make claims or challenges to the estate. Most people are not aware of these rules and deadlines and so getting the right advice from the start may be good protection for both you and the estate.
  2. Inventory and Secure the Decedent’s Assets & Important Documents. A trustee or administrator of an estate is charged with the duty to assemble, inventory and safeguard the decedent’s assets and important documents. In the immediate aftermath of a death, it could be a chaotic situation with visitors and relatives coming and going and, as the representative of the estate or trust, it is incumbent on you to safeguard the important assets and documents. You will need to determine whether the decedent had a will or trust, and assemble all important documents, contracts, bank accounts, financial accounts, safe deposit boxes, investment accounts, unpaid wages or other income sources, mortgages, insurance policies, retirement accounts, social security or other government benefits, pensions, real estate, businesses, prior tax returns, digital assets (email, social media accounts), etc. of the decedent. It may take some investigation into the files of decedent or interviewing the family members to uncover all potential assets and liabilities, and don’t assume decedent told you everything there was to know. A separate bank account will likely need to be set up for the estate or trust, and never comingle your personal finances with the estate/trust finances. You will need to obtain several certified copies of the death certificate in order to establish control over certain accounts held by third party custodians/banks. Some assets such as real estate may need to be appraised to determine the fair market value for purposes of estate taxes, reporting, or for distribution.
  3. Gather and Assemble a List of Decedent’s Creditors. This does not necessarily mean that you will immediately pay every bill as soon as it arrives. Rather, there could be other expenses that take priority such as funeral expenses or federal and state taxes. As a trustee or administrator of the estate, you could get into trouble by paying expenses that then leaves the estate unable to meet its tax or other priority obligations.   It is important to try and get a broad picture of the Decedent’s overall financial situation, including factoring in potential tax liabilities, in order to establish a game plan for administering the estate or trust and paying creditors. Of course, some debts such as mortgages or car payments need to be timely made to prevent the account from going to default, but have a concerted strategy for handling Decedent’s creditors. If it appears that the estate may not have sufficient assets to cover all liabilities, then professional assistance or assistance from the courts may be needed to determine how to prioritize payments.
  4. Notify Decedent’s Heirs and Beneficiaries. Some states have time requirements on when heirs and beneficiaries should be notified and whether they are entitled to receive a copy of Decedent’s will or trust. Their ability to bring challenges to the trust or estate may depend on when they were first notified and so seek help to determine the requirements in your situation and document your communications with heirs and beneficiaries.
  5. Manage the Assets of the Estate Prudently and Obtain the Consent of Heirs or Beneficiaries for any Major Actions. As the trustee or administrator, you are a fiduciary and must act in the best interests of the beneficiaries or heirs. You generally have a duty to manage and invest the assets as a reasonably prudent investor would and can be held personally responsible for failing to do so. Therefore, seek the advice of legal and/or financial counsel regarding any issues with managing or investing the assets of the estate, and if a decision needs to be made regarding an important asset (such as selling the asset, making significant improvements to real estate, etc.), consider obtaining the written consent of all beneficiaries before authorizing such action.
  6. Distribute the Assets to the Heirs/Beneficiaries. Once all the creditors and taxes have been paid and the estate is in a position to be distributed to the beneficiaries, an accounting may need to be performed and approved by the heirs/beneficiaries, and then the assets of the estate/trust may be distributed and estate or trust closed.

Again, keep in mind these are only general guidelines for administering trusts and estates and there may be specific state or federal requirements and deadlines that will apply to your situation. If you have a particularly large estate that may implicate state or federal estate taxes, there are likely additional requirements and deadlines and so it is recommended that you check with appropriate professionals as soon as possible for large estates.

For smaller estates or assets with lower value that are not held in trust, there may be other options for distributing those assets without the need for probate.   The rules and procedures can be rather complex depending on the state and the situation and so make sure you consult with appropriate professionals to ensure you are complying with your responsibilities as a fiduciary for the estate/trust.

What Do I Need to Know About Title Insurance

April 4, 2017 Real Estate Comments Off on What Do I Need to Know About Title Insurance

We all know that title insurance is a necessity when purchasing real estate, but many do not have a sufficient understanding of what title insurance is really for and steps we can take to deal with title insurance companies to prevent being embroiled in a title dispute. Litigating title disputes can often be long, expensive, and often difficult to predict the outcome with any certainty. For that reason, having a solid grasp of what title insurance can do and cannot do is important for any would be purchaser of real estate.

The condition of title is one of the most important due diligence items for a buyer of real estate.   Purchasers usually want title to real estate to be clean, or as lawyers describe it to be “marketable.” Marketable title does not mean title that is completely free from any liens or claims, but merely title that is sufficiently free from doubt that an informed and reasonable buyer would accept it. For example, some legal descriptions for properties will exclude mineral rights, or contain easements for sewer, gas, or other utility lines. Technically, these are claims or “encumbrances” against title, but most would not consider these types of claims to be a sufficient “cloud” on title to render it unmarketable since those types of claims typically do not affect a buyer’s right to enjoy the property.

WHAT IT A PRELIMINARY TITLE REPORT?

Title insurance does not remove defects nor does it guarantee marketable title, but merely provides a means of recovery if title does prove unmarketable for a reason that is covered under the policy. In a typical real estate transaction, one of the initial first steps in escrow is that the title insurer will issue a “Preliminary Title Report” (“Prelim”). This is a crucial document for buyers to understand as part of their overall due diligence.   Contrary to popular belief, a Prelim is not a guarantee of the condition of title and title companies are generally not liable for errors appearing on the Prelim. I’ve seen cases where title insurance companies made mistakes on the Prelim, but unfortunately there was no recourse against the title insurance company because the Prelim is merely an offer, not a binding representation of title.  Therefore, although Prelim is a good starting point for conducting due diligence on the condition of title, but depending on the property, additional due diligence may be needed above and beyond what appears on the Prelim. Additionally, following a Prelim the Title Company issues a commitment for title and issues their title policy off of this commitment. It is the terms of the actual policy that comes from the Title Commitment that you need to be most certain about as the Prelim is not binding on the insurance company.

UNDERSTAND THE EXCEPTIONS TO YOUR POLICY

The most important part of reading the Prelim and the Commitment that follows is understanding the exceptions. The Commitment will list the exceptions which are items that would not be covered under the policy. Exceptions may be specifically listed, such as existing mortgages, unpaid taxes, federal tax liens, recorded easements, etc.   There are also general exceptions that are typically listed as an Exhibit to the Prelim or Commitment as a “Schedule B” Exception. These exceptions are usually described very generally and in legalese (i.e. most purchasers don’t pay attention to it). However, it is important for the purchaser to have a general understanding of these general exclusions so that if there is a potential issue on the property that is possibly excluded under these general exceptions, the purchaser can consult with the right professionals (lawyers, inspectors, surveyors, etc.) to determine what are the risks, and what steps can be taken to fix the defect (or else re- negotiate the price or cancel the deal).

For example, boundary disputes and encroachments from neighbors are typically not covered under a title policy. If the physical inspection of the property shows some doubts as to the boundary lines (e.g. no walls or physical marker showing the boundary lines or trees along the property line that create doubt as to whose side of the property it is on), then further due diligence, hiring professionals, or conducting a survey would be recommended. Even though standard policies may not cover certain risks, additional coverage might be available to cover these types of claims for an additional fee if you inquire.

Furthermore, standard title policies typically cover only matters in the public record (recorded liens, easements, judgments, etc.) and do not cover issues not shown in the public records.

As such, the Prelim and Commitment should not be the sole resource for determining whether there are issues with title, but if there are any doubts, these should be independently researched, or any doubt should be addressed directly with the seller and/or title rep.   For example, if the seller has been sued, or owes taxes to the IRS, these issues may not appear on the Prelim or Commitment if nothing has yet been recorded, but those issues could definitely affect your interest in the property, and so consider confirming with your seller that they are not aware of any unrecorded interests that could affect title or conduct your own independent due diligence. In addition, Prelims and Commitments may disclose the existence of a lien, but fails to provide specific information about its details, and in those cases, actual copies of the lien documents should be obtained from title or the seller.

GETTING A SPECIAL ENDORSEMENT

Any questions regarding the condition of title should be discussed with the title officer and/or attorney so that further investigation can be done to determine what can be done with respect to any title issues that arise during escrow. Sometimes a title insurer may be willing to issue a “special endorsement” to cover a particular title issue that would not otherwise be covered under the policy, but it is incumbent on the buyer as part of his/her due diligence to inquire about these issues, and of course, preferably during the due diligence period while the buyer still has the right to negotiate or cancel the deal. These types of inquiries should be made in writing so there is a record documenting the discussion.   I have experienced situations where a title insurer initially denies coverage for a claim stating that they were not aware of the issue, but then had to reverse course when presented with written evidence that the issue was discussed with the title company during escrow.

Finally, as with any insurance company, it is important to make sure you are working with a reputable company that will be there for the long haul. Getting a policy on the cheap from an unknown company will be useless if that company goes out of business. Choice of title companies are negotiable, although if the seller is paying for title insurance, they will usually insist on their own title company. Make sure that company is legitimate and has an established history and track record.

Fortunately, most homeowners will never need to make a claim on their title insurance. However, anyone who has experience litigating these types of disputes knows that the outcome is frequently hard to predict, and is often determined by which party has the most resources. If a claim ever arises requiring litigation, you’ll want to have the resources of an insurance company defending your interests, and in order to maximize that possibility, it is important to perform your due diligence on the property, on the title insurance company, and the details of the policy they propose to issue for your property.

Alternatives for Securing Your Loans or Investments

March 7, 2017 Asset Protection, Business planning, Law Comments Off on Alternatives for Securing Your Loans or Investments

We often advise clients who want to loan money or participate in an investment to “get adequate security” for their investment. The purpose of getting additional security for your loan is so that you have something else that you can go after if the loan goes south.

Ordinarily, if your loan is “unsecured,” it generally means that if the investment tanks, then your only remedy would be to sue the debtor and go through the potentially expensive process of litigation in hopes that you can get a judgment against the debtor, and perhaps most importantly, that the debtor will then have assets from which you can collect.

In our experience, if a debtor has defaulted on your investment, they are likely experiencing financial issues as a whole, and will unlikely have assets for you to recover from even if you prevail in your lawsuit. Moreover, a debtor having financial issues and/or without assets is a likely candidate for bankruptcy, and for those reasons, investors who are reduced to having to resort to the court system to remedy a failed investment are often just throwing good money after bad.

In general, real estate with sufficient equity to secure the investment is the best form of security for the primary reasons that real estate is immovable, and there is a well established public record for recording and determining rights and priorities to real estate.

However, if securing your investment with real estate is not an option, that does not mean your investment must be unsecured. In fact, virtually any type of property or asset can serve as collateral for an investment. Unlike real estate, the process and laws for securing your investment using “personal property” as collateral will depend on the type of property as well as the applicable state, local, and sometimes federal law that apply.   Examples of personal property that can serve as collateral for your loan include the following:

  1. Interests in Inventory, Equipment, or Fixtures – If you are lending to a business and that business has assets, those assets could likely serve as security for your loan. In general, this would require an additional “security” agreement which specifically identifies the assets that are being offered as security for the loan, which then must be “perfected” usually by filing a UCC-1 Financing Statement with the Secretary of State for the state where the business is located. This procedure is most often used by banks and other financing companies for business loans that are not secured by real estate. The benefit is, like real estate, the office of the Secretary of State serves as a central resource where anyone can access to determine the existence of liens against the assets of a business and the priority of those liens.
  1. Interests in Stock or interests in LLCs – If the debtor owns interests in his/her own corporation or LLC, the interest in the corporation or LLC could serve as security for a loan. This is most often accomplished by a “pledge” agreement whereby the debtor offers his/her interests in the corporation or LLC as collateral for the loan. One drawback for stock or LLC interests is, unlike real estate or other asset classes, there is no central resource like a recorders’ office or secretary of state for determining if there are competing or priority claims against privately held interests in businesses.   In addition, a pledge agreement doesn’t mean much if the entity itself has no assets and so adequate due diligence on the entity that is being pledged is essential.
  1. Interests in publicly traded securities and securities accounts – Interests in stocks or other securities held by a brokerage can also serve as collateral for a loan. Usually, this is achieved by having the parties to the loan enter into an agreement with a third party custodian that holds the account (sometimes called a securities intermediary) which provides that upon a default on the loan, the third party custodian will deliver the asset to the creditor without further consent by the debtor.
  1. Interests in Intellectual Property – Interests in Trademarks, Patents, Copyrights, and even Trade Secrets can serve a security for a loan, although the procedures for perfecting these interests in intellectual property will differ and it is often difficult to place a value on intellectual property for purposes of determining whether the value is adequate for the loan.
  1. Interests in Tangible Personal Property – Virtually any item of personal property of value (such as jewelry, equipment, vehicles, etc.) can serve as security for a loan. Usually this would entail delivering the property to a third party who holds the asset similar to an escrow or consignment subject to performance of the terms of the loan. For assets which ownership is evidenced by some certificate of title, there may be a department or organization which provides for registering your lien (e.g. the Department of Motor Vehicles).

Securing your loan or investment with personal property is just one part of the due diligence that you should be performing when considering any particular investment. As this article demonstrates, the documents and procedures necessary to document, establish and perfect these secured transactions may vary widely and so you want to make sure that you follow the correct legal procedures and that your security documents are properly drafted so ensure that your loan or investment is, indeed, secure.