My first transaction tax and mortgage questions... - Posted by mike pollock

Posted by Rick on August 05, 2001 at 19:10:06:

There is no 18 month rule for doing a 1031 exchange. However, he cannot do a 1031 for property that was only used as his personal residence.

The Carlton Sheets info about rolling his gain into a new purchase was based upon pre-1997 law - it no longer exists. As you pointed out, it was replaced by the $250,000/$500,000 rule if lived in for 2 out of last 5 years.

My first transaction tax and mortgage questions… - Posted by mike pollock

Posted by mike pollock on August 05, 2001 at 14:03:59:

I have been studying real estate for about a year now and just had an offer accepted on my first property. I’m real excited to finally enter the world of real estate. Anyway,
I will pay $146K for the house and about $6K in closing costs. I plan on selling the property for about 180K (based on comps in the area)in about 8 months following some TLC (~$8K) type work. I will also live there for the eight months.

My first question is regarding:
Capital gains taxes when I sell it in eight months. My understanding from Sheets’ course was that if I buy another property of equal or greater value within like a six month period of when I sell this one, and essentially “exchange” the gains from the sale into the new property, that I wouldn’t have to pay capital gains tax on the earnings. My realtor says that I must live there/own it for two years for this to work. I do not recall any discussion about a “two year minimum ownership.” Can anyone clarify this for me?

My other question is regarding mortages:
I plan on putting ten percent down in cash (I may refinance this out right away, not sure yet). Basically, I’m looking at 3 scenarious for bank financing. The first is a 30 yr fixed (90/10) at 7-1/8% with PMI. The second option is a fixed 80/10/10 where my realtor described this as a mortgage where 80/10 comes from two different lenders/backers and you put down 10% and will not have to pay any PMI (same int rate as 90/10 loan). This sounds a little fishy to me. The third option is a 3yr ARM at 6-1/4% (I think you can do either the 90/10 or 80/10/10 version of this). The reason I am considering the ARM is because I plan on getting rid of it in less than a year and the low int rate would be locked in for that period. Can anyone give me advice on these scenarious or offer some other possibilites based on the situation?

You’re help is greatly appreciated!

My first transaction tax and mortgage questions… - Posted by Dave T

Posted by Dave T on August 05, 2001 at 21:40:00:

80/10/10 is quite common. The way it usually works is: You get a conventional loan for 80% of the purchase price, your seller takes back a second for 10%, and you put 10% down. Since your lender’s loan is for 80% of the purchase price, no PMI is required to protect his position (unless you get an FHA loan).

From a business perspective, the ARM makes sense even if you plan to keep the property for two or three years. Somewhere between four and five years, the ARM advantage over a fixed rate loan disappears. For longer terms, the fixed rate loan is usually superior.

Check with another mortgage lender or mortgage broker. I suspect that you should be able to get a better rate on a purchase money loan for an owner occupied property. Lender’s in my area are advertising interest rates in the mid to high 6s for owner occupied loans, and about one point lower for ARMs.

If you sell your primary residence after only eight months of ownership and use, your profit is taxed as ordinary income (capital gains tax treatment does not apply). Even if you buy a replacement primary residence, your profit on the sale of the first residence is fully taxable in the year of sale.

transaction tax and mortgage questions… - Posted by Tom – IN

Posted by Tom – IN on August 05, 2001 at 14:28:09:

I like the ARM idea, it should work just fine.
There are two different basic rules for deferring or not paying cap gains tax. One possiblity is to do a 1031 exchange, where you roll the profit from this house into the next house. But you have to have owned the property at lease 18 months to use this provision. A second second of the new cap gains law eliminates cap gains of up to $250.000/500,000 if you have lived in the house for any two of the past five years, as your primary residence.
Neither of these provisions apply here. But what’s the problem? You’re making about a $30k profit, and will have to pay about $5k in taxes. If this really bothers you, lease the house out with an option to buy, and you’ll have (most likely) owned it for 18 months by the time it closes.

Re: First transaction tax and mortgage questions - Posted by mike

Posted by mike on August 07, 2001 at 08:53:03:

What area or lenders are you dealing with? I can’t seem to find any rates below what I talked about in my first post…