What Does a Home Inspector Look For?

A couple months back, we mentioned a number of items that you can do to get your house ready for sale. So, you've been good enough to get the property under contract and a closing date has been scheduled. Now, if you can just pass the inspection without a number of concessions or issues to scramble to fix before closing.

Well, the following items reflect areas of your home that are typically looked at by a certified home inspector (ASHI®… American Society of Home Inspectors). In some instances, if not given proper attention prior to the inspection, they may become issues to be resolved as a result of the Inspection Condition of the contract and could potentially cost more in time and money. Take a minute to review this checklist. It would be wise to go ahead and make any necessary corrections now.

Add downspout extensions of 4” flexible tubing 5’ from the house to control basement seepage.

Maintain a positive grade of dirt approximately 3’ away from the foundation to direct water away from the house.

Check flashing around chimney, vent pipes and eves for leaks and caulk with roofing cement.

Clean all gutters and check alignment. Replace rusted out sections.

Power wash exterior siding and decks.

Clean masonry stoops and walks and paint handrails with rustoleum.

Caulk windows and door thresholds with a silicone/latex caulk.

Freshly paint the front door, windows, trim and shutter for curb appeal.

Put down fresh bark/rock and add flowers to brighten up the front yard.

Repair floor squeaks by screwing the sub-floor to the joist.

Have the furnace and air conditioning unit(s) serviced by a licensed contractor; check for gas leaks, heat exchanger problems… Get a written report.

Repair leaky faucets, loose toilets, plumbing leaks, and re-caulk the tub/shower with a silicone tub and tile caulk.

Clean ashes from the fireplace and check the firebrick for cracks and the condition of the flue and damper. Have a chimney sweep clean the area if there is more than 1/3” of creosote.

Patch cosmetic sheet rock cracks with spackling compound. Touch-up paint.

Check windows for proper operation.

In crawl spaces add 6 mil polyethylene over exposed dirt as a vapor barrier and radon gas deterrent.

Check all exhaust fans, whole house fans, ceiling fans and attic fans for operation.

These tips could save you a more costly "find" by the inspector or, worse yet, give your buyer a reason to delay closing or back out of the contract.

For more tips or to find a home inspector in your area there are three organizations that you might find helpful The American Society of Home Inspectors, The National Association of Certified Home Inspectors or The National Association of Home Inspectors.

Related party exchange IRS rulings confirms past guidance

Two new Private Letter Rulings have been released that follow the pattern of recent previous rulings on Related Party Exchanges. The recent rulings holds consistent with previous answers that the taxpayer may acquire replacement property from a related party if the related party is also doing an exchange into a replacement property.

The taxpayers intend to sell property to an unrelated party and acquire replacement property from a related entity. The related party will then use the sale proceeds to acquire another property. The letters indicate that both the taxpayer and related party will use a Qualified Intermediary to complete their exchange and both will hold their replacement property they buy for at least two years.

A 1031 exchange is not allowed if it is part of a transaction, or series of transactions, structured to transfer a low cost basis from one entity to another or if one of the two parties is cashing out of their investment. In both cases, the IRS held that receipt of limited cash boot by the related party would not invalidate the exchange under §1031. Both parties will end up owning property that is like kind to the property they sold.

The full Revenue Procedure Rulings are available by clicking PLR 200820017 and PLR 200820025.

Possible capital gains tax increase on the horizon?

Recently, the Wall Street Journal released an article discussing a recent phenomena we've seen in the exchange business. The article, written by Dale Arden is titled Property Investors Fear Gains-Tax Rise, Shift 1031 Strategy. It discussed the idea that real estate investors are not using 1031 exchanges as a strategy in light of the possibility that a new administration will raise capital gains tax rates. Instead, they are taking advantage of, what is perceived as the lowest capital gains tax rate, the 15% long-term capital gains tax.

We discussed this a couple months back in an entry titled, AMT, Capital Gains and the Time Value of Money. The answer to the question really comes down to whether it is financially better to pay a 15% tax rate or pay a 20% or 25% rate when the property is sold some years out. Central to the analysis of this is the assumptions made. When will the replacement property be sold and at what level of appreciation? The longer the hold period and the greater the appreciation, the more likelihood that it may still make sense to defer the gain and pay the tax later. That, of course, assumes there is a capital gains tax that is higher at the date you defer than today. After all, they could go up only to be reduced at some later date before you eventually cash out and pay the tax. Betting on politics...now that is a tricky game!

Recapture Rules for GO Zone Property in an Exchange

The IRS recently released Notice 2008-25 that provides depreciation recapture guidelines for Gulf Coast area property damaged by hurricanes Katrina, Rita and Wilma in 2005. The Gulf Opportunity Zone Act of 2005 provided a first year depreciation bonus on qualified rehabilitation expenditures of "GO Zone property". However, the sale of GO Zone property is subject to recapture of the bonus depreciation under various conditions, including certain 1031 Exchanges.

The rules are fairly technical but essentially this is what it comes down to:

There is no recapture if the replacement property is GO Zone property in the hands of the taxpayer.

There is recapture if the replacement property isn't GO Zone property in the hands of the taxpayer and isn't substantially (80%) used in the GO Zone or in the active conduct of a trade or business by the taxpayer in the GO Zone.

There is no recapture if the replacement property isn't GO Zone property in the hands of the taxpayer but is substantially used in the GO Zone and in the active conduct of a trade or business by the taxpayer in the GO Zone.

To read more about the guidelines as outlined in the Notice, please read about the GO Zone Property Recapture Rules on our website.

Senate Estate Tax Alternative Hearings Expected to Yield No Action

Last week, the Senate Finance Committee met to discuss "Alternatives to the Current Federal Estate Tax System". This was the second of three hearings scheduled. Issues surrounding the possible administrative burdens to the Internal Revenue Service and the role of government in estate taxation. Also discussed were the complaince with budgetary rules and precautions to a new estate taxation system. Members reviewed the accessions tax and comprehensive inheritance tax.

Despite adding amendments to the Senate budget resolution and these three scheduled hearings, experts believe that it is unlikely there will be any substantive movement on the estate tax issue this year. More likely, the issue could be addressed next year before the 2010 one year full repeal and reversion to pre-2001 law that would occur in 2011.

IRS 1031 Exchange Fact Sheet

On March 5th, the IRS released a new ‘Fact Sheet’ (#21 in the Tax Gap Series) on 1031 exchanges. The information contained it in is fairly basic and doesn't provide anything too earth shattering to those who've done exchanges. It does note the incidental increase in Qualified Intermediary bankruptcies. It does also mention taxpayers need to be wary of schemes involving non-qualifying exchanges of vacation or second homes and 'promotors' that allow constructive receipt or refer to a 1031 exchange as "tax-free".

Finally, they make mention a very important aspect...consult with a tax professional for additional assistance. In combination with a good qualified intermediary, a real estate attorney tax or accounting professional and professional real estate agent should be included early on to ensure the exchange is structured properly and legitimately processed.

To see the full the full IRS Fact Sheet, see the Like Kind Exchange Fact Sheet located on our website.

Tax Cuts Explained - Economics 101

We haven't posted for a couple weeks and there is much to report. However, today, I wanted to post the following that I received in an email. I think it is appropriate for a Friday...

Because it's the election season, let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement until one day the owner threw them a curved ball (or is that a curved beer!). "Because you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20."

Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:

The fifth man, like the first four, now paid nothing (100% savings).

The sixth now paid $2 instead of $3 (33% savings).

The seventh now paid $5 instead of $7 (28% savings).

The eighth now paid $9 instead of $12 (25% savings).

The ninth now paid $14 instead of $18 (22% savings).

The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant the men began to compare their savings.

"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man, "but he got $10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar too. It's unfair that he got ten times more than I!"

"That's true!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth man and beat him up. The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our Tax System works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia

For those who understand, no explanation is needed.


For those who do not understand, no explanation is possible.