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The 1031 Exchange – An Effective Real Estate Investment Resource

A 1031 exchange is known as a like-kind exchange and can be an effective tool for those who have investment real estate.  When selling investment real estate, most people face a significant tax burden. A like-kind exchange can significantly reduce or even eliminate this burden.

The 1031 Exchange Rule
Property can only qualify for a like kind exchange if they follow specific rules as laid out by the US tax code. Investment properties can only be exchanged for properties that are another investment. For example, you cannot trade a business property for a residential property unless the residential property is going to generate income. The second (and perhaps most often violated) rule for a 1031 exchange is how the proceeds of the sale are handled. For example, you cannot take the proceeds from one sale and buy a pay off another property you own nor can you purchase from one of your agents. This type of transaction will result in all proceeds being taxable. A qualified intermediary must be a person who is completely separate from the transaction. [Read more…]

The Legal Problems Associated with Renting a Room in Your Home

The number of people in Rhode Island who rent out space in their home…an extra room or an apartment…is skyrocketing. But many people don’t realize that doing so can create legal problems.

Craigslist reports that the number of people offering to rent a room in a home has nearly doubled over the last year or so. Some of this is due to the economic doldrums. But another phenomenon is that many baby boomers whose children have grown up and moved away have houses that are larger than they need, yet they don’t want to move – or they can’t sell because they owe more on their mortgage than their home is worth. Often, these people rent out extra space to generate income.

That’s all fine – but many people who rent out a room or convert a garage into a studio apartment don’t realize the complexities of landlord-tenant law. Even if you only have one apartment, or even if you only rent to “friends,” you still need to have a formal lease and understand the legal rules for tenancies, or you could find yourself facing unexpected legal issues down the road. [Read more…]

What you need to know about “mortgage contingency” terms

A very comon scenario: A RI couple put down a $45,000 deposit on an $885,000 home, and signed an agreement saying the purchase was contingent on the couple’s being able to get a mortgage for the remaining $840,000. Sometime later, the couple told the builder that they weren’t going to apply for a mortgage and weren’t going to go through with the deal.

The builder refused to return the $45,000 deposit, and the case went to court.

The result? The builder got to keep the $45,000 deposit.

A couple couldn’t back out of a deal just because their income went down and they thought they could no longer get a loan.

If a “mortgage contingency” in a contract says that the purchase is contingent on the buyer’s being able to obtain a mortgage, this creates an obligation on the buyer’s part to actually apply for a mortgage, the Court decided. A buyer can’t just change his or her mind and renege on the deal without applying.

In this case, the couple claimed that they had signed the contract assuming that a separate business deal would go through, and when it fell apart, they didn’t apply for a mortgage because they figured they wouldn’t be able to get one. The couple also claimed the builder knew the deal depended on the business deal going through. [Read more…]

RI Landlords collect on damage property

In Rhode Island, when an apartment is rented, the tenant pays a security deposit that can be applied if he or she damages the property. Usually, unless the lease says otherwise, the tenant is liable only for damageto the property…not for ordinary wear and tear. The landlord is typically supposed to maintain the property and perform routine upkeep.

Security deposits are normally a small matter, but in some cases, tenant damage can be a big issue. Two recent cases at opposite extremes show that it’s important to speak with an attorney if you have any questions or concerns.

In one case, a landlord leased a house and 25 acres to a married couple. The couple had two dogs, and the wife apparently also kept some horses on the property. Significantly, the couple also agreed in the lease to return the property in the same condition in which they received it. This was important, because while a tenant usually isn’t liable for ordinary wear and tear, this couple agreed to maintain the property even if it suffered the typical effects of use. [Read more…]

Is a “No Closing Cost” offer right for you?

A lot of Rhode Island lenders these days are offering a “no closing costs” option if you take out a mortgage. With this option, the lender pays the closing costs for you, but you pay a slightly higher interest rate on the loan.

This can be a good idea in some circumstances. But you have to run the numbers to find out if it’s right for you.

The appeal of a “no closing costs” loan is obvious: Closing costs can be expensive! The national average of closing costs for a $200,000 purchase-money mortgage is more than $4,000, according to a survey by And that figure can vary considerably by state: In New York, the most expensive state, the average total of closing costs for the same mortgage is $6,183.

On very expensive homes, it’s possible to have closing costs that are north of $10,000.

For many people who are struggling to come up with a 20% down payment, the idea of avoiding closing costs is very attractive.

On the other hand, if you accept a loan with a higher interest rate, you’ll be paying the higher rate for the entire life of the loan, which means you could be paying many thousands of dollars extra as the years go by. [Read more…]

Landlords can be liable if tenant doesn’t pay

If a tenant hires a contractor to make improvements to a property, but the tenant doesn’t pay the contractor in full, can the contractor sue the landlord for the difference?

It sounds unlikely, but it happened in one case recently.

Former Boston Celtics player Dana Barros leased a warehouse and hired a contractor to make improvements so he could turn it into a sports complex. Later, the contractor believed it hadn’t been paid in full, so it went to court against Barros and against the owner of the warehouse.

The warehouse owner argued that it couldn’t be sued because it was merely the landlord; it never signed an agreement with the contractor.

Most states have what are called “mechanic’s liens, such that if a contractor isn’t paid in full by someone for work on a property, it can place a lien on the person’s interest in the property. [Read more…]

Reasons to always have a property inspected

A couple who purchased a condo in a building that turned out to be contaminated with toxic chemicals can recover only 65% of their losses, because they could have arranged an environmental inspection of the property before they bought it but didn’t do so,  a Court of Appeals recently decided.

The couple bought a condo unit in a converted factory. The developer had installed a vapor barrier, but never actually decontaminated the dangerous chemicals on the site.

The buyers claimed that the seller’s real estate agents assured them the site was safe. It appears the agents believed that was true at the time, but when they later found out that the site still had problems, they didn’t say anything.

According to the court, the agents could still be liable, because even though they didn’t technically lie, they had a legal obligation to tell the buyers about the problems once they knew about them.

A couple who claimed they were misled about a property can’t recover all their losses, because they could have discovered the problems by hiring an inspector.

On the other hand, the court said the buyers were partly at fault because they never obtained an environmental inspection. The buyers merely relied on the agents’ statements, along with a local newspaper article and public “buzz” suggesting that the factory had been cleaned up.

A jury found that the agents were 65% at fault and the buyers were 35% at fault, and the court said this was correct – so the buyers can recover only 65% of what they lost.

The Importance of Flood Insurance

Many people are surprised to discover that their standard homeowner’s insurance policy does not cover them in the event of a flood.

If you want flood insurance, you generally have to buy a separate policy. Typically these policies are sold by private insurers, but are backed by the U.S. Government through the National Flood Insurance Program.

Some federally backed mortgage programs require homeowners to buy flood insurance if they live in a high-risk area. Some private lenders require this as well, and they may require it even if the property is not in a high-risk area.

You should note that just because a property is not in a high-risk area doesn’t mean that flooding is impossible. High-risk areas are typically low-lying regions that are subject to storm surges or overflowing rivers, but even property in a very low-risk area can still be flooded due to heavy rainfall, drainage system failures, or a broken water main.

In fact, about 27% of all insurance claims for flooding are brought by property owners who don’t live in flood zones. [Read more…]

The Tax Advantages of Buying, Selling, Refinancing Real Estate

Owning a home provides a lot of tax advantages. Sometimes, though, the rules can be tricky.

Here’s a brief introduction to some of the many tax rules involved in buying, selling, or refinancing a home. But remember, the rules are complicated, and there are always exceptions. You’ll want to consult your RI real estate attorney or tax advisor to see how the general rules apply to your specific situation.

  • If I own a home, can I deduct my mortgage interest payments?

Yes, home mortgage interest is generally deductible on your federal income tax return on loan amounts up to $1 million. To get the deduction, you’ll need to itemize your deductions on Schedule A. For most people, this is the primary tax advantage of owning a home.

Your lender will typically send you a notice at the end of the year telling you how much of your payments were for interest as opposed to principal.

  • Can I deduct my property taxes?

Yes, in most cases you can deduct your local property taxes on your federal income tax return – again, if you itemize deductions.

Homeowners often pay some money each month as part of their mortgage payment that goes into an escrow account, which the lender then uses to pay property taxes. Note that the amount you can deduct is the amount that’s actually paid in taxes – not the amount you pay into this account, which might be slightly different.

Some types of property taxes – such as special one-time assessments for sidewalks or sewer lines – might not be deductible. Also, condo fees and homeowners’ association fees are not deductible. [Read more…]

What you need to know if you’re going to hire an architect

Hiring an architect to design a home, a commercial building, or a new addition can be very exciting. But there can be some traps for the unwary in the fine print of the contract, and you’ll want to have an attorney look it over in order to protect your rights.

Here’s just one example: Who owns the architect’s drawings and plans? You might assume that you do, since you’re paying for them. But one of the most commonly used standard contracts says that the architect, not you, has all ownership rights (including copyrights) in any drawings, plans, or specifications that the architect creates.

What does that mean? It means that if the contract with the architect is terminated for any reason, you have to return all the documents to the architect, and you no longer have a right to use the plans for your building!

There is a provision that says that if the architect is “adjudged” to be in default, you can go ahead and use the plans – but having an architect “adjudged” to be in default can be very time-consuming and expensive.

This gives an architect tremendous leverage to have you settle any dispute in his or her favor, so that you can continue with the construction.

Instead of signing this standard contract, you might want to insist that the architect’s plans will be a “work for hire” – an arrangement that means you will own the plans, not the architect.

Some architects may be reluctant to agree to a “work for hire” arrangement, because they want to be able to legally use similar plans in the future for other clients. In such a case, you might be able to compromise by agreeing that the architect will own the plans, but you’ll have an unrestricted right to use them as long as the architect has been paid in full according to the contract.