This article is part 5 of a series provided by our friends at Quantum Advisors.

- Mick Orton

If you own highly appreciated real estate, we know that you may be reluctant to sell because of the large tax bill you think you’ll face. This hesitancy may be especially true if you own investment real estate, because you may have to pay both capital gain taxes and depreciation recapture taxes associated with the sale. We know that the thought of selling real estate, and paying 20%, or even 30% of the sale price in taxes to the government has stopped many real estate investors from selling their properties.

We think there may be a solution you’d like to investigate: The Private Annuity Trust.

You may have heard that as of Wednesday the 18th of October, 2006, the US Treasury department announced changes planned for allowability of the PAT as we know it. The bottom line is that PAT’s will still be available, but the Treasury Department wants to eliminate the tax deferral benefit. This means that we will not use the PAT structure for tax deferral any longer. That of course is the bad news. The good news is that we still have the following tax deferral options available for clients. Over the next few weeks we will discuss in detail options that these new changes bring.

1031TIC – 100% tax deferral and the client can own a percentage of an institutional grade investment property.

Custom TIC – 100% tax deferral and the client can own up to 100% of an institutional grade investment property.

Structured Installment Sale - This is the PAT replacement. 100% tax deferral with the payments guaranteed by a very large US insurance company.

We actually are confident that 4X more clients will opt for the Structured Installment Sale. We were already planning to bring the Structured Installment Sale out as an additional option for tax deferral. Anyone who is interested in tax deferral will be offered the above 3 options which should work for almost everyone.

We are in the process of re-creating our website, our marketing materials, our seminar presentations, etc. to offer a truly comprehensive platform of solutions for your clients – we are always here to provide solutions – whatever works best for the client – and we have multiple choices to offer that will help them solve the problem of selling their highly appreciated real estate without worries about losing a third to taxes.

For more information, or for a FREE, 10 page Tax Savings Analysis on your property, contact Gary Katz at QFN – 800-224-1053 – or email Gary@QAplan.com.

- Betsy Hartwell – Quantum Advisors

*This is the sixth in a series of articles – to be continued…

Part 1 may be read here.
Part 2 may be read here.
Part 3 may be read here.
Part 4 may be read here.
Part 5 may be read here.

We talked about this “churning” issue in our September 23 post. As stated previously, articles have appeared on other blogs such as SocketSite from people who are disgruntled at Realtors for manipulating statistics by withdrawing properties and relisting at a lower listing price to avoid the “reduced” stigma. From the Realtor’s point of view, this does the best service for their clients who want to get the property sold for the best price. Using this technique gives the property “new” exposure to the real estate community and does not give the impression that “there is something wrong” with it. After all, isn’t this the Realtors’ job? They are in the business of selling properties, not generating statistics!

Now the California Association of Realtors is addressing these issues by presenting a Q&A on their website. They say:

“With the changing market, real estate practitioners representing sellers face new challenges marketing their listings. Some have engaged in the practice of relisting or “churning” a listing. The following legal article addresses this subject and some of the related problems and issues.

- Copyright© 2006 CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.). Permission is granted to C.A.R. members only to reprint and use this material for non-commercial purposes provided credit is given to the C.A.R. Legal Department. Other reproduction or use is strictly prohibited without the express written permission of the C.A.R. Legal Department. All rights reserved.

This was published last week from the National Association of Realtors:

The housing market will continue to stabilize in the months ahead, according to NAR’s most recent Pending Homes Sales Index (PHSI). In August, the PHSI stood at 110.1, up 4.3 percent from the previous month and down 14.1 percent from August 2005. The index gauges home sales activity for upcoming months based on the number of transactions that have signed contracts but are not yet closed. A PHSI of 100 or more generally indicates a high level of homes sales activity.

“Our sense is that home sales may have reached a low in August — the Pending Home Sales Index shows home sales should be fairly stable over the next two months, although a minor decline is possible,” said NAR Chief Economist David Lereah. “With fewer new listings coming on the market, we should be able to draw down the inventory supply early next year to the point where home prices will rise, but at a slower pace than historic norms.”

The PHSI declined across the nation in August compared with the readings a year ago. On a regional basis, the PHSI was highest in the South, where it declined 9.4 percent to 126.8. In the West, the index fell 16.9 percent to 112.7. The PHSI also declined in the Northeast and Midwest regions, falling to 95.4 and 93.8, respectively. Read more.

- National Association of Realtors

Adams & Kessler are attorneys who deal with real estate law in California. Their website is Davis-Stirling.
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On July 24, 2006, President Bush signed HR42, the “Freedom to Display the American Flag Act of 2005″ which prohibits restrictions on displaying the U.S. flag on a member’s unit, lot or exclusive use common area. Under the Act, community associations:

…may not adopt or enforce any policy, or enter into any agreement, that would restrict or prevent a member of the association from displaying the flag of the United States on residential property within the association with respect to which such member has a separate ownership interest or a right to exclusive possession or use.

The law allows community associations to establish reasonable time, place, or manner restrictions necessary to protect a substantial interest of the association. This is similar to California’s Civ.Code §1353.5 adopted in 2002, which allows owners to display the United States flag on their separate property or exclusive use common area, regardless of any association restrictions to the contrary.

- Adrian J. Adams, Esq.

Foster Weeks does a weekly mortgage update.
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“…the last Fed meeting gave the indication that inflation was under control, as the official word following the meeting was that the Fed again elected to pause in the rate hike cycle…the inside story spun a bit of a different tale. Last Wednesday, the ‘Meeting Minutes’ from the last Federal Open Market Committee policy-setting meeting were released, giving the details of the dialogue amongst the attending members, including those who did not vote in the last meeting. As it turns out, the comments reeked of continued concerns about inflation in the economy. And because inflation erodes the value of a fixed-return Bond, it’s bad news for Bonds – and therefore home loan rates, which are based on Bonds. On all this news, home loan rates were unchanged to slightly worse, about .125% higher over the course of the week”… read on.

- Foster Weeks

This article is part 5 of a series provided by our friends at Quantum Advisors.

- Mick Orton

More questions and answers about Private Annuity Trusts:

Q. What happens if I live longer or less than life expectancy?

A. Your payments from the trust continue for as long as you live, regardless of how long you live. The payments can also be based on the joint life expectancy of you and your spouse. The IRS table is used to calculate exactly what you will receive from your trust. If you live 15 years past your life expectancy, your trust payments will continue on for 15 years past your life expectancy. If you die 15 years prior to your life expectancy, your trust payments will terminate then. Life expectancy is just the number used to calculate the size of the payments. After your death, the private annuity payments terminate and all remaining assets are passed to your beneficiaries free of estate taxes and gift taxes.

Q. Can the trust buy property at a later date?

A. Yes, the investments of the trust are extremely flexible. The main focus of the trust is to be able to make payments as agreed to you. You can even borrow from the trust. Investment strategies for the trust are handled by our company as your registered investment advisor.

Q. Is there any flexibility in the annuity payment stream?

A. You can start taking payment immediately, or you can defer payments up until age 70 1/2. The trust may issue more than one annuity contract to you at the outset, providing tremendous flexibility in income flow and timing. Once payments commence, the same payments must be made to you for as long as you live.

Q. What happens if capital gains tax rates are lowered after I set up the private annuity?

A. Politicians frequently advocate lowering capital gains rates, so this could happen. In that case, you would get the benefit of the lowered rate on the capital gains portion of your annuity payments from the time the tax rates are lowered going forward.

Q. When I sell the property, may I keep some of the cash from the sale?

A. Yes, in that case you would pay taxes only on the portion of assets that you kept out of the trust. One possible superior alternative would be to have all the assets go into the trust and then borrow out the funds you needed. This way you will not pay tax on the amount you need in a lump sum and you will be paying interest on the loan back to yourself.

Q. How can I have my tax advisor or attorney analyze the private annuity idea?

A. QFN will gladly provide your tax advisor with the technical legal information s/he needs to properly advise you. For a quick answer, have your tax advisor review: IRS Revenue Rulings 55-119 and 69-74, plus the IRS’ GCM39503 of 5/19/86 and Treasury Decision TD-8754 issued in 1998, and the Ninth Circuit U.S. Court of Appeals decision “LaFargue v. Commissioner, 689 F. 2d 845 (1982)”.

Q. I’m interested in having one of these plans put together, what should I do next?

A. Your next step is to contact QFN directly at 800-224-1053. We will communicate with your tax advisors if necessary. We will also provide an illustration of your annuity payments. To get the program put together we will help you fill out an application. Then our attorney, who is an expert on Private Annuity Trusts, will review the information and put the documentation together. We’ll assist you with implementation; it’s very simple, since we handle all the steps of the process.

For more information, or for a FREE, 10 page Tax Savings Analysis on your property, contact Gary Katz at QFN – 800-224-1053 – or email Gary@QAplan.com.

- Betsy Hartwell – Quantum Advisors

*This is the fifth in a series of articles – to be continued…

Part 1 may be read here.
Part 2 may be read here.
Part 3 may be read here.
Part 4 may be read here.

A reader asks:

I heard from a friend of mine that the San Francisco Board of Realtors has decided to discontinue the public side of their website for those of us who are not licensed agents. Is this true?

Our reply:

To some degree, you are correct. Several weeks ago that announcement was made by an agent in our office who is a member of the board. Though some Realtors objected, the board voted to take down the public side of the MLS. No date was given as to when the change was taking place.

You will, however, still be able to access the site through links from individual Realtors’ websites. For example, you may access the MLS through SFResidence by going to this link to do your own property search.

- Mick Orton

Avram Goldman, President and COO of Coldwell Banker, San Francisco Bay Area said in his latest weekly report:

“Something must be afoot. Eleven offices reported increasing sales activity—a number we haven’t seen in many a moon. Most offices (20) saw steady activity and only one showed decreasing activity.

“Are buyers beginning to sense that it is time to move with no guarantees that interest rates will remain low and that well priced and merchandised properties will not sit on the market? Or are sellers becoming more realistic in their pricing? We are seeing a number of price reductions. Are sellers becoming more flexible in their negotiation? I think it is probably all of the aforementioned. This is a good sign for both buyers and sellers.

“More listed properties are expiring and not being re-listed allowing inventories to modulate. There has been a pick up of the number of offices (65%) reporting multiple offers—most of these transactions receiving 2-4 offers and sometimes selling at full price and in some cases a little below listed price. It is still important that sellers realize that pricing and merchandising are essential to attract offers and most significant that offers are going to take some time to negotiate.

“An interesting phenomenon is that the highest end of the market is moving. We had a $19 mil. sale on the Peninsula and two $10 mil transactions in San Francisco—reaffirming that those with significant resources are still bullish on real estate.

“Open house activity is steady. Still seeing the best activity on those homes opened for the first time. Buyers are still being deliberate in their decision making process—making sure they feel confident that the properties they are writing on have long term value.

“Here are the numbers for the week: Twelve offices reported increasing listing inventories, 15 steady and 5 decreasing—11 offices saw increasing sales activity, 20 steady and 1 decreasing.”

- Avram Goldman

* For an e-mail alert when this report is updated, send a note to info@SFResidence.com with “weekly market report” in the subject line. For last month’s San Francisco market figures go to our website.

A reader asks:

When a TIC is purchased with individual loans are buyers able to close on a unit separately or does it have to be at the same time as the other buyers?

Our reply:

Initially when considering selling a whole property as separate TIC interests the building will usually have only one loan secured by the property with the original owner. So when the first TIC is sold, and if the goal is to have individual financing, then each TIC owner must get a new loan on their unit’s interest. After that when one parties’ interest is sold that unit’s loan is the only one that needs to be refianced.

- Janis Stone

A reader asks:

I have been hearing about “North of Lake” for some time, but wonder… where’s the lake? I finally figured out that they meant north of Lake Street. But how did the street get its name?

Our reply:

I don’t know where Lake street got its name but there is a lake north of Lake Street and a park. The park is Mt. Lake Park and it is a very popular park that has a lake with swans and ducks, a children’s playground, tennis courts and a walking path. They have several seating areas with benches and grassy areas for picnics or games. It is a dog friendly park and goes from 7th Avenue to Funston. Properties North of Lake — even on the north side of Lake street– are typically more valuable than South of Lake.

I have a new property listing coming on next week that is on 7th Avenue and has direct access from their garden right on to Mt. Lake Park; it is a very unique setting. This area is especially popular with families.

- Janis Stone