Wishing you all the Best this Holiday Season! The Salcedos - Brian, Sarah, Parker & ChopperWednesday, December 17, 2008
Happy Holidays
Wishing you all the Best this Holiday Season! The Salcedos - Brian, Sarah, Parker & Chopper
10 Steps to Repair Your Credit
Basic Facts About Credit Scores & Credit Reporting by Jim Eyre
There are three main credit repositories, or “credit bureaus”, in the U.S.: Equifax, Experian, and TransUnion. Each different repository assigns a credit score to your credit “profile”, which is obtained from public records and information reported to them by your creditors. Equifax gives what is called a “Beacon Score”, Experian renders an “Isaac Score” (some credit reports will show it as an “Emperica Score”), and TransUnion assigns you a “Fico Score”. Some creditors, such as automobile dealerships and credit card companies, will obtain a credit report from only one of the repositories, and thus will obtain only one score for you. If you apply for credit and are denied based on information from only one repository, and you want to pursue it further, ask the creditor to obtain a credit report from a different repository to see if the score is higher.
Mortgage lenders generally obtain “tri-merge” credit reports, reports that gather information from all three credit repositories, and then merge that data into one report. Mort mortgage lenders will use the middle of your three credit scores to evaluate your credit history if you’re borrowing by yourself. If you’re borrowing with another person(s), they’ll use the lower/lowest middle score to evaluate your credit history. However, if your lender is a subprime lender, they may use the middle score of the primary wage earner in the case of more than one borrower on the same loan. Be aware that if one mortgage lender obtains your credit score, the score may be somewhat different from that which is obtained by another lender. Why? Because every mortgage lender gives the credit repositories its’ own method or formula for credit scoring, and the repositories simply apply those formulas to your information to render a score. Simply put, one lender might deduct 3 points from a perfect score for a 30-day late payment on a credit card in the past 12 months, while another lender might deduct 5 points for the same late payment.
What Affects Your Credit Scores
It is estimated that the following percentages are approximately the same across the three repositories:
35% of your score is based on your payment history for all accounts;
30% of your score is based on the amount owed, relative to the amount of credit available, especially in regard to revolving accounts;
15% of your score is based on how long you have been using credit;
10% of your score is based on your applications for new credit; and
10% of your score is based on the types of credit used.
Can Credit Scores Be Improved?
Yes, but there are a few things you should know and understand as you begin this process. The first thing I would advise you to is NOT to spend money on a credit repair agency. I realize that some of these types of businesses are legitimate, and can actually help you. But in my experience, most of them are “rip-off’s”, and they’re just going to charge you more money that you could otherwise use to pay off a creditor, or improve your status to “current” on a revolving credit card account. The second thing I would say is that even though you decide to be responsible and begin to remedy some of the things that damaged your credit score, it may be some time before you actually begin to see your credit score go up again. Next, realize that derogatory accounts remain on your credit report even after they are paid off. And they stay there, staring you and your potential creditors right in the face for seven long years. The good news is that the older the derogatory information is, the less impact it will have on your score. It will continue to do some harm to your score as they age, just not as much. You should also understand that paying off a collection that is more than 24 months old actually hurts your score initially because it automatically becomes a “new activity”. The act of paying off the old account moves the debt to a current activity date, and the seven year period starts anew for that account. I know it sounds cold and heartless, but mortgage lenders don’t “cut you any slack” for late payments that are due to divorce. Generally it is their opinion that the two parties involved in a divorce should at least stay in good enough communication with each other to pay their bills on time. However, we all realize that there are other more legitimate reasons for a poor credit history, such as death of a spouse or significant other, extended or catastrophic medical circumstances, being “down-sized” out of your job, etc. These “real life events” usually result in negative consequences to a person’s credit score. But take heart, it’s not the end of the world, and you can recover, although it may be a long, laborious, and often discouraging process. But if you’re in it “for the long haul”, you can make this happen for you and your loved ones. And last, realize that each entry on your credit report is being reported by either Equifax, Experian, and/or Transunion. Perhaps it has been reported by only one of the three, maybe by two of them, or even by all three. For each entry on your report, you will need to deal separately with the three repositories. So if you’re trying to get a late credit card payment removed from your report, and it has been reported by all three repositories, then you’ve got triple the work to do on that one account.
Step 1 – Get out a legal pad of paper and a pencil, and List ALL your late payments, charged-off accounts, and collections in the chronological order that they were charged off, were turned in to a collection agency, or became delinquent, with the most recent credit difficulty first on the list. Usually this will result in a list that shows your delinquent accounts at the top of the list, followed by your charged-off accounts, followed at the end by the collection agency accounts. This is precisely the order in which you want to work on your credit report difficulties.
Step 2 – Immediately dispute any derogatory information on your credit report that does not actually belong to you! You must write a letter of dispute regarding the inaccurate information reported by a specific creditor to the credit repository, outlining the creditor, account numbers and incorrect information. See the sample shown below. Send it “Registered Mail, Return Receipt Requested”. If no hard copies are necessary, file online. Under the Fair Credit Reporting Act effective October 1, 1987, the credit repository has 5 days from the receipt of a written investigation request to contact the appropriate credit grantor about investigating the complaint, and receive a reply back within 30 days of the original written notification. Then, within 5 business days after the completion of the investigation, the repository must send a written report back to the borrower, with its’ findings, including a copy of the revised report if there was any change, stating 1 of 3 things: (1) there is an error and the credit data is modified to reflect the accurate information, (2) there is no error, so the credit file stands, or (3) the credit grantor(s) did not respond in the allotted time, therefore the disputed item(s) is deleted from the file. So, it takes a total of 40 days, minimum.
TO:______________________________________________________________________:
(Name of Credit Reporting Firm – Experian, Equifax, TransUnion)
I dispute the completeness and/or accuracy of my credit file as revealed to me on ____________(date).
In accordance with Section 611 of the Fair Credit Reporting Act, I hereby request that you reinvestigate and record the current status of the information I have disputed below in paragraph 1. (Include any supporting documents you may have.)
If your reinvestigation does not resolve the dispute, I hereby file the statement below in paragraph 2, which shall be included in any subsequent consumer report containing the information in question:
1. The disputed portion reads:____________________________________________________________________.
2. I maintain that ______________________________________________________________________________.
(This section may be limited to 100 words if the reporting firm assists in writing the summary.)
You must completely and accurately complete the following:
(Your Name) (Date)
(Signature)
(Address)
(Social Security Number)
(Bureau Report #, if available)
Step 3 – Get rid of the late payments – pay them current! Ignore the rest of the list until you can accomplish this. Credit-scoring software penalizes you for keeping accounts past due, so “past dues” can totally destroy a credit score. And if they haven’t already been charged-off or turned over to a collection agency, they are still damaging your score more than charge-offs and collections! Consequently, pay the creditor the past due amount as reported. Now, if you can’t do anything else, stay current on these obligations for a while before going on with this process. If you have funds left over, go on to the next step. Contact all creditors in this category and request a good faith adjustment that removes the late payments reported on your account. Be persistent if they refuse. Call them back, over and over. Remind them that you have been a good customer, and that you would deeply appreciate their help. Since most creditors receive calls at a call center, if the person you speak with refuses to make a courtesy adjustment on your account, call back and try again with someone else, or ask for a supervisor. Persistence and politeness pays off in this scenario. If you are frustrated, rude, and unclear with your request, you are making it very difficult for them to help you and probably won’t succeed.
Step 4 – If a creditor has already charged off an account, and/or it has been turned over to a collection agency, the best way to handle this credit-scoring dilemma is to actually contact the agency who now owns the debt, and try to negotiate with them. Tell them you are willing to pay off the account under the condition that all negative reporting is withdrawn from the credit repositories. Request that they send you a letter explicitly stating its’ agreement to report the debt as “paid as agreed” instead of the usual “paid settled”. If they won’t agree to this, ask them to agree to simply deleting all reporting relative to this debt altogether from the credit repositories. Some creditors will do this, others won’t. But it can’t hurt to ask. If they agree – GET IT IN WRITING to avoid future problems. Although not all businesses will delete reporting, removing all references to a collection account completely will increase your score, and it’s certainly worth the effort involved. If they simply won’t agree, just move on to the next charge-off or collection. Remember, a paid charge-off or collection really isn’t much better than an unpaid charge-off or collection, in terms of credit-scoring. Remember that you’re dealing with the newest credit problems first on your list, and paying off an older charge-off or collection won’t help your credit score nearly as much as if it were a newly charged-off debt.
Step 5 – although not related to past due balances, now you should start paying down your balances on existing revolving accounts. The amount you should pay them down to varies from expert to expert – some say pay them down to 50% of the available credit line, some say 33% and still others say 25%. My advice would be to first list your revolving accounts in order of their interest rate, with the highest rate account at the top of the list. Then work on paying that account down to 50% of the available credit line. Then move on to the account with the second highest interest rate, pay it down to 50%, and so on. Once you’ve gotten all the accounts down to 50%, then start at the top of the list again, and reduce the first one to 33%, move on to the second highest, reduce it to 33%, and so on. Then start at the top of the list once more, paying it down to 25% of the available credit line, and on down the list, until all your revolving accounts are at 25% of the limit or less. Another way to accomplish some of this is what I call “Getting Even”, or ‘making your credit cards work for you”. If you have one credit card with a high limit, and not much is owed on that account, use that card to reduce the balances on your other cards. In other words, if you are carrying a $6,000 balance on a credit card with at $10,000 limit, and you have two other cards with $3,000 and $5,000 limits respectively, transfer your balances so that you have a $1,000 balance on the $3,000 limit card, a $1,666 balance on the $5,000 limit card, and a $3,333 balance on the $10,000 limit card. Now each card is at 33% of its’ limit. Perhaps more than any other step in the entire process, this will begin to really improve your credit score, because it shows restraint on the part of the borrower. In other words, even though the borrower has a lot of credit available to him/her/them, the borrower is reluctant to put themselves in that much debt – they want to “play it safe”, and credit-scoring software really rewards such practice. While you’re in the midst of doing all this, make sure that your creditors are not only reporting your timely payments, and the correct balances, but also your available credit limit as well. Some creditors forget to report this item, and this will negate all your hard work. If you have a credit card with a $5,000 limit, and you only $250 on it, and the creditor does not report the credit limit, credit-scoring software will “read” your report as a $250 balance on a $250 limit, which shows no restraint at all. Finally, pay half the amount due on an account, but pay it twice per month. Creditors are required to record each and every payment on your credit report, so this will effectively “double” the number of on-time payments that you have made!
Avoid “credit surfing” like the plague! Credit-surfing is the practice of transferring credit card balances on accounts on which you’re currently paying interest to a new credit card with a temporary interest rate of -0-, or if not -0-, at least much lower than on the previous card. When people do this, they really don’t save very much money, and they really start to hammer their credit score even lower! They typically transfer more than half of the available credit line on the new card, so they have a balance that is higher than half of the available credit line, and they don’t actually keep the balance on the new card long enough for their score to actually begin improving before they transfer the balance to another new card. Thus they’re continually opening new accounts, and it just begins to compound on itself. This does them no good at all, and actually starts to defeat all their hard work.
Step 6 – Don’t close any existing revolving accounts right away. This lowers your “debt-to-available credit” ratio. For example, if you have a total credit-card debt of $10,000 and the total credit available to you is $20,000, you are using 50% of your total credit availability. If you close a credit card with a $5,000 credit limit, you will reduce your credit availability to $15,000, and change your ratio so that you are now using 67% of your available credit, thus “reducing” the amount of restraint you exercise. Some experts say that the “magic number” of credit cards to have in order to maximize your score is between three and five. Having more will not significantly damage your score, unless you allow them to get out of hand. Also, many experts say to never close a revolving account once it has been opened. Also, don’t open more credit accounts that you actually think you need.
Step 7 – Assuming you’ve gotten this far, you now probably have credit cards with zero balances that you don’t know what to do with. Don’t close these accounts! Use each one of them every six months or so, and then immediately pay off the balance when you receive the bill. Remember that paying off the balance does not automatically close the account. The fact that you use these accounts, pay them off in full when you receive the bill, and never get over-extended will begin to further enhance your scores.
Step 8 – Remember that list of charge-offs and collections you worked on in Step 4? Get it out again. Now you’re going to work on paying off the ones that would not agree to report “paid as agreed” or to simply delete the reporting totally. I know, I know…by now you’re getting tired of all this. But don’t worry – the end is in sight! You want to pay these off, one-by-one, as fast as you can, but don’t mail in a check! When you have the funds, call the creditor, and ask what the payoff is. Purchase a money order or cashiers’ check for exactly that amount. Compose a letter to the creditor, stating that your payment is to be considered payment in full, and that their acceptance and deposit constitutes their agreement to your payment in full, and also that it constitutes a full closing of the account altogether. Also ask them to send you a receipt immediately. Send it to them “Registered Mail, Return Receipt Requested”. When you receive the signed receipt of your letter, add it to your records. Do the same with the receipt they send to you, if they send you one. If not, then you have the registered mail receipt, along with your copy of the letter for your records. Once this is done, send copies of all this to whichever credit repositories reported the account negatively in the beginning, asking them to report the account as “paid in full”. Once again be sure to use “Registered Mail, Return Receipt Requested”, and save the receipt with your records. You may wonder why you should even pay these off at all. The reason is that if one creditor can’t collect from you, they may sell the debt to another collection agency. When that new collection agency begins to try and collect from you, the same debt will show up on your credit report, as a new account, and you’ve got to start all over again, working on the same debt. Essentially, you’ll have the same debt on your report twice.
Step 9 – Don’t get down, don’t let the process defeat you, remember that it can be a slow and time-consuming process. You didn’t get into trouble overnight, so you probably won’t get out of trouble overnight, either. Be persistent! Don’t give up! Don’t quit!
Step 10 – Even though you have now changed your old habits with your use of credit, it is extremely important that your current activities do not counteract your efforts. Don’t make any major purchases during this time if you can avoid them. Never pull your own credit report more than twice per year on the internet. If you have to finance something, do not allow your credit report to be pulled unless the person you’re dealing with first agrees to give you a full photocopy of the report, just to make sure that they are telling you the “straight scoop” about what is in your report. If you have to go elsewhere to obtain the item you’re shopping for, don’t worry – all “like inquiries” made by “like creditors”, i.e., auto dealers and other auto dealers, mortgage lenders and other mortgage lenders, made within a 30-day period of time are counted as only ONE inquiry. And most important, if you’re applying for a mortgage, NEVER pay off any debt, NEVER apply for any new credit, and NEVER accept any new credit, without first speaking to your mortgage lender. If you do, you may unintentionally lower your credit score, and accidentally disqualify yourself from buying a home.
SHOULD YOU NEED TO CONTACT THE CREDIT REPOSITORIES:
I. EQUIFAX, P.O. Box 104873, Atlanta, GA 30348, (800) 685-1111, Fraud Dept., (800) 525-6285
II. TRANSUNION, P.O. Box 1000, Chester, PA 19022, (800) 888-4213, Fraud Dept., (800) 680-6289
III. EXPERIAN, P.O Box 2002, Allen, TX 75013, (888) 397-3742, Fraud Dept: (888) 397-3742,
(Option 2, then Option 3)
OTHER IMPORTANT INFORMATION YOU MIGHT WANT:
I. To be removed from Solicitation mailing Lists - (888) 567-8688, http://www.optoutprescreen.com/.
II. FEDERAL TRADE COMMISSION, http://www.ftc.gov/, Go to “Consumers”, then go “File a Complaint”.
III. ATTORNEY GENERAL OF WASHINGTON STATE, http://www.atg.wa.gov/, Go to “File a Complaint”.
There are three main credit repositories, or “credit bureaus”, in the U.S.: Equifax, Experian, and TransUnion. Each different repository assigns a credit score to your credit “profile”, which is obtained from public records and information reported to them by your creditors. Equifax gives what is called a “Beacon Score”, Experian renders an “Isaac Score” (some credit reports will show it as an “Emperica Score”), and TransUnion assigns you a “Fico Score”. Some creditors, such as automobile dealerships and credit card companies, will obtain a credit report from only one of the repositories, and thus will obtain only one score for you. If you apply for credit and are denied based on information from only one repository, and you want to pursue it further, ask the creditor to obtain a credit report from a different repository to see if the score is higher.
Mortgage lenders generally obtain “tri-merge” credit reports, reports that gather information from all three credit repositories, and then merge that data into one report. Mort mortgage lenders will use the middle of your three credit scores to evaluate your credit history if you’re borrowing by yourself. If you’re borrowing with another person(s), they’ll use the lower/lowest middle score to evaluate your credit history. However, if your lender is a subprime lender, they may use the middle score of the primary wage earner in the case of more than one borrower on the same loan. Be aware that if one mortgage lender obtains your credit score, the score may be somewhat different from that which is obtained by another lender. Why? Because every mortgage lender gives the credit repositories its’ own method or formula for credit scoring, and the repositories simply apply those formulas to your information to render a score. Simply put, one lender might deduct 3 points from a perfect score for a 30-day late payment on a credit card in the past 12 months, while another lender might deduct 5 points for the same late payment.
What Affects Your Credit Scores
It is estimated that the following percentages are approximately the same across the three repositories:
35% of your score is based on your payment history for all accounts;
30% of your score is based on the amount owed, relative to the amount of credit available, especially in regard to revolving accounts;
15% of your score is based on how long you have been using credit;
10% of your score is based on your applications for new credit; and
10% of your score is based on the types of credit used.
Can Credit Scores Be Improved?
Yes, but there are a few things you should know and understand as you begin this process. The first thing I would advise you to is NOT to spend money on a credit repair agency. I realize that some of these types of businesses are legitimate, and can actually help you. But in my experience, most of them are “rip-off’s”, and they’re just going to charge you more money that you could otherwise use to pay off a creditor, or improve your status to “current” on a revolving credit card account. The second thing I would say is that even though you decide to be responsible and begin to remedy some of the things that damaged your credit score, it may be some time before you actually begin to see your credit score go up again. Next, realize that derogatory accounts remain on your credit report even after they are paid off. And they stay there, staring you and your potential creditors right in the face for seven long years. The good news is that the older the derogatory information is, the less impact it will have on your score. It will continue to do some harm to your score as they age, just not as much. You should also understand that paying off a collection that is more than 24 months old actually hurts your score initially because it automatically becomes a “new activity”. The act of paying off the old account moves the debt to a current activity date, and the seven year period starts anew for that account. I know it sounds cold and heartless, but mortgage lenders don’t “cut you any slack” for late payments that are due to divorce. Generally it is their opinion that the two parties involved in a divorce should at least stay in good enough communication with each other to pay their bills on time. However, we all realize that there are other more legitimate reasons for a poor credit history, such as death of a spouse or significant other, extended or catastrophic medical circumstances, being “down-sized” out of your job, etc. These “real life events” usually result in negative consequences to a person’s credit score. But take heart, it’s not the end of the world, and you can recover, although it may be a long, laborious, and often discouraging process. But if you’re in it “for the long haul”, you can make this happen for you and your loved ones. And last, realize that each entry on your credit report is being reported by either Equifax, Experian, and/or Transunion. Perhaps it has been reported by only one of the three, maybe by two of them, or even by all three. For each entry on your report, you will need to deal separately with the three repositories. So if you’re trying to get a late credit card payment removed from your report, and it has been reported by all three repositories, then you’ve got triple the work to do on that one account.
Step 1 – Get out a legal pad of paper and a pencil, and List ALL your late payments, charged-off accounts, and collections in the chronological order that they were charged off, were turned in to a collection agency, or became delinquent, with the most recent credit difficulty first on the list. Usually this will result in a list that shows your delinquent accounts at the top of the list, followed by your charged-off accounts, followed at the end by the collection agency accounts. This is precisely the order in which you want to work on your credit report difficulties.
Step 2 – Immediately dispute any derogatory information on your credit report that does not actually belong to you! You must write a letter of dispute regarding the inaccurate information reported by a specific creditor to the credit repository, outlining the creditor, account numbers and incorrect information. See the sample shown below. Send it “Registered Mail, Return Receipt Requested”. If no hard copies are necessary, file online. Under the Fair Credit Reporting Act effective October 1, 1987, the credit repository has 5 days from the receipt of a written investigation request to contact the appropriate credit grantor about investigating the complaint, and receive a reply back within 30 days of the original written notification. Then, within 5 business days after the completion of the investigation, the repository must send a written report back to the borrower, with its’ findings, including a copy of the revised report if there was any change, stating 1 of 3 things: (1) there is an error and the credit data is modified to reflect the accurate information, (2) there is no error, so the credit file stands, or (3) the credit grantor(s) did not respond in the allotted time, therefore the disputed item(s) is deleted from the file. So, it takes a total of 40 days, minimum.
TO:______________________________________________________________________:
(Name of Credit Reporting Firm – Experian, Equifax, TransUnion)
I dispute the completeness and/or accuracy of my credit file as revealed to me on ____________(date).
In accordance with Section 611 of the Fair Credit Reporting Act, I hereby request that you reinvestigate and record the current status of the information I have disputed below in paragraph 1. (Include any supporting documents you may have.)
If your reinvestigation does not resolve the dispute, I hereby file the statement below in paragraph 2, which shall be included in any subsequent consumer report containing the information in question:
1. The disputed portion reads:____________________________________________________________________.
2. I maintain that ______________________________________________________________________________.
(This section may be limited to 100 words if the reporting firm assists in writing the summary.)
You must completely and accurately complete the following:
(Your Name) (Date)
(Signature)
(Address)
(Social Security Number)
(Bureau Report #, if available)
Step 3 – Get rid of the late payments – pay them current! Ignore the rest of the list until you can accomplish this. Credit-scoring software penalizes you for keeping accounts past due, so “past dues” can totally destroy a credit score. And if they haven’t already been charged-off or turned over to a collection agency, they are still damaging your score more than charge-offs and collections! Consequently, pay the creditor the past due amount as reported. Now, if you can’t do anything else, stay current on these obligations for a while before going on with this process. If you have funds left over, go on to the next step. Contact all creditors in this category and request a good faith adjustment that removes the late payments reported on your account. Be persistent if they refuse. Call them back, over and over. Remind them that you have been a good customer, and that you would deeply appreciate their help. Since most creditors receive calls at a call center, if the person you speak with refuses to make a courtesy adjustment on your account, call back and try again with someone else, or ask for a supervisor. Persistence and politeness pays off in this scenario. If you are frustrated, rude, and unclear with your request, you are making it very difficult for them to help you and probably won’t succeed.
Step 4 – If a creditor has already charged off an account, and/or it has been turned over to a collection agency, the best way to handle this credit-scoring dilemma is to actually contact the agency who now owns the debt, and try to negotiate with them. Tell them you are willing to pay off the account under the condition that all negative reporting is withdrawn from the credit repositories. Request that they send you a letter explicitly stating its’ agreement to report the debt as “paid as agreed” instead of the usual “paid settled”. If they won’t agree to this, ask them to agree to simply deleting all reporting relative to this debt altogether from the credit repositories. Some creditors will do this, others won’t. But it can’t hurt to ask. If they agree – GET IT IN WRITING to avoid future problems. Although not all businesses will delete reporting, removing all references to a collection account completely will increase your score, and it’s certainly worth the effort involved. If they simply won’t agree, just move on to the next charge-off or collection. Remember, a paid charge-off or collection really isn’t much better than an unpaid charge-off or collection, in terms of credit-scoring. Remember that you’re dealing with the newest credit problems first on your list, and paying off an older charge-off or collection won’t help your credit score nearly as much as if it were a newly charged-off debt.
Step 5 – although not related to past due balances, now you should start paying down your balances on existing revolving accounts. The amount you should pay them down to varies from expert to expert – some say pay them down to 50% of the available credit line, some say 33% and still others say 25%. My advice would be to first list your revolving accounts in order of their interest rate, with the highest rate account at the top of the list. Then work on paying that account down to 50% of the available credit line. Then move on to the account with the second highest interest rate, pay it down to 50%, and so on. Once you’ve gotten all the accounts down to 50%, then start at the top of the list again, and reduce the first one to 33%, move on to the second highest, reduce it to 33%, and so on. Then start at the top of the list once more, paying it down to 25% of the available credit line, and on down the list, until all your revolving accounts are at 25% of the limit or less. Another way to accomplish some of this is what I call “Getting Even”, or ‘making your credit cards work for you”. If you have one credit card with a high limit, and not much is owed on that account, use that card to reduce the balances on your other cards. In other words, if you are carrying a $6,000 balance on a credit card with at $10,000 limit, and you have two other cards with $3,000 and $5,000 limits respectively, transfer your balances so that you have a $1,000 balance on the $3,000 limit card, a $1,666 balance on the $5,000 limit card, and a $3,333 balance on the $10,000 limit card. Now each card is at 33% of its’ limit. Perhaps more than any other step in the entire process, this will begin to really improve your credit score, because it shows restraint on the part of the borrower. In other words, even though the borrower has a lot of credit available to him/her/them, the borrower is reluctant to put themselves in that much debt – they want to “play it safe”, and credit-scoring software really rewards such practice. While you’re in the midst of doing all this, make sure that your creditors are not only reporting your timely payments, and the correct balances, but also your available credit limit as well. Some creditors forget to report this item, and this will negate all your hard work. If you have a credit card with a $5,000 limit, and you only $250 on it, and the creditor does not report the credit limit, credit-scoring software will “read” your report as a $250 balance on a $250 limit, which shows no restraint at all. Finally, pay half the amount due on an account, but pay it twice per month. Creditors are required to record each and every payment on your credit report, so this will effectively “double” the number of on-time payments that you have made!
Avoid “credit surfing” like the plague! Credit-surfing is the practice of transferring credit card balances on accounts on which you’re currently paying interest to a new credit card with a temporary interest rate of -0-, or if not -0-, at least much lower than on the previous card. When people do this, they really don’t save very much money, and they really start to hammer their credit score even lower! They typically transfer more than half of the available credit line on the new card, so they have a balance that is higher than half of the available credit line, and they don’t actually keep the balance on the new card long enough for their score to actually begin improving before they transfer the balance to another new card. Thus they’re continually opening new accounts, and it just begins to compound on itself. This does them no good at all, and actually starts to defeat all their hard work.
Step 6 – Don’t close any existing revolving accounts right away. This lowers your “debt-to-available credit” ratio. For example, if you have a total credit-card debt of $10,000 and the total credit available to you is $20,000, you are using 50% of your total credit availability. If you close a credit card with a $5,000 credit limit, you will reduce your credit availability to $15,000, and change your ratio so that you are now using 67% of your available credit, thus “reducing” the amount of restraint you exercise. Some experts say that the “magic number” of credit cards to have in order to maximize your score is between three and five. Having more will not significantly damage your score, unless you allow them to get out of hand. Also, many experts say to never close a revolving account once it has been opened. Also, don’t open more credit accounts that you actually think you need.
Step 7 – Assuming you’ve gotten this far, you now probably have credit cards with zero balances that you don’t know what to do with. Don’t close these accounts! Use each one of them every six months or so, and then immediately pay off the balance when you receive the bill. Remember that paying off the balance does not automatically close the account. The fact that you use these accounts, pay them off in full when you receive the bill, and never get over-extended will begin to further enhance your scores.
Step 8 – Remember that list of charge-offs and collections you worked on in Step 4? Get it out again. Now you’re going to work on paying off the ones that would not agree to report “paid as agreed” or to simply delete the reporting totally. I know, I know…by now you’re getting tired of all this. But don’t worry – the end is in sight! You want to pay these off, one-by-one, as fast as you can, but don’t mail in a check! When you have the funds, call the creditor, and ask what the payoff is. Purchase a money order or cashiers’ check for exactly that amount. Compose a letter to the creditor, stating that your payment is to be considered payment in full, and that their acceptance and deposit constitutes their agreement to your payment in full, and also that it constitutes a full closing of the account altogether. Also ask them to send you a receipt immediately. Send it to them “Registered Mail, Return Receipt Requested”. When you receive the signed receipt of your letter, add it to your records. Do the same with the receipt they send to you, if they send you one. If not, then you have the registered mail receipt, along with your copy of the letter for your records. Once this is done, send copies of all this to whichever credit repositories reported the account negatively in the beginning, asking them to report the account as “paid in full”. Once again be sure to use “Registered Mail, Return Receipt Requested”, and save the receipt with your records. You may wonder why you should even pay these off at all. The reason is that if one creditor can’t collect from you, they may sell the debt to another collection agency. When that new collection agency begins to try and collect from you, the same debt will show up on your credit report, as a new account, and you’ve got to start all over again, working on the same debt. Essentially, you’ll have the same debt on your report twice.
Step 9 – Don’t get down, don’t let the process defeat you, remember that it can be a slow and time-consuming process. You didn’t get into trouble overnight, so you probably won’t get out of trouble overnight, either. Be persistent! Don’t give up! Don’t quit!
Step 10 – Even though you have now changed your old habits with your use of credit, it is extremely important that your current activities do not counteract your efforts. Don’t make any major purchases during this time if you can avoid them. Never pull your own credit report more than twice per year on the internet. If you have to finance something, do not allow your credit report to be pulled unless the person you’re dealing with first agrees to give you a full photocopy of the report, just to make sure that they are telling you the “straight scoop” about what is in your report. If you have to go elsewhere to obtain the item you’re shopping for, don’t worry – all “like inquiries” made by “like creditors”, i.e., auto dealers and other auto dealers, mortgage lenders and other mortgage lenders, made within a 30-day period of time are counted as only ONE inquiry. And most important, if you’re applying for a mortgage, NEVER pay off any debt, NEVER apply for any new credit, and NEVER accept any new credit, without first speaking to your mortgage lender. If you do, you may unintentionally lower your credit score, and accidentally disqualify yourself from buying a home.
SHOULD YOU NEED TO CONTACT THE CREDIT REPOSITORIES:
I. EQUIFAX, P.O. Box 104873, Atlanta, GA 30348, (800) 685-1111, Fraud Dept., (800) 525-6285
II. TRANSUNION, P.O. Box 1000, Chester, PA 19022, (800) 888-4213, Fraud Dept., (800) 680-6289
III. EXPERIAN, P.O Box 2002, Allen, TX 75013, (888) 397-3742, Fraud Dept: (888) 397-3742,
(Option 2, then Option 3)
OTHER IMPORTANT INFORMATION YOU MIGHT WANT:
I. To be removed from Solicitation mailing Lists - (888) 567-8688, http://www.optoutprescreen.com/.
II. FEDERAL TRADE COMMISSION, http://www.ftc.gov/, Go to “Consumers”, then go “File a Complaint”.
III. ATTORNEY GENERAL OF WASHINGTON STATE, http://www.atg.wa.gov/, Go to “File a Complaint”.
Wednesday, July 30, 2008
Parker is Here!!
Our little boy decided to come early! He was born on July 19, 2008 at 35 weeks. To check out his adventure go to: www.parkersalcedo.blogspot.comSunday, July 13, 2008
Friday, June 27, 2008
Thursday, June 12, 2008
New state law required condo associations to report money set aside for long-term maintenance
Attention, condominium shoppers: Washington soon will become one of a half-dozen states requiring condo associations to provide a financial-wellness check that can predict whether the place is a potential money pit.
The check, called a reserve study, estimates how much money an association must set aside to pay for expensive long-term maintenance, such as repaving a parking lot, replacing a roof or rebuilding rotting decks.
Although many associations require reserve studies, many have ignored their own requirements, local condo experts say. That will have to change June 12, when updates to the state's condo law take effect and associations must prepare and annually update such a study and make it available to buyers.
Calling it the "biggest thing to happen since the Condominium Act of 1990 was passed," longtime condo attorney Kris Sundberg says the new provisions will address "the dirty little secret of the condo world: Most condos are severely underfunded."
However, what the law does not do is to require that associations actually save the money their study finds is needed to cover future maintenance. Laws in a few states, including Hawaii, do.
"While this law may not put Washington in the vanguard, it clearly puts them toward the top of the list in being progressive on the issue," says Frank Rathbun, of the Community Associations Institute, a national nonprofit educational organization for homeowners associations and their members.
The reserve study must be done by a professional and can be waived only if it would "impose an unreasonable hardship," something the law does not define. Still, the associations group, condo attorneys and property managers call the change necessary, if somewhat overdue, for a growing segment of the housing market. A quarter of King County home sales are condos, and many buyers are homeowner novices.
"It will act as consumer protection for a lot of potential buyers and give them a better perspective of the true costs of ownership in a condominium association," says Marshall Johnson, president of The CWD Group, which manages about 90 condo associations in Seattle and Bellevue.
Sundberg, of Mercer Island, says that's been sorely lacking.
"We're seeing a substantial increase in litigation from unhappy purchasers who bought a condo then found out there's a huge special assessment being levied," he says. These irate buyers "go after the board, the manager, the real-estate agents, the seller," he says.
Considered a one-time cost to pay for major repairs, a special assessment is what associations turn to when they haven't built sufficient long-term savings in what's called a reserve account.
The account is separate from the annual budget, which pays for regular, ongoing expenses such as insurance.
When a special assessment is levied, owners are billed for their portions.
"We regularly see assessments in the $60,000 to $80,000 range per unit," Sundberg says. "Most condominium associations have neither a current reserve study nor adequately funded reserves."
That wouldn't surprise Jim Talaga, president of Association Reserves Washington, a reserve-study provider. Many 20-year-old communities have had little serious maintenance, he says.
An older 50-unit building could face $200,000 for a new roof and $70,000 for new exterior paint — with no money set aside to pay for them.
A first-time reserve study, on the other hand, costs about $2,500, although that depends a lot on the size of the community, Talaga says.
Matt Reed had first-hand experience with the reserves issue when he served on the board of a South Everett condominium. His underfunded complex faced at least $1 million in serious repairs because of delayed maintenance," he says.
The root of the problem, Reed says, was a membership of mostly first-time owners who hadn't made the mental transition from apartment dweller to homeowner.
"They were trying to defer all the responsibility and remain renters," he says.
After the board voted to levy a substantial special assessment, a group of angry owners successfully voted to override it, and the work went undone.
Faced with an emotionally draining stalemate, Reed sold his condo and bought a house.
The new law will make it harder for condo associations to conceal from buyers a lack of long-term financial planning. Those that use the hardship exemption to forgo a reserve study must disclose that to prospective buyers along with this warning:
"The lack of a current reserve study poses certain risks to you, the purchaser. Insufficient reserves may, under some circumstances, require you to pay" a special assessment.
Sundberg thinks having that in print may dissuade some buyers and lenders from investing in underfunded condos.
It will also affect their prices, Johnson predicts. "The unit that has minimal reserves is going to be cheaper than one with high reserves, so what they're saving by not putting into reserves will be lost in the price they get for it," Johnson says.
Once associations realize the true cost of scrimping on savings, reserve accounts will grow and the problem will correct itself, Sundberg says.
Meanwhile a real concern for associations is finding a qualified pro to do a reserve study. Several firms exist locally, but demand may overwhelm supply as associations attempt to comply with the new law.
Condo lawyer Brian McLean, of Leahy.ps in Kirkland, worked on the law's passage. He recommends that associations address this issue in their next budget cycle, research whether a reserve specialist is available and find out what the cost will be.
"This is a great planning tool, but no one wants this to cause a sense of undue urgency," McLean says. "I'm comfortable saying everyone has time to do this and do it right."
The check, called a reserve study, estimates how much money an association must set aside to pay for expensive long-term maintenance, such as repaving a parking lot, replacing a roof or rebuilding rotting decks.
Although many associations require reserve studies, many have ignored their own requirements, local condo experts say. That will have to change June 12, when updates to the state's condo law take effect and associations must prepare and annually update such a study and make it available to buyers.
Calling it the "biggest thing to happen since the Condominium Act of 1990 was passed," longtime condo attorney Kris Sundberg says the new provisions will address "the dirty little secret of the condo world: Most condos are severely underfunded."
However, what the law does not do is to require that associations actually save the money their study finds is needed to cover future maintenance. Laws in a few states, including Hawaii, do.
"While this law may not put Washington in the vanguard, it clearly puts them toward the top of the list in being progressive on the issue," says Frank Rathbun, of the Community Associations Institute, a national nonprofit educational organization for homeowners associations and their members.
The reserve study must be done by a professional and can be waived only if it would "impose an unreasonable hardship," something the law does not define. Still, the associations group, condo attorneys and property managers call the change necessary, if somewhat overdue, for a growing segment of the housing market. A quarter of King County home sales are condos, and many buyers are homeowner novices.
"It will act as consumer protection for a lot of potential buyers and give them a better perspective of the true costs of ownership in a condominium association," says Marshall Johnson, president of The CWD Group, which manages about 90 condo associations in Seattle and Bellevue.
Sundberg, of Mercer Island, says that's been sorely lacking.
"We're seeing a substantial increase in litigation from unhappy purchasers who bought a condo then found out there's a huge special assessment being levied," he says. These irate buyers "go after the board, the manager, the real-estate agents, the seller," he says.
Considered a one-time cost to pay for major repairs, a special assessment is what associations turn to when they haven't built sufficient long-term savings in what's called a reserve account.
The account is separate from the annual budget, which pays for regular, ongoing expenses such as insurance.
When a special assessment is levied, owners are billed for their portions.
"We regularly see assessments in the $60,000 to $80,000 range per unit," Sundberg says. "Most condominium associations have neither a current reserve study nor adequately funded reserves."
That wouldn't surprise Jim Talaga, president of Association Reserves Washington, a reserve-study provider. Many 20-year-old communities have had little serious maintenance, he says.
An older 50-unit building could face $200,000 for a new roof and $70,000 for new exterior paint — with no money set aside to pay for them.
A first-time reserve study, on the other hand, costs about $2,500, although that depends a lot on the size of the community, Talaga says.
Matt Reed had first-hand experience with the reserves issue when he served on the board of a South Everett condominium. His underfunded complex faced at least $1 million in serious repairs because of delayed maintenance," he says.
The root of the problem, Reed says, was a membership of mostly first-time owners who hadn't made the mental transition from apartment dweller to homeowner.
"They were trying to defer all the responsibility and remain renters," he says.
After the board voted to levy a substantial special assessment, a group of angry owners successfully voted to override it, and the work went undone.
Faced with an emotionally draining stalemate, Reed sold his condo and bought a house.
The new law will make it harder for condo associations to conceal from buyers a lack of long-term financial planning. Those that use the hardship exemption to forgo a reserve study must disclose that to prospective buyers along with this warning:
"The lack of a current reserve study poses certain risks to you, the purchaser. Insufficient reserves may, under some circumstances, require you to pay" a special assessment.
Sundberg thinks having that in print may dissuade some buyers and lenders from investing in underfunded condos.
It will also affect their prices, Johnson predicts. "The unit that has minimal reserves is going to be cheaper than one with high reserves, so what they're saving by not putting into reserves will be lost in the price they get for it," Johnson says.
Once associations realize the true cost of scrimping on savings, reserve accounts will grow and the problem will correct itself, Sundberg says.
Meanwhile a real concern for associations is finding a qualified pro to do a reserve study. Several firms exist locally, but demand may overwhelm supply as associations attempt to comply with the new law.
Condo lawyer Brian McLean, of Leahy.ps in Kirkland, worked on the law's passage. He recommends that associations address this issue in their next budget cycle, research whether a reserve specialist is available and find out what the cost will be.
"This is a great planning tool, but no one wants this to cause a sense of undue urgency," McLean says. "I'm comfortable saying everyone has time to do this and do it right."
Tuesday, April 22, 2008
Baby Salcedo
It's a BOY!!!!!!!!!!!! Brian and I are happy to report Parker John Salcedo is very healthy and active and we can't wait to meet him this August!!!
Thursday, April 3, 2008
1031 Exchange
In this series of tax articles, I have discussed the tax benefits for residential properties, such as the exclusion of gain of up to $500,000, or the various tax deductions available to homeowners.
Now we turn to the tax benefits available to real estate investors.
If you own investment property, and sell it, you will have to pay capital gains tax; for 2007, the tax rate is 15 percent.
But investors are required to depreciate a portion of their property. While this may provide a small tax benefit each and every year, when the property is ultimately sold, in many cases this depreciation must be recaptured at the rate of 25 percent.
Enter the like-kind exchange, which is a way of deferring that tax. At the outset of this column, it must be pointed out that contrary to popular opinion, this is not a "tax-free" transaction. The exchange, authorized by section 1031 of the Internal Revenue Code, will only defer -- not avoid -- the capital gains tax. It will not relieve you from the ultimate obligation to pay the capital gains tax.
Many years ago, a man by the name of T.J. Starker sold property in Oregon, pursuant to a "land exchange agreement," but did not receive any money for the sale. Instead, the seller -- a couple of years later -- transferred replacement property to Starker. The Internal Revenue Service considered this a taxable sale, but the 9th Circuit Court of Appeals held that this was a deferred exchange permitted under Section 1031 of the Tax Code. In other words, the exchange did not have to take place simultaneously.
The ideal exchange is a direct exchange. I own investment property A and you own property B (also investment). Both are of equal value. On Aug. 1, 2007, you convey B to me and on that same day I convey property A to you. If there is a written agreement between us that this is to be a 1031 exchange, neither of us will have to immediately pay any capital gains tax on any profit we have made.
But it is almost impossible to arrange such a transaction. The logistics of finding the replacement property to be exchanged simultaneously with the relinquished property is very difficult to coordinate.
Accordingly, most 1031 exchanges today are deferred.
There are two kinds of deferred (Starker) exchanges:
· Forward exchange: You sell the relinquished property, and within the time limitations spelled out in Section 1031, obtain the replacement property;
· Reverse exchange: You obtain title to the replacement first, and then sell the relinquished property.
The rules are complex, but here is a general overview of the process. With some important exceptions (discussed below) the rules apply equally whether the exchange is forward or reverse.
Section 1031 permits a delay (non-recognition) of gain only if the following conditions are met:
Must be investment property: The property transferred (called the "relinquished property") and the exchange property ("replacement property") must be "property held for productive use in trade, in business or for investment." Neither property in this exchange can be your principal residence, unless you have abandoned it as your personal house. Your vacation home would also not qualify as investment property, unless you actually start to rent it out more or less full time.
The area of vacation homes is complex and often misunderstood by taxpayers and lawyers alike. The IRS recently promised to provide more information to taxpayers regarding the treatment of these vacation homes.
There must be an exchange: The IRS wants to ensure that a transaction that is called an exchange is not really a sale and a subsequent purchase. Practically, an exchange looks like a sale, but the paperwork involved with the transaction makes it an exchange. It is important that anyone considering a 1031 exchange retain counsel who is familiar with the various rules.
The replacement property must be of "like kind": As a general rule, all real estate is considered "like kind" with all other real estate. Thus, a condominium unit can be swapped for an office building, a single-family home for raw land, or a farm for commercial or industrial property.
Once you meet these tests, it is important that you determine the tax consequences. If you do a like-kind exchange, your profit will be deferred until you sell the replacement property. However, it must be noted that the cost basis of the new property in most cases will be the basis of the old property. Discuss this with your accountant to determine whether the savings by using a like-kind exchange will make up for the lower cost basis on your new property. Many taxpayers are excited about the concept of deferring their gain, but when they analyze their situation, they realize that the tax will only be a few thousand dollars. Additionally, becoming a landlord again may not be that attractive.
There are two important time limitations that are spelled out in the statute and cannot be waived or modified:
1. Identification of the replacement property within 45 days. Congress did not like the fact that Mr. Starker had no time limitations on when the exchange could take place. Accordingly, the law now requires that the taxpayer identify the replacement property no later than 45 days after the relinquished property has been sold. According to the IRS, the taxpayer may identify more than one property as replacement property. However, the maximum number of replacement properties that the taxpayer may identify is either three properties of any fair market value, or any number of properties as long as their aggregate fair market value does not exceed 200 percent of the aggregate fair market value of all of the relinquished properties.
The replacement property or properties must be unambiguously described in a written document. According to the IRS, real property must be described by a legal description, street address or distinguishable name (e.g., The Nathan Apartment Building).
2. A neutral party is essential. If the taxpayer has any control of even one penny of the relinquished property's sales proceeds -- even for one minute -- the exchange will fail. All such proceeds must be held in escrow by a neutral party until the taxpayer is ready to close on the replacement property. At that time, the funds must go directly into that purchase. Generally, an intermediary or escrow agent is involved in the transaction. In order to make absolutely sure that the taxpayer does not have control or access to these funds during this interim period, the IRS requires that this agent cannot be the taxpayer or a related party. The holder of the escrow account can be a broker or an attorney, unless the attorney had within the past two years represented the taxpayer. In such cases, the IRS takes the position that the client controls the attorney and the funds would be constructively in the hands of the taxpayer.
3. Take title within 180 days: Title to the replacement property must be obtained no later than the earlier of 180 days after the relinquished property is transferred or the due date of the taxpayer's income tax return for the year in which the transfer is made. If, for example, you transferred the relinquished property on Dec. 1, 2007, your tax return is due on April 15, 2008, which is only 136 days. You either have to obtain the replacement property by that date or get extensions from the IRS so that you can extend out to the full 180 days. Nowadays, getting an extension is automatic. If by the due date, you file Form 4868, you will get an extension for six months. Please note, however, that while this allows you to late file your tax return, you still have to pay the tax by April 15, 2008.
4. Interest on the exchange proceeds.
What happens to the interest earned while the sales proceeds are held in escrow? The IRS calls this the "growth factor," and any such interest to the taxpayer has to be reported as earned income. Once the replacement property is obtained by the exchanger, the interest can either be used for the purchase of that property or paid directly to the exchanger.
Reverse exchanges: It is often difficult to meet the 45/180-day requirements. You have found the replacement property, but do not yet have a buyer for your relinquished property. And the owner of the new property is not prepared to wait until you are able to go to closing on your current property.
The reverse Starker -- if done properly -- can solve this dilemma. Here are some of the important rules:
1. The taxpayer must arrange for the replacement property to be held in a "qualified exchange accommodation arrangement." In government language, this is called "QEAA."
2. Qualified indicia of ownership of the property by the QEAA is required. This means that the QEAA must either have legal title to the replacement property or some other arrangement that is acceptable to the IRS to demonstrate ownership. For example, a land sales contract (also called "contract for deed") may suffice. Under this latter arrangement, the QEAA will not have actual legal title, but will have contractual obligations. This may -- depending on state or local law -- avoid having to pay a double recordation-transfer tax. Otherwise, this tax must be paid when the property is first transferred to the QEAA and then again when it is transferred to the ultimate taxpayer.
3. No later than five business days after the property is transferred to the QEAA, the taxpayer and the exchange accommodation titleholder (called the QEAT) must enter into a written agreement that states that the latter is holding the property for the benefit of the taxpayer in order to facilitate an exchange under section 1031. Generally, this can be accomplished by a lease of the property from the QEAT to the taxpayer.
4. Both the taxpayer and the exchange accommodation titleholder (the QEAA) must file separate federal income tax returns, so as to advise the IRS of any income and expense incurred while the QEAT had ownership of the property.
5. No later than 45 days after the replacement property is transferred, the taxpayer must identify the relinquished property. The IRS allows the taxpayer to identify alternative and multiple properties, and if the taxpayer owns several investment properties, this provides some flexibility as to which property will be sold.
6. No later than 180 days after the replacement property is transferred to the QEAT, it must be conveyed to the taxpayer.
7. Perhaps the most important aspect of a reverse Starker is the requirement that the taxpayer have a legitimate desire to engage in a 1031 exchange. According to the IRS regulations:
At the time the qualified indicia of ownership of the property is transferred to the exchange accommodation titleholder, it is the taxpayer's bona fide intent that the property held by the exchange accommodation titleholder represents ... replacement property ... in an exchange that is intended to qualify for non-recognition of gain (in whole or in part) or loss under §1031.
In other words, you cannot buy the replacement property and then -- as an afterthought -- decide to treat the transaction as a 1031 exchange.
The rules are extremely complex. You must seek both legal and tax accounting advice before you enter into any like-kind exchange transaction -- whether forward or reverse.
Now we turn to the tax benefits available to real estate investors.
If you own investment property, and sell it, you will have to pay capital gains tax; for 2007, the tax rate is 15 percent.
But investors are required to depreciate a portion of their property. While this may provide a small tax benefit each and every year, when the property is ultimately sold, in many cases this depreciation must be recaptured at the rate of 25 percent.
Enter the like-kind exchange, which is a way of deferring that tax. At the outset of this column, it must be pointed out that contrary to popular opinion, this is not a "tax-free" transaction. The exchange, authorized by section 1031 of the Internal Revenue Code, will only defer -- not avoid -- the capital gains tax. It will not relieve you from the ultimate obligation to pay the capital gains tax.
Many years ago, a man by the name of T.J. Starker sold property in Oregon, pursuant to a "land exchange agreement," but did not receive any money for the sale. Instead, the seller -- a couple of years later -- transferred replacement property to Starker. The Internal Revenue Service considered this a taxable sale, but the 9th Circuit Court of Appeals held that this was a deferred exchange permitted under Section 1031 of the Tax Code. In other words, the exchange did not have to take place simultaneously.
The ideal exchange is a direct exchange. I own investment property A and you own property B (also investment). Both are of equal value. On Aug. 1, 2007, you convey B to me and on that same day I convey property A to you. If there is a written agreement between us that this is to be a 1031 exchange, neither of us will have to immediately pay any capital gains tax on any profit we have made.
But it is almost impossible to arrange such a transaction. The logistics of finding the replacement property to be exchanged simultaneously with the relinquished property is very difficult to coordinate.
Accordingly, most 1031 exchanges today are deferred.
There are two kinds of deferred (Starker) exchanges:
· Forward exchange: You sell the relinquished property, and within the time limitations spelled out in Section 1031, obtain the replacement property;
· Reverse exchange: You obtain title to the replacement first, and then sell the relinquished property.
The rules are complex, but here is a general overview of the process. With some important exceptions (discussed below) the rules apply equally whether the exchange is forward or reverse.
Section 1031 permits a delay (non-recognition) of gain only if the following conditions are met:
Must be investment property: The property transferred (called the "relinquished property") and the exchange property ("replacement property") must be "property held for productive use in trade, in business or for investment." Neither property in this exchange can be your principal residence, unless you have abandoned it as your personal house. Your vacation home would also not qualify as investment property, unless you actually start to rent it out more or less full time.
The area of vacation homes is complex and often misunderstood by taxpayers and lawyers alike. The IRS recently promised to provide more information to taxpayers regarding the treatment of these vacation homes.
There must be an exchange: The IRS wants to ensure that a transaction that is called an exchange is not really a sale and a subsequent purchase. Practically, an exchange looks like a sale, but the paperwork involved with the transaction makes it an exchange. It is important that anyone considering a 1031 exchange retain counsel who is familiar with the various rules.
The replacement property must be of "like kind": As a general rule, all real estate is considered "like kind" with all other real estate. Thus, a condominium unit can be swapped for an office building, a single-family home for raw land, or a farm for commercial or industrial property.
Once you meet these tests, it is important that you determine the tax consequences. If you do a like-kind exchange, your profit will be deferred until you sell the replacement property. However, it must be noted that the cost basis of the new property in most cases will be the basis of the old property. Discuss this with your accountant to determine whether the savings by using a like-kind exchange will make up for the lower cost basis on your new property. Many taxpayers are excited about the concept of deferring their gain, but when they analyze their situation, they realize that the tax will only be a few thousand dollars. Additionally, becoming a landlord again may not be that attractive.
There are two important time limitations that are spelled out in the statute and cannot be waived or modified:
1. Identification of the replacement property within 45 days. Congress did not like the fact that Mr. Starker had no time limitations on when the exchange could take place. Accordingly, the law now requires that the taxpayer identify the replacement property no later than 45 days after the relinquished property has been sold. According to the IRS, the taxpayer may identify more than one property as replacement property. However, the maximum number of replacement properties that the taxpayer may identify is either three properties of any fair market value, or any number of properties as long as their aggregate fair market value does not exceed 200 percent of the aggregate fair market value of all of the relinquished properties.
The replacement property or properties must be unambiguously described in a written document. According to the IRS, real property must be described by a legal description, street address or distinguishable name (e.g., The Nathan Apartment Building).
2. A neutral party is essential. If the taxpayer has any control of even one penny of the relinquished property's sales proceeds -- even for one minute -- the exchange will fail. All such proceeds must be held in escrow by a neutral party until the taxpayer is ready to close on the replacement property. At that time, the funds must go directly into that purchase. Generally, an intermediary or escrow agent is involved in the transaction. In order to make absolutely sure that the taxpayer does not have control or access to these funds during this interim period, the IRS requires that this agent cannot be the taxpayer or a related party. The holder of the escrow account can be a broker or an attorney, unless the attorney had within the past two years represented the taxpayer. In such cases, the IRS takes the position that the client controls the attorney and the funds would be constructively in the hands of the taxpayer.
3. Take title within 180 days: Title to the replacement property must be obtained no later than the earlier of 180 days after the relinquished property is transferred or the due date of the taxpayer's income tax return for the year in which the transfer is made. If, for example, you transferred the relinquished property on Dec. 1, 2007, your tax return is due on April 15, 2008, which is only 136 days. You either have to obtain the replacement property by that date or get extensions from the IRS so that you can extend out to the full 180 days. Nowadays, getting an extension is automatic. If by the due date, you file Form 4868, you will get an extension for six months. Please note, however, that while this allows you to late file your tax return, you still have to pay the tax by April 15, 2008.
4. Interest on the exchange proceeds.
What happens to the interest earned while the sales proceeds are held in escrow? The IRS calls this the "growth factor," and any such interest to the taxpayer has to be reported as earned income. Once the replacement property is obtained by the exchanger, the interest can either be used for the purchase of that property or paid directly to the exchanger.
Reverse exchanges: It is often difficult to meet the 45/180-day requirements. You have found the replacement property, but do not yet have a buyer for your relinquished property. And the owner of the new property is not prepared to wait until you are able to go to closing on your current property.
The reverse Starker -- if done properly -- can solve this dilemma. Here are some of the important rules:
1. The taxpayer must arrange for the replacement property to be held in a "qualified exchange accommodation arrangement." In government language, this is called "QEAA."
2. Qualified indicia of ownership of the property by the QEAA is required. This means that the QEAA must either have legal title to the replacement property or some other arrangement that is acceptable to the IRS to demonstrate ownership. For example, a land sales contract (also called "contract for deed") may suffice. Under this latter arrangement, the QEAA will not have actual legal title, but will have contractual obligations. This may -- depending on state or local law -- avoid having to pay a double recordation-transfer tax. Otherwise, this tax must be paid when the property is first transferred to the QEAA and then again when it is transferred to the ultimate taxpayer.
3. No later than five business days after the property is transferred to the QEAA, the taxpayer and the exchange accommodation titleholder (called the QEAT) must enter into a written agreement that states that the latter is holding the property for the benefit of the taxpayer in order to facilitate an exchange under section 1031. Generally, this can be accomplished by a lease of the property from the QEAT to the taxpayer.
4. Both the taxpayer and the exchange accommodation titleholder (the QEAA) must file separate federal income tax returns, so as to advise the IRS of any income and expense incurred while the QEAT had ownership of the property.
5. No later than 45 days after the replacement property is transferred, the taxpayer must identify the relinquished property. The IRS allows the taxpayer to identify alternative and multiple properties, and if the taxpayer owns several investment properties, this provides some flexibility as to which property will be sold.
6. No later than 180 days after the replacement property is transferred to the QEAT, it must be conveyed to the taxpayer.
7. Perhaps the most important aspect of a reverse Starker is the requirement that the taxpayer have a legitimate desire to engage in a 1031 exchange. According to the IRS regulations:
At the time the qualified indicia of ownership of the property is transferred to the exchange accommodation titleholder, it is the taxpayer's bona fide intent that the property held by the exchange accommodation titleholder represents ... replacement property ... in an exchange that is intended to qualify for non-recognition of gain (in whole or in part) or loss under §1031.
In other words, you cannot buy the replacement property and then -- as an afterthought -- decide to treat the transaction as a 1031 exchange.
The rules are extremely complex. You must seek both legal and tax accounting advice before you enter into any like-kind exchange transaction -- whether forward or reverse.
Sunday, March 30, 2008
Gregoire says State economy strong, buy a house
Not 'doomsday' here, governor tells Realtors
David Ammons Associated Press
OLYMPIA – Gov. Chris Gregoire, urging potential home buyers to put aside their worries about the national economy, said Thursday she's reminded of Franklin Roosevelt's old line that the only thing to fear is fear itself.
Addressing the politically powerful Washington Realtors, the Democratic governor said she sometimes wishes people wouldn't watch the evening news because of all the "doomsday" talk of a home mortgage meltdown and a pending recession.
Gregoire said that in actuality, the state economy has seldom been so strong, with record low unemployment, 222,000 new jobs created in the past three years, and national publications praising the business climate here.
She conceded that the national news is having a psychological effect on home buyers, even though there are relatively few mortgage failures here.
"This is a very frustrating time," the governor said, adding "Our economy is strong – buy your home. ... There is no good reason for a slowing of home purchasing in the state of Washington today."
The decision by the Federal Reserve Board to lower the prime interest rate and the possibility of another downtick could revitalize home sales and economic activity here, Gregoire said.
The governor said her economic advisers say virtually every sector of the state economy is doing fine except for new housing starts.
"We need to turn that one indicator around," she said.
Gregoire's Republican challenger, Dino Rossi, appeared before the group a day earlier with a campaign speech sharply critical of the governor's handling of transportation, education, public safety and other core services.
Gregoire made no mention of either Rossi or the campaign, but some of her comments seemed to respond to some of his criticism.
"We're trying to cut through the bureaucracy, get things done and make sure we're business-friendly," the governor said.
She talked about an economic turnaround on her watch and praised progress in the areas that Rossi mentioned, education, highways and public safety. She also talked about "quality of life" improvements, including better financing of state parks and the initial work on cleaning up Hood Canal and Puget Sound.
A day earlier, Rossi accused Gregoire of sitting on recommendations for changes in the state Growth Management Act that are needed so more housing can be built closer to where people live. The governor said she supports that concept, particularly because it would ease some traffic congestion in urban areas.
Land-use policies aren't off limits for refinement, she indicated. She didn't give specifics, and Rossi didn't either.
"Don't let the barriers of yesterday get in our way, but be thinking really progressively about what we want to look like tomorrow," Gregoire said.
The Realtors' group, which bills itself as the state's largest professional trade group, with 25,000 members statewide, endorsed Rossi four years ago.
Rossi was a commercial real estate salesman for years before entering politics, and he now handles his own property investments.
A leader of the association, Sam Pace of Kent, said the group is bipartisan and that it isn't inevitable that Rossi will win the group's nod again this time. Both Rossi and Gregoire will be invited to an interview panel and the endorsement will be made in July, he said.
David Ammons Associated Press
OLYMPIA – Gov. Chris Gregoire, urging potential home buyers to put aside their worries about the national economy, said Thursday she's reminded of Franklin Roosevelt's old line that the only thing to fear is fear itself.
Addressing the politically powerful Washington Realtors, the Democratic governor said she sometimes wishes people wouldn't watch the evening news because of all the "doomsday" talk of a home mortgage meltdown and a pending recession.
Gregoire said that in actuality, the state economy has seldom been so strong, with record low unemployment, 222,000 new jobs created in the past three years, and national publications praising the business climate here.
She conceded that the national news is having a psychological effect on home buyers, even though there are relatively few mortgage failures here.
"This is a very frustrating time," the governor said, adding "Our economy is strong – buy your home. ... There is no good reason for a slowing of home purchasing in the state of Washington today."
The decision by the Federal Reserve Board to lower the prime interest rate and the possibility of another downtick could revitalize home sales and economic activity here, Gregoire said.
The governor said her economic advisers say virtually every sector of the state economy is doing fine except for new housing starts.
"We need to turn that one indicator around," she said.
Gregoire's Republican challenger, Dino Rossi, appeared before the group a day earlier with a campaign speech sharply critical of the governor's handling of transportation, education, public safety and other core services.
Gregoire made no mention of either Rossi or the campaign, but some of her comments seemed to respond to some of his criticism.
"We're trying to cut through the bureaucracy, get things done and make sure we're business-friendly," the governor said.
She talked about an economic turnaround on her watch and praised progress in the areas that Rossi mentioned, education, highways and public safety. She also talked about "quality of life" improvements, including better financing of state parks and the initial work on cleaning up Hood Canal and Puget Sound.
A day earlier, Rossi accused Gregoire of sitting on recommendations for changes in the state Growth Management Act that are needed so more housing can be built closer to where people live. The governor said she supports that concept, particularly because it would ease some traffic congestion in urban areas.
Land-use policies aren't off limits for refinement, she indicated. She didn't give specifics, and Rossi didn't either.
"Don't let the barriers of yesterday get in our way, but be thinking really progressively about what we want to look like tomorrow," Gregoire said.
The Realtors' group, which bills itself as the state's largest professional trade group, with 25,000 members statewide, endorsed Rossi four years ago.
Rossi was a commercial real estate salesman for years before entering politics, and he now handles his own property investments.
A leader of the association, Sam Pace of Kent, said the group is bipartisan and that it isn't inevitable that Rossi will win the group's nod again this time. Both Rossi and Gregoire will be invited to an interview panel and the endorsement will be made in July, he said.
Oh, Baby!!!
This is definately our child...already stubborn, already a mind of its own, already loves sleeping/hates waking up! We had our first ultrasound and the baby just wouldn't show us the goods. I tried everything to get it to wake up, turn over and uncross it's legs and nothing. I don't like calling my baby an "IT". I already thought I had waited as long as I possibly could to find out if we are having a boy or a girl, but it seems as though our child decided we should wait a little longer.
FYI - In the first photo the baby is sucking it's thumb, and the second photo it is sleeping on it's stomach with it's legs crossed and tucked under it's body...it stayed like this for pretty much the whole visit. We were able to see everything else...the heart, brain, organs and all looks good, so needless to say we are thankful for that.
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