Key Vocabulary for 1031 Exchanges

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By Dr. Robert G. Hetsler, Jr.

If you’re new to the world of section #1031 of the IRS Tax Code, the terminology that comes along with these tax-saving exchanges can be confusing. To help you understand the phrases you will undoubtedly hear if you choose to complete a tax-deferred 1031 exchange, here’s a list of the key terms you will come across.

Like-Kind: A term that refers to the nature or character of the property being exchanged. In order for the exchange to qualify for tax-deferred status, both the relinquished and replacement property must meet the IRS definition of like-kind.

Boot: This is the fair market value of any non-qualified property you receive during the exchange. It can be cash, loans, property, reduction in debt or even supplies. Basically, anything of value that you receive during the exchange could be considered boot.

Constructive Receipt: Any indirect control you have over the proceeds of the exchange. If you benefit in any way from the proceeds (aside from the purchase of replacement property), this could be considered constructive receipt and can jeopardize the tax-deferred nature of the exchange.

Qualified Intermediary: The individual or entity that manages the exchange and holds sale proceeds for relinquished property (to avoid the exchanger having actual or constructive receipt) and title to the replacement property (again, to avoid receipt issues during the exchange).

Relinquished Property: The old property the exchanger is getting rid of during the exchange.

Replacement Property: The new property the exchanger will acquire during the exchange.

Exchanger: The investor who is conducting the 1031 exchange for his or her own benefit.

 

7 Bookkeeping Mistakes That Real Estate Business Owners Make and How to Avoid Them

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By Leon McKenzie, CEO, US Probate Leads

How would you feel if you had to watch as your hard-earned wealth goes up in flames because you failed to make sure that your finances were in order?

The word horrible comes to mind.

Statistics show that about 49% of small businesses will not be able to survive for 5 years or more. So, if this is a fate that you want to avoid as a real estate investor, your bookkeeping must be in order.

And while you have the option of hiring a bookkeeper to sort out your business finances, you still need to take an active role in managing them. You could start by identifying the common mistakes small businesses make and do everything you can to avoid or rectify them.

So, what are these mistakes? And how should you go about addressing them?

1. Using a Personal Account for Business Transactions

A personal bank account is for personal financial transactions. This is the account that allows you to pay your personal expenses and keep your savings. But many small business owners, which include those in the real estate, tend to use personal bank accounts for business transactions.

This is a big no-no.

At no point in time should you do such a thing. How are you going to trace what is coming in from your business? And how will you be able to separate your personal and business transactions?

Mixing things up in this manner is a recipe for trouble. Sooner or later, the IRS may require you to account for all monies coming into your real estate business, and you will be unable to meet their requirements – at least not without some expensive accounting help.

If you are currently running your business and personal life from one bank account, you need to do something to change that. Opening a business account takes a short time but will save you a lot of grief in the long term.

2. Paying For Business Transactions Using Personal Debit and Credit Cards

Are you one of those real estate investors that use your personal debt and credit cards to pay for business transactions?

You need to stop.

Doing this is just as bad as using a personal bank account to run your business operations. It’s going to be very difficult for you to keep track of your personal and business expenditures. You will need to spend more time and effort to find out what belongs where, which you may not be able to do.

So, what should you do?

It’s really simple: get separate debit and credit cards for your businesses. And if you are not in a position to do so, then dedicate one debit or credit card to business transactions for easy accounting. Doing so helps you build creditworthiness not just on a personal level, but on a business level as well.

3. Poor Record Keeping

Are you one of those people who assume that when the time comes to do your taxes you will remember it all?

How is that working out for you?

Poor record keeping is a serious issue for some real estate investors. You may fail to keep receipts of the building or renovation materials that you use. You may also fail to keep a record of your debts or payments to freelance professionals that you hire. Categorizing employees or expenses wrongly may also be an issue. Regardless of what the problem is, poor record keeping will come back to haunt you in the very near future – when the taxes come calling.

The first thing to do is write down everything you spend in the way of business transactions. Use a business credit or debit card to pay off your expenses because it makes everything much easier to track. Be sure to ask for a receipt – always. Then make sure that you have categorized your business transactions and employee-related expenses correctly. In addition, keep a very close eye on what is coming in and going out of your business accounts. Be sure to keep a record of your business activities going back a few years, just in case.

It may seem like a nuisance to keep good records, but when you need to account for your money to IRS or potential business buyers, you will thank yourself for doing so. Not only will you be able to stay out of trouble, but you will also be able to stay on top of reimbursable expenses that will help keep more money in your pocket.

4. Not Reconciling Your Bank And Credit Accounts

If you have a good record of your business transactions but do not reconcile your bank and credit accounts, then there is no difference between you and hoarders who buys things that they do not use.

What’s the point?

Those receipts and statements you keep should be used to reconcile your credit and bank accounts. It is the only way for you to get a clear picture of your real estate business in terms of what you owe and how much you really own as equity and cash.

So take time every week or month to balance the books. Don’t procrastinate until it is too late to save your business.

5. Setting Little Money Aside For Taxes And Other Bills

Are you setting very little money for taxes?

That’s probably the reason you get penalized often.

How about a steady cash flow: are you always short of cash to run your business?

If you run a real estate business, then you are self-employed. That means that you are responsible for setting aside enough money aside to pay your taxes and any other financial emergencies that crop up. We are talking about Social Security, Medicare, and retirement savings for the future.

Your poor cash flow on the other hand, could be attributed to poor accounting or the fact that you are overextending yourself financially. If you are spending most of your business revenues on expanding your business without keeping a financial emergency fund for the business, then between your regular business expenses and debts, you will have little money for emergencies – hence the poor cash flow.

So take stock of your finances, and leverage debt to help you expand that real estate business without compromising your ability to pay taxes or keep the business in operation.

Cash is still king.

6. Not Backing Up Data

After all the effort you have gone into to digitize your business and learn how everything works, you are currently sitting tight and have no care in the world.

This is a dangerous mindset to have.

Digitization of business data makes taking care of your real estate investments much easier. But what happens when your systems are hacked or your servers fail?

You will need to resort to your backups, of course.

So, the question is: do you back up data? How often do you do it?

What are you waiting for?

You need to back up your data digitally and manually. You can back up your real estate business data in the cloud or a second business server. You should also keep your paper records as a backup just in case your entire digital system fails completely.

You can set up your digital system to back up data automatically after a set period. That, in addition to keeping a paper record of your business transactions, will be helpful should your business ever need an audit or should your systems fail.

7. Trying To Do It All

Nobody understands your real estate business better than you do. You have put blood, sweat, and tears into running it and making it a success. For that reason, you are having a hard time ceding the control of your business to someone else. So you try to do it all. And you are failing- miserably.

“Pride comes before a fall.” How often have you heard that statement?

Is it more important for you to be in control or to be successful?

Well then, it is time for you to try to keep up with every aspect of your business. While it is wise for you to keep up with your business finances, it does not hurt to hire a bookkeeper to help you out. Not everyone has a head for numbers, and it is okay to hire those that do.

And when you do hire a bookkeeper to help you with your business finances, supervise but do not micromanage. Take the time to discuss what you want that professional to do, and then provide him or her with the chance to do the assigned job properly.

Business bookkeeping is part and parcel of running a real estate business. In order for you to make money, what comes in must be more than what goes out. And in order to make good profits, you have to understand what goes on in your business, right? So, it all comes a full circle. What this implies is that you must know what goes on in your business on the financial front. Be sure to hire a professional bookkeeper to help you out if you cannot manage your business finances. But even as you do, make work easier on yourself by avoiding the common bookkeeping mistakes that business owners tend to make. It will make your business operations much more efficient and profitable.

Getting Started with Your Tax Lien Certificate and Tax Deed Investment Business

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By: Ted Thomas


Investing in tax lien certificates and tax deeds is a business that almost anyone can start. It doesn’t require any more than motivation, a small amount of money, and knowledge of how the system works. While I can’t help you with the first two requirements, my successful students and I can help you with the third one.

The Basics of Any Good Business

As the old saying goes, knowledge is power. The more you know, the better your investments will be – whether you are creating wealth through the stock market, by opening your own storefront, or by purchasing tax lien certificates and tax deeds.

Think of your investment business as an office building. Before the walls goes up, there has to be a foundation in place. Not only is the foundation the most important part of constructing the building, it’s the hardest part to do. It takes careful planning, using the blueprints (knowledge) to create a foundation that will support the subsequent structure.

Although its importance can’t be overstated, one day the foundation will be covered up. No one will be able to see it and it will become a forgotten part of the building. Nevertheless, the building must stand firmly on the foundation or it will crumble.

The same is true of a business. Your profits will speak for themselves, but no one will realize the time, research, and effort you put into creating a foundation of success. Just remember that without those ingredients, your road to profitable investments will be a rough one.

Understand the Process

The more comfortable you are with the process of bidding on tax lien certificates and tax deeds, the better your chances of making good buying decisions. One of my successful students, Craig Talkington, puts it this way, “You do it once and it gets easier every time you do it. It’s guaranteed. The worst that happens is you get your money back.”

Not only that, it gets more profitable! Recently, Craig bought a 10-acre tract of land at a Tax Lien certificate sale. It was next to a school in a bad part of town and everyone thought he was crazy. But Craig was crazy like a fox – he figured the school would eventually want to use it for expansion. He bought the certificate for $1,500 and later sold the property to the school system for $34,000. Craig kept investing part time and it didn’t take long for his profits to snowball.

Know the Rules

Each county is different when it comes to auctioning tax lien certificates and tax deeds. They have specific rules and particular bidding procedures. There are many bidding processes, I’m only mentioning two in this tutorial.

The bidding process at a tax lien certificate or tax deed auction varies. Two types are a reverse auction and rotational bidding.

At a traditional auction, bidding starts with a minimum amount and each subsequent bid goes up; in a reverse auction, it starts at the high point and then goes lower. This type of auction is used in the states of Arizona and Florida. In Florida, the bidding is on an interest rate that starts at 18 percent. The interest rate gets progressively lower as the bidding continues and may go down to less than one percent.

The state of Colorado, on the other hand, uses a rotational bidding process. This means the bidders are all given a card with a number; the auctioneer will go around the room in order from lowest to highest number asking for bids. At some rotational bid auctions, the numbers are printed on ping pong balls and put into a big drum, much like you might see at a bingo game.

Dates and times vary widely amongst tax districts, too. For instance, the state of Texas sells tax defaulted properties every month. Texas counties sell tax deeds; however the deed has an encumbrance. Texas allows the property owners to pay the investor directly and redeem the tax-defaulted property anytime within 180 days. The owner must pay the amount of the defaulting taxes on the deed plus 25%, no matter the amount of days the debt has been outstanding. You could easily make a tidy profit in less than 30 days and that is why Texas is a popular state when it comes to tax deed investing.

Obviously, there is a lot to learn about the particular rules imposed by each county and municipality – but learning them forms the foundation of your business.

Get Started Now

The most important thing is that you get started on your investment business. You don’t have to quit your day job; you need to make small changes and begin to control your destiny so you have money in the future.

Ask yourself, “Is this in my best interests?” The more you learn the better your investment business will be and the more you will like it. Tax lien certificate and tax deed investing is as safe an investment as you can imagine since it is secured by real estate, your money protected by tax code, and certificates pay one of the highest rates of interest in the market.

Ted Thomas is famous for showing newcomers and investors how to earn 6 figure incomes within 1 year of completing his training program. Conservative investors love tax lien certificates because they are predictable, certain and secure and sold by local government. Tax defaulted properties are sold at oral big auctions and online. Starting bid, only the back taxes…. More information at www.TedThomas.com