Was talking to a real estate investor today, as he’d called me with a question. We know each other moderately well, and since his ride hadn’t arrived yet (we’ll get back to that ride), he took the opportunity to call. He wanted to know if it made sense to refinance any of his income properties. I said based upon the last few years, he may not have the required LTV (loan to value) ratio to pull it off just yet. He replied, saying that minor detail hadn’t yet entered into the conversation he’d been having with himself on the subject. He’s pretty dry like that. In fact, his humor is Gobi Desert dry — and rapier like if challenged. 
I asked him what he needed a ride for, and he told me he and his (way) better half were being picked up to go to the other side of the island. Seems they were vacationing, but he wasn’t gonna rub my nose in it — unless I gave him the opening. The next few minutes were galling, to say the least.
When it was clear he’d has his fill of my envy, I asked him his home’s loan balance and market value. Both answers were great — below conforming limits on the loan, and far below the LTV requirements. What was his current interest rate? He ‘thinks’ it’s in the ‘high’ 5′s. close enough for horseshoes and refinancing — more or less.
Today he can easily qualify for a ‘rate and terms’ refi. He’ll be able to get around 4.5%, maybe a 1/4% higher. Who knows? What was true at 10 this morning might be a bald faced lie by afternoon coffee. His loan turns out to be interest only, and will adjust in a few years. I told him gettin’ a 30 year fixed rate under 5% is a no-brainer of the first degree. Frankly, the mere fact rates that low exist in my world still seems surreal to me. Why? ‘Cuz I was in the business for over 30 years before I saw my first interest rate under 7%. It never dawned on me it was possible to have rates under 7%, much less under 5%. There is a God, and He loves me.
Almost forgot about the stealth boot. First, let’s define what ‘boot’ is in real estate investment nomenclature. (Always wanted to fit that word into a post. ) ‘Boot’ is something of value, almost always cash, constructively received by an investor at the closing of a tax deferred exchange. It is taxable for sure, and to be avoided, at least most of the time.
So what’s stealth boot? It’s boot that sneaks up on ya ‘cuz you didn’t know to ask one silly little question. Let’s say you have an income property and you know that any cash received via refinancing isn’t what we call a ‘taxable event’. In other words, it’s your money to do with as you will — with just one irritating exception.
What if you refinanced that property, and pocketed $200,000 or so. Then, a short while later you decided it’d be a great idea to enter that property into a tax deferred exchange. You did so, and it was a dynamite improvement of your position. You’re ecstatic, until that is, your tax preparer gives you that RCA Dog look while going through your records the following tax season.
Here’s the problem in a nutshell. The IRS, if you’re audited, will take the position you refinanced for tax free cash ‘in anticipation’ of the exchange. They will then levy a new tax bill on the $200,000 — payment of which they’ll most assuredly want immediately. That’s what we in the biz call a bummer. Your protection is the passage of time between the refi and the exchange. Frankly, I’ve never heard anything concrete about how long a period that should be. Figures, right?
Now ya know. Be careful. Ever tried to prove ‘intent’ to the IRS? Exactly, me neither.
BawldGuy Takeaway: Review all your loans today. If they’re higher than what’s now available by a long shot? Refi by 4:30 yesterday afternoon if possible. If you think it’s a close call, call this guy — Brian Brady. Literally, he’s the most knowledgeable lender with whom I’ve ever done business, and I don’t say things like that lightly. You can reach him, or at least leave him a message at 858 777-9751. Brian has done loans for my clients not only in California, but out of state as well. He did a few out of state loans a couple years ago that even the locals couldn’t get done.
Call him — he’s the real deal.
Oh, and tell him BawldGuy sent ya.
And please, don’t trip over any stealthy boot.
While you’re at it, call me too. I need a fix. And nothing fills that need better than talking with somebody new with a lotta questions and a desire to make things happen. Call 619 889-7100 and wait for, “Hi, this is Jeff”. Have a good one.
Related posts:
- How A Purposeful Plan Makes Use Of A Partial 1031 Tax Deferred Exchange — A Case Study
- Tax Deferred Exchange With a Twist — How Purposeful Planning Makes a Difference
- Purposeful Planning Your Retirement Requires A Hitter’s Sense Of Timing
- The Returns Are In — We’re Now Recommending San Diego — Numbers Making Sense
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