Where to Stay
There are a number of options available including hotels, bed & breakfasts, and a wide variety of quality cabin rentals. Most of the cabin rental companies require a 2 night minimum and prices will range from $135 to $250 per night. If you would like more information on cabin rentals and other lodging available please visit Our Lodging Page.
What if I Want to Rent My Cabin?
In the Blue Ridge area approximately 75% of the cabins sold are used as a Second-homes. The majority of these cabins were purchased primarily as a get-away for their owners personal use; however, many cabin owners elect to put their cabins in the rental program. Especially with soaring property values, in the North Georgia Mountains, the cost of owning a vacation cabin can be an expensive proposition. "More and more people are looking to rentals as a way to defray some of the costs.
The conventional wisdom is that you can't make a rental cabin pay for itself. Renting out your cabin for a few weeks a year can help defray some of your expenses, sure, but most people find their properties fall far short of breaking even. Your cabin would need to be rented about 120 to 150 nights a year to break even. Management companies in Blue Ridge charge anywhere from 25% to 35% of gross rental income. The number of nights per year will depend on the following;
Even if your cabin does not break even there are still many advantages to considering putting it in the rental program:
- The price you charge per night Your cabin will rent in a given price range. It will rent less if you price it high compared to the competition than if you price it more aggressively compared to the competition.
- How many nights you use it personally if you block-off every holiday for owner use it will impact you nights of rental and income.
- How it's furnished Most renters come back to Blue Ridge repeatedly, and more often than not, when asked would you come back to the same cabin you stayed at last time the answer is NO. They might say it was OK but we will try a different one next time. In my opinion the key to a successful rental cabin is to have repeat business. Furnishings are the key if the cabin is nicely set up with comfortable beds, good linens, dinnerware and lodge furnishings it will make a big difference.
- Location Mountain View and creek cabins are in the highest demand and usually rent for more money then a cabin on a wooded lot. Buy a cabin in an area where outdoor activities are available.
- How many it sleeps Cabins usually have a base rent for 1 4 people and charge an extra person charge. The larger cabins are more conducive to renters coming for longer visits; smaller cabins may be more geared to weekend rental customer.
- Fun! Fun!! Fun!!! Things to do; hot tubs are essential, have a game room, movies and video games for the kids. If your cabin has lots of stuff to keep the kid's occupied parents can have a more relaxing vacation.
In Blue Ridge a good property manager is all but essential if you'll be renting out your cabin. Talk to several cabin rental companies to find one that charges reasonable fees, aggressively screens potential tenants and stays on top of maintenance and repairs. You might want to talk to some of the owner of cabin that management company and find out what their experience has been. Some owners manage their own cabins but it can be difficult to manage cleaning and maintenance for out of town owners.
- You can write off many of your expenses - including mortgage interest and property taxes, utilities, maintenance and management fees. In addition, you can write off a portion of your rental losses depending on how much you use it personally and your income bracket. Ask a tax professional's to help you sort through the potential write-offs and what they could mean for your bottom line.
- Use it personally - In a short term cabin rental you can defray some of the expenses while still being able to use it personally. The IRS allows you to use your cabin for 14 days and still claim the full deduction. If you use it more than 14 days you can write off a percentage of owner use compared to nights rented.
- Afford a better cabin - You may be able to afford a larger cabin or one with on a creek or with a better view if you factor in some rental income to offset your monthly expenses.
- Less maintenance - Your rental management company should take care of cleaning, repairs and maintenance making your time at the cabin more enjoyable.
Ask yourself the following questions if you're considering buying and renting out your cabin:
Client vs. Customer in Brokerage Relationships
- Have you crunched the numbers? You'll need to come up with a some numbers, including an estimate of how many weeks the property is likely to be rented and all your monthly costs including, mortgage, insurance, property and sales taxes, advertising, utilities, maintenance, repairs and cleaning. Be realistic! Figure on the low side and if those numbers makes sense then it may be a good option for you to consider.
- Are you willing to give up the use of your property during the peak season and holidays? This is the conflict that keeps many vacation homes from being profitable. Demand for your property is likely to be the highest in the weeks your family most wants to be there.
- Can you hold on if things get tough? If real estate appreciation slows or even reverses, it could take many years before your property rises in value enough to offset the substantial costs of buying and selling the property.
All brokerage relationships fall into one of two broad categories: 1) broker-client relationships and 2) broker-customer relationships.
In a broker-client relationship, the real estate broker is representing the client and is acting as his or her legal agent in buying, selling, or leasing property. In Georgia, a broker-client relationship can only be formed by the parties entering into a written agreement. The agreement must explain, among other things, how the broker will be paid, the duty of the broker to keep client confidences, and the types of client or agency relationships offered by the broker.
The other type of brokerage relationship is known as a broker- customer relationship. With this type of relationship, the broker is not representing the customer in a legal or agency capacity. However, the broker can still work with the customer and help him or her by performing what are known as ministerial acts. These include, for example, identifying property for sale or lease, providing pre-printed real estate form contracts, preparing real estate contracts at the direction of the customer, and locating lenders, inspectors, and closing attorneys on behalf of the customer. The different types of brokerage relationships within each of these categories are discussed below:
It is very important for buyers and seller's to understand the types of agency offered by Brokers in the State of Georgia while in the process of buying or selling a home. At Coldwell Banker High Country Realty we DO NOT offer Dual Agency. I will represent either a buyer or a seller in a transaction but never both in the same transaction. Should I find a buyer or another agent from Coldwell Banker High Country Realty find a buyer we will either treat that buyer as a Customer or handle the sale under Designated Agency.
Types of Agency
Seller Agency Seller agency occurs when the real estate broker is representing the seller in selling his or her property. This type of brokerage relationship is created by the seller and the broker entering into a written contract known as a listing agreement Seller agency is also sometimes called listing agency.
Buyer Agency Buyer agency occurs when the real estate broker represents the buyer in locating and assisting the buyer in negotiating for the purchase of property suitable to the buyer. A buyer agency is created when the buyer enters into a written agreement commonly known as a buyer brokerage agreement. Buyer agency is sometimes referred to as buyer brokerage.
Dual Agency Georgia law allows both parties to agree to have one agent or broker represent them in a real estate transaction at the same time. In other words, the agent or broker has a client relationship with all parties to the transaction without acting in a designated agency capacity. In these situations, neither party is exclusively represented by a designated real estate agent. This type of brokerage relationship is called dual agency. Georgia law allows real estate brokers to act as dual agents if they first get the written consent of both parties.
Designated Agency In some real estate transactions, the real estate agent representing the buyer and the real estate agent representing the seller both work for the same broker or brokerage firm. In such a transaction, the broker may allow each agent to exclusively represent their respective clients. This type of brokerage relationship is known as designated agency. In a designated agency transaction, the designated agent for the buyer owes the same duties to the buyer as if the agent was acting only as a buyer's agent. Similarly, the designated agent for the seller owes the same duties to the seller as if the agent was acting only as the seller's agent. With designated agency, each designated agent is prohibited from disclosing to anyone other than his or her broker any information requested to be kept confidential by the client unless the information is otherwise required to be disclosed by law. Therefore, designated agents may not disclose such confidential information to other agents in the company. The broker is also prohibited from revealing any confidential information he or she has received from one designated agent to the other designated agent, unless the information is otherwise required to be disclosed by law. Confidential information is defined as any information that could harm the client's negotiating position which information the client has not consented to be disclosed. In Georgia, designated agency is defined by state statute not to be dual agency.
Transaction Brokerage A transaction brokerage relationship is one in which a real estate broker or brokers assists both parties in a real estate transaction but does not enter into a client relationship with, nor represents, either party. In a transaction brokerage relationship, the broker treats both parties as customers and can only perform ministerial acts for either party.
Brokers May Help Parties Other Than Their Clients: Brokers who represent one party in a real estate transaction as a client can still help the other party in the transaction as a customer by performing ministerial duties for the other party. When a real estate broker works with a party as a customer or client, the broker may not knowingly give the party false information.
One of the most important things for a buyer to consider in their search for a home or cabin is a discussion on Agency. Most believe that the Agent with whom they are working on a regular basis represents them and their interests, however, without entering into a written buyer agency agreement that may not be the case.
The Listing Agent represents the seller in the transaction. It is that Agent's fiduciary duty (where their loyalty lies) to protect the seller's position at all times. Seller Agent's Obligations to the Client Include;
Buyer's Agency, however, may be an option available to you. Simply put, it allows the Agent with whom you are working to be your representative and to put your interests above all others. An agent representing you, the buyer, owes the same fiduciary duties listed above. Unless you enter into a Buyer Agency agreement the agent helping you will likely be treating you as a customer and not an agency relationship.
- Loyalty The Seller's Agent must always act in best interest of client and never in the best interest of the licensee.
- Obedience The Seller's Agent must carry out all lawful instructions of client.
- Disclosure of all material facts which would have an affect on the decision making process.
- Accountability The Seller's Agent must protect and account for all money, documents, valuables or other personal property given to him/her by anyone.
- Confidentiality Duty to keep the client's information and/or discussions confidential and which survives the termination of the agency relationship. Duty does not apply to legally required disclosures involving known physical hazardous conditions of property.
- Reasonable Skill, Care and Due Diligence The Seller's Agent must act in a reasonably capable and competent manner in performing the duties and requirements of a licensee.
The Listing Agent represents the seller; they cannot reveal certain things to you, as the buyer: Buyer Agency turns the tables. If a Buyer's Agency agreement is struck between you and your Agent, it is you, rather than the seller, who has the representation from the Agent with whom you are working. If you are being represented by a Buyer's Agent, some of the potential benefits include:
Is it necessary to have a Buyer's Agent? No. Thousands of home buyer's have been well served dealing with the seller's Agent or transactional Agent. The important thing is to understand your options, so that you don't unintentionally accept less representation than you want. You should have a discussion on agency right at the beginning when you start working with an agent which may prevent a misunderstanding down the road.
- The Agent can help develop negotiating strategy and provide a Comparable Market Analysis, revealing at what price similar properties in the area have been listed for and sold for.
- The Agent can reveal to you any information about the seller that the Agent has been able to ascertain. This may include reasons for selling, potential concessions, or other information that may be to your advantage.
- Information about property value trends that may influence your decision about a certain area can be relayed to you.
Q - What is a tax-deferred exchange?
In a typical transaction, the property owner is taxed on any gain realized from the sale. However, through a Section 1031 Exchange, the tax on the gain is deferred until some future date. Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment.
A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of "like-kind", while deferring the payment of federal income taxes and some state taxes on the transaction. The theory behind Section 1031 is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer's investment is still the same, only the form has changed (e.g. vacant land exchanged for apartment building). Therefore, it would be unfair to force the taxpayer to pay tax on a "paper" gain.
The like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.
What are the benefits of exchanging v. selling?
What are the different types of exchanges?
- A Section 1031 exchange is one of the few techniques available to postpone or potentially eliminate taxes due on the sale of qualifying properties.
- By deferring the tax, you have more money available to invest in another property. In effect, you receive an interest free loan from the federal government, in the amount you would have paid in taxes.
- Any gain from depreciation recapture is postponed.
- You can acquire and dispose of properties to reallocate your investment portfolio without paying tax on any gain.
What are the basic requirements for a valid exchange?
- Simultaneous Exchange: The exchange of the relinquished property for the replacement property occurs at the same time.
- Delayed Exchange: This is the most common type of exchange. A Delayed Exchange occurs when there is a time gap between the transfer of the Relinquished Property and the acquisition of the Replacement Property. A Delayed Exchange is subject to strict time limits, which are set forth in the Treasury Regulations.
- Build-to-Suit (Improvement or Construction) Exchange: This technique allows the taxpayer to build on, or make improvements to, the replacement property, using the exchange proceeds.
- Reverse Exchange: A situation where the replacement property is acquired prior to transferring the relinquished property. The IRS has offered a safe harbor for reverse exchanges, as outlined in Rev. Proc. 2000-37, effective September 15, 2000. These transactions are sometimes referred to as "parking arrangements" and may also be structured in ways which are outside the safe harbor.
- Personal Property Exchange: Exchanges are not limited to real property. Personal property can also be exchanged for other personal property of like-kind or like-class.
What are the general guidelines to follow in order for a taxpayer to defer all the taxable gain?
- Qualifying Property - Certain types of property are specifically excluded from Section 1031 treatment: property held primarily for sale; inventories; stocks, bonds or notes; other securities or evidences of indebtedness; interests in a partnership; certificates of trusts or beneficial interest; and chooses in action. In general, if property is not specifically excluded, it can qualify for tax-deferred treatment.
- Proper Purpose - Both the relinquished property and replacement property must be held for productive use in a trade or business or for investment. Property acquired for immediate resale will not qualify. The taxpayer's personal residence will not qualify.
- Like Kind - Replacement property acquired in an exchange must be "like-kind" to the property being relinquished. All qualifying real property located in the United States is like-kind. Personal property that is relinquished must be either like-kind or like-class to the personal property which is acquired. Property located outside the United States is not like-kind to property located in the United States.
- Exchange Requirement - The relinquished property must be exchanged for other property, rather than sold for cash and using the proceeds to buy the replacement property. Most deferred exchanges are facilitated by Qualified Intermediaries, who assist the taxpayer in meeting the requirements of Section 1031.
When can I take money out of the exchange account?
- The value of the replacement property must be equal to or greater than the value of the relinquished property.
- The equity in the replacement property must be equal to or greater than the equity in the relinquished property.
- The debt on the replacement property must be equal to or greater than the debt on the relinquished property.
- All of the net proceeds from the sale of the relinquished property must be used to acquire the replacement property.
Once the money is deposited into an exchange account, funds can only be withdrawn in accordance with the Regulations. The taxpayer cannot receive any money until the exchange is complete. If you want to receive a portion of the proceeds in cash, this must be done before the funds are deposited with the Qualified Intermediary.
Can the replacement property eventually be converted to the taxpayer's primary residence or a vacation home?
Yes, but the holding requirements of Section 1031 must be met prior to changing the primary use of the property. The IRS has no specific regulations on holding periods. However, many experts feel that to be on the safe side, the taxpayer should hold the replacement property for a proper use for a period of at least one year.
If the owner later on wants to take advantage of the home owner's exemption (up to $250,000 or $500,000 for a couple), there is now a five year holding period requirement.
What is a Qualified Intermediary (QI)?
A Qualified Intermediary is an independent party who facilitates tax-deferred exchanges pursuant to Section 1031 of the Internal Revenue Code. The QI cannot be the taxpayer or a disqualified person.
Why is a Qualified Intermediary needed?
- Acting under a written agreement with the taxpayer, the QI acquires the relinquished property and transfers it to the buyer.
- The QI holds the sales proceeds, to prevent the taxpayer from having actual or constructive receipt of the funds.
- Finally, the QI acquires the replacement property and transfers it to the taxpayer to complete the exchange within the appropriate time limits.
The exchange ends the moment the taxpayer has actual or constructive receipt (i.e. direct or indirect use or control) of the proceeds from the sale of the relinquished property. The use of a QI is a safe harbor established by the Treasury Regulations. If the taxpayer meets the requirements of this safe harbor, the IRS will not consider the taxpayer to be in receipt of the funds. The sale proceeds go directly to the QI, who holds them until they are needed to acquire the replacement property. The QI then delivers the funds directly to the closing agent.
Can the taxpayer just sell the relinquished property and put the money in a separate bank account, only to be used for the purchase of the replacement property?
No-The IRS regulations are very clear. The taxpayer may not receive the proceeds or take constructive receipt of the funds in any way, without disqualifying the exchange.
If the taxpayer has already signed a contract to sell the relinquished property, is it too late to start a tax-deferred exchange?
No, as long as the taxpayer has not transferred title, or the benefits and burdens of the relinquished property, she can still set up a tax-deferred Exchange. Once the closing occurs, it is too late to take advantage of a Section 1031 tax-deferred exchange (even if the taxpayer has not cashed the proceeds check).
Does the Qualified Intermediary actually take title to the properties?
No, not in most situations. The IRS regulations allow the properties to be deeded directly between the parties, just as in a normal sale transaction. The taxpayer's interests in the property purchase and sale contracts are assigned to the QI. The QI then instructs the property owner to deed the property directly to the appropriate party (for the relinquished property, its buyer; for the replacement property, taxpayer).
What are the time restrictions on completing a Section 1031 exchange?
A taxpayer has 45 days after the date that the relinquished property is transferred to properly identify potential replacement properties. The exchange must be completed by the date that is 180 days after the transfer of the relinquished property, or the due date of the taxpayer's federal tax return for the year in which the relinquished property was transferred, whichever is earlier. Thus, for a calendar year taxpayer, the exchange period may be cut short for any exchange that begins after October 17th. However, the taxpayer can get the full 180 days, by obtaining an extension of the due date for filing the tax return.
What if the taxpayer cannot identify any replacement property within 45 days, or close on a replacement property before the end of the exchange period?
Unfortunately, there are no extensions available. If the taxpayer does not meet the time limits, the exchange will fail and the taxpayer will have to pay any taxes arising from the sale of the relinquished property, unless the IRS has expressly granted extensions in specified disaster area(s).
Is there any limit to the number of properties that can be identified?
There are three rules that limit the number of properties that can be identified. The taxpayer must meet the requirements of at least one of these rules:
What are the requirements to properly identify replacement property?
- 3-Property Rule: The taxpayer may identify up to 3 potential replacement properties, without regard to their value; or
- 200% Rule: Any number of properties may be identified, but their total value cannot exceed twice the value of the relinquished property, or
- 95% Rule: The taxpayer may identify as many properties as he wants, but before the end of the exchange period the taxpayer must acquire replacement properties with an aggregate fair market value equal to at least 95% of the aggregate fair market value of all the identified properties.
Potential replacement property must be identified in a writing, signed by the taxpayer, and delivered to a party to the exchange who is not considered a "disqualified person". A "disqualified" person is any one who has a relationship with the taxpayer that is so close that the person is presumed to be under the control of the taxpayer. Examples include blood relatives, and any person who is or has been the taxpayer's attorney, accountant, investment banker or real estate agent within the two years prior to the closing of the relinquished property. The identification cannot be made orally.
What is a reverse exchange?
A reverse exchange, sometimes called a "parking arrangement," occurs when a taxpayer acquires a Replacement Property before disposing of their Relinquished Property. A "pure" reverse exchange, where the taxpayer owns both the Relinquished and Replacement properties at the same time, is not allowed. The actual acquisition of the "parked" property is done by an Exchange Accommodation Titleholder (EAT) or parking entity.
Is a reverse exchange permissible?
Yes. Although the Treasury Regulations still do not apply to reverse exchanges, the IRS issued "safe harbor" guidelines for reverse exchanges on September 15th, 2000, in Revenue Procedure 2000-37. Compliance with the safe harbor creates certain presumptions that will enable the transaction to qualify for Section 1031 tax-deferred exchange treatment.
How does a reverse exchange work?
In a typical reverse (or "parking") exchange, the "Exchange Accommodation Titleholder" (EAT) takes title to ("parks") the replacement property and holds it until the taxpayer is able to sell the relinquished property. The taxpayer then exchanges with the EAT, who now owns the replacement property. An exchange structured within the safe harbor of Rev. Proc. 2000-37 cannot have a parking period that goes beyond 180 days.
What happens if the exchange cannot be completed within 180 days?
If the reverse exchange period exceeds 180 days, then the exchange is outside the safe harbor of Rev. Proc. 2000-37. With careful planning, it is possible to structure a reverse exchange that will go beyond 180 days, but the taxpayer will lose the presumptions that accompany compliance with the safe harbor.
Can the proceeds from the relinquished property be used to make improvements to the replacement property?
Yes. This is known as a Build-to-Suit or Construction or Improvement Exchange. It is similar in concept to a reverse exchange. The taxpayer is not permitted to build on property she already owns. Therefore, an unrelated party or parking entity must take title to the replacement property, make the improvements, and convey title to the taxpayer before the end of the exchange period.
What is the difference between "realized" gain and "recognized" gain?
Realized gain is the increase in the taxpayer's economic position as a result of the exchange. In a sale, tax is paid on the realized gain. Recognized gain is the taxable gain. Recognized gain is the lesser of realized gain or the net boot received.
What is Boot?
Boot is any property received by the taxpayer in the exchange which is not like-kind to the relinquished property. Boot is characterized as either "cash" boot or "mortgage" boot. Realized Gain is recognized to the extent of net boot received.
What is Mortgage Boot?
Mortgage Boot consists of liabilities assumed or given up by the taxpayer. The taxpayer pays mortgage boot when he assumes or places debt on the replacement property. The taxpayer receives mortgage boot when he is relieved of debt on the replacement property. If the taxpayer does not acquire debt that is equal to or greater than the debt that was paid off, they are considered to be relieved of debt. The debt relief portion is taxable, unless offset when netted against other boot in the transaction.
What is Cash Boot?
Cash Boot is any boot received by the taxpayer, other than mortgage boot. Cash boot may be in the form of money or other property.
What are the boot "netting" rules?
I bought the property as a single person and I would like to acquire the replacement property together with my spouse?
- Cash boot paid offsets cash boot received
- Cash boot paid offsets mortgage boot received (debt relief)
- Mortgage boot paid (debt assumed) offsets mortgage boot received
- Mortgage boot paid does not offset cash boot received
The most conservative way is to stay consistent and complete the exchange the same way it was started and to add the spouse after the completion of the exchange. An exception can be made if there is a lender requirement that the spouse has to be added in order to qualify for a loan. If an exchange is planned well ahead of time, another solution would be to add the spouse to the title of the currently held property. Timing should be discussed with the CPA.
I closed escrow on my first replacement property within the 45 day identification period. Can I now identify three more properties within my 45 day identification period?
If you are using the three property rule, the completed acquisition counts as one and you may identify only up to two additional properties.
How do I identify two different properties (or percentages of ownership through a TIC) covered by ONE purchase contract?
If the properties could be sold separately at a later date, they should be identified as two properties.
Can I Buy Real Estate with Funds in my IRA?
The rules governing allowable investments by IRAs preclude an IRA's investment in life insurance, collectibles (e.g., artwork, antiques, metals, gems, and most coins) and S corporations. All other types of investments are permitted, and thus the range of possible investment choices is nearly unlimited. Consequently, an IRA can purchase any form of real estate.
Real estate IRA investing opens up a huge range of alternative investments for individuals who are knowledgeable about real estate investing or who work with knowledgeable advisors, sponsors, or brokers. Investing in real estate for your retirement may serve as a means to diversify your retirement portfolio to hedge against the cyclical changes in the stock market, economy and bank and government-based investments.
For many who are experienced with real estate investing, real estate investments hold the potential to protect against the loss of principal while generating better than market rate returns through income production and capital gains. When real estate investments are not leveraged, both income and capital gains can flow back to IRAs tax-deferred (or tax-free if the IRA is a Roth IRA).
It's Easy - If you have your IRA purchase real estate from an unrelated party and pay cash for it, and you do not use the real estate for personal reasons while it is in your IRA (i.e., you treat it strictly as an investment), there are no special issues.
More difficult - If your IRA invests in real estate through a down payment and leveraging, there are some significant issues to consider:
As a consequence, although it is perfectly legal, it may not be desirable to have an IRA carry debt in a real estate investment transaction if there is any significant risk that the IRA will be unable to pay the mortgage payments.
- You cannot personally guarantee a loan for your IRA;
- It may be difficult to get a bank to allow an IRA to be the debtor without a personal guarantee. However, there are now some banks that specialize in loans to IRAs. Currently, the minimum IRA down payment for such loans is 30%, although the exact amount is up to the lender;
- Your IRA will pay tax on UDFI (Unrelated Debt Financed Income), which is the income and/or capital gains attributable to the leveraged portion. (UDFI is taxed at the trust tax rate because an IRA is treated as a trust for this purpose.)
What you can't do in an IRA with real estate
What you Can Do in an IRA with Real Estate
- Your IRA cannot directly or indirectly buy real estate from a "disqualified person". Who is a disqualified person?
- The IRA owner;
- the IRA owner's spouse, descendant (e.g., son), or ascendant (e.g., mother);
- spouse of a descendant of the IRA holder;
- a fiduciary of the IRA or person providing services to the IRA (e.g., the trustee or custodian);
- an entity at least 50% of which is owned (or at least 50% of the beneficial interests are held) by a combination of the above (e.g., if you and your spouse own 50% of an LLC, that LLC is a disqualified person with respect to your IRA); or
- a 10% owner, officer, or director or highly compensated employee of such an entity.
- You cannot have your IRA enable an investment for yourself or another disqualified person. In other words, if the IRA's investment is deemed essential to accomplishing a transaction in which both you and your IRA invest, then the transaction would be considered a prohibited transaction.
- Your IRA cannot purchase a real estate asset and then have a disqualified person use it while it is in the IRA. For example, you cannot buy a vacation home and use it partly for personal use, even though you might rent it to unrelated persons the rest of the year.
Buying real estate from an unrelated party (i.e., one who is not a disqualified person) with cash is the simplest way of investing in real estate with your IRA. Your IRA can buy raw land, commercial property, residential (e.g., rental) property, real estate options, as well as extend loans (e.g., first and second mortgages), secured by real estate with your IRA, to unrelated parties.
As discussed above, your IRA can also buy property through leveraging, provided the loan is not guaranteed by the IRA owner (or any other disqualified person) and that the IRA has enough liquidity to support the mortgage and expenses. Generally, most custodians will have limits on the amount of leverage they will permit. Also, as previously mentioned, leveraging can result in income taxes on UDFI that must be paid by the IRA. Generally, these taxes are higher than would be paid on income generated from a property that you buy and finance personally. In addition, the UDFI taxes must be paid from funds from the IRA and, therefore, there has to be enough liquidity in the IRA to cover these taxes. See IRS Form 990T and its accompanying instructions for details.
In summary, the tax laws (1) require that the investments in an IRA not benefit the IRA owner or other "disqualified persons" and (2) prevent "self-dealing" between the IRA and the IRA owner or other disqualified persons. However, by properly structuring an IRA investment in real estate, an IRA can obtain the benefits of real estate investment in a manner that complies with applicable tax laws.
(The foregoing is a general discussion. It is not intended, and should not be relied upon, as an opinion or advice on any legal, tax or investment aspects of IRAs. An IRA owner considering an IRA investment in real property should consult with an advisor.)
Financing in North Georgia
How much house can I afford?
Know what you can afford is the first rule of home buying, and that depends on how much income and how much debt you have. In general, lenders don't want borrowers to spend more than 28 percent of their gross income per month on a mortgage payment or more than 36 percent on debts.
It pays to check with several lenders before you start searching for a home. Most will be happy to roughly calculate what you can afford and prequalify you for a loan. Coldwell Banker Mortgage is an excellent resource that you can use from the comfort of your home or office.
The price you can afford to pay for a home will depend on six factors:
Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance (or PITI as it is known). If you have to pay monthly homeowners association dues and/or private mortgage insurance, this also will be added to your PITI.
- Gross income
- Available cash for the down payment, closing costs and cash reserves required by the lender
- Your outstanding debts
- Your credit history
- The type of mortgage you select
- Current interest rates
This ratio should fall between 28 to 33 percent, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34 to 38 percent range.
Is it important to get Prequalified?
Most experts recommend that you should get prequalified for a loan first. By being prequalified, you will know exactly how much house you can afford. Almost all mortgage lenders now prequalify people, and many of them can even do it on the Internet. You also can do your own affordability calculations; most recent consumer books on home buying include steps to doing so, as do various real estate Internet sites.
It also helps your agent to negotiate the best deal on your behalf when the Seller's know you are knowledgeable, motivated and qualified to complete the sale.
Do's and Don'ts
Here are some important things you will want to keep in mind when applying for a mortgage and during the loan process.
.Just get pre-qualified for a mortgage. Get pre-approved. Getting pre-approved will put you much closer to obtaining a loan and locking in a rate and term. Contact your local Mortgage Advisor to find out how.
.Buy anything on credit or make any large purchases that would deplete your savings. Even if there's an exceptional offer to buy now and pay later, the future payments will still have to be counted in your overall debt ratio.
.Apply for new credit. Credit inquiries can negatively affect your credit scores.
.Quit or change jobs. Making a job change is often times out of your control. If this happens, contact your Mortgage Advisor as soon as possible.
.Sell anything for your down payment. If you must, contact your Mortgage Advisor as proof of ownership and value must be established.
.Get pre-approved before you start looking for a home. You'll know what price range you can afford before you get in your car. If your credit needs some work, your Mortgage Advisor can help you with special services that can turn you into a qualified buyer.
.Gather your personal information beforehand, such as your two most recent pay stubs and two most recent bank statements. If you have discarded them, contact your employer and your bank right away to get duplicates.
.Properly document the money that you will be using as a down payment by putting it in a bank account. Save as much as possible for your down payment. Having a history of regular deposits is best.
.Make all loan and other debt payments on time. There is no other element that can dramatically impact the success of your application than your credit history.
.Listen to your Realtor and Mortgage Advisor. If you are comfortable doing so, give privacy consent to your Realtor, so that they can more easily assist you during the home buying process. They will be looking out for your best interest during this time.
.Get excited! You are about to become a homeowner!
Buying Properties in Foreclosure
Thanks to the Internet, it's easier than ever to find homes in foreclosure. For a monthly fee of up to $50 you can surf a number of web sites which list thousands of available properties.
The biggest bargains can be found in areas where there's a large concentration of distressed properties. The banks with the most exposure to these areas are typically the most motivated to cut a deal since they don't want to get stuck with a glut of real estate they can't unload. But before you snap up the cheapest home you can find, make sure to do some research. Find out if the property is located in a decent neighborhood with good schools and healthy employment rates. Local real estate web sites are a great place to start your research and find an agent who is familiar with foreclosures.
Try to Avoid Auctions
While there are a number of safe ways to buy a foreclosed property, bidding on one at a court auction isn't one of them. That's because you're probably buying a home sight unseen and without the benefit of an inspection. You'll have no idea whether the home needs extensive repairs and how much they might cost. Some of these properties also owe back taxes, a headache that's transferred to the new owner. And finally, in most cases, you'll need to pay cash for the home.
The least risky way to buy a foreclosed home is to wait until the bank has put it back onto the real estate market. These properties are called bank-owned or real estate-owned (REO). Before a bank hangs a "For Sale" sign, it pays off all the existing debts and taxes, and in many cases, repairs the home to bring it up to the standards of the neighborhood. Best of all, you should be able to buy a bank-owned property with a traditional mortgage.
Understand Home Values
Not all foreclosures being sold by the bank are necessarily a bargain. Home prices have fallen dramatically in many areas from their peaks in 2006, a time when loose-lending practices allowed people of all credit ranks to easily obtain mortgages. Now, many homeowners going through the foreclosure process owe more on the mortgage than their property is actually worth. Make sure you research home values in the area. That way, you'll be better able to identify potential deals.
If you fall in love with a home in pre-foreclosure that's overpriced, then you can see if the bank will allow a short sale. This is when the bank accepts less for the home than the amount owed on the mortgage. While not an ideal scenario, accepting a lower price is often in the bank's best interest. They often end up reducing a home's asking price to match current market values or even price it below market value to move it quicker.
While it's always a good idea to get pre-approved for a mortgage before you start shopping for a home, it's even more important when you're shopping for foreclosed properties. Even if you have stellar credit, some lenders won't make a loan on a distressed property. Other lenders will only offer a mortgage if the house is in decent condition.
If your loan officer is willing to make a loan on a foreclosed property, find out what criteria the home needs to meet in order to qualify for a mortgage. You can expect the lender to allow cosmetic repairs, but be unforgiving of termites and other serious fixes.
Order a Home Inspection
As with buying any home having it thoroughly inspected is very important. But inspections are even more important when you're dealing with homes in foreclosure. When people have trouble paying their bills, they typically put off the regular maintenance. Once a home is seized by a bank, it then sits vacant and falls even further into disrepair. In a worst-case scenario, a homeowner could be so angry he lost his home that he actively destroys a property before he moves out. Without an inspection, you won't be able to estimate the cost for repairs or be able to report the home's true condition to your lender.