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How much does it cost to do an exchange?
The exchange fee for property under $200k (1 for 1) is $600, with no interest paid to the exchanger. For exchange property in excess of $200k, the exchanger has a choice of two fee options. If the exchanger chooses to earn interest on exchange funds held, the fee is $750 plus $250 for each replacement property. If the exchanger chooses not to receive interest, the exchange fee is $500 plus $250 for each replacement property. Please call us for quotes on reverse and construction exchanges.
When must the investor decide to complete an exchange?
The decision to exchange must be made prior to closing of the relinquished property. The exchange agreement must be in place and delivered to all parties before the relinquished property transfer of title.
Can the proceeds from the sale of the relinquished property simply be held in escrow at closing?
The proceeds from the sale of the relinquished property should be delivered to a “qualified intermediary”. The proceeds cannot be held in escrow, unless the escrow account in question is either a “qualified escrow account” or a “qualified trust account” and not subject to the control of the investor. Any control by the investor is considered to be constructive receipt and is boot.
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What is the 45-day Identification Period and when does it begin?
Section 1031 requires that the replacement property be identified within 45 days of closing on the relinquished property. This identification period is strictly enforced and violation will defeat the tax deferral.
What is the 180-day exchange period and when does it begin?
Section 1031 requires the replacement property be purchased within 180 days of closing on the relinquished property OR the date the taxpayer’s tax return is due, whichever date is first. The purchase date is considered to be the closing date. Note that for tax return due dates that fall before the 180 days, a tax return extension can be filed. However, a taxpayer can never amend their return for extension purposes.
Is there an extension allowed to either the 45-day period or the 180 period?
The IRS does not allow extensions for either the 45-day period or the 180-day period.
If the exchanger’s 45th or 180th day falls on a weekend or holiday do I get the benefit of the following business day?
No. The IRS calculates this timeline based on calendar days. There are no extensions given.
When is a 1031 exchange considered completed?
A 1031 exchange is considered complete once the exchanger has acquired title to all of the identified replacement property(s) to which the exchanger is entitled, within 180 days.
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Does vacant land qualify as like-kind property?
Yes, vacant land is like kind with all other types of real property. However, like other properties, in order to qualify for a 1031 Exchange, the land must be held for productive use in a trade or business or for investment.
If the relinquished property is classified as residential income property, does the replacement property need to be residential income property?
No. The like-kind requirement does not limit the type of real property acquired in an exchange. You may exchange residential income property for commercial property, commercial property for industrial property and vacant land for residential income property. Any combination of properties may be exchanged. Again, any property involved in an exchange must be held for productive use in a trade or business or for investment.
What are the requirements for deferring tax on a capital gain?
In order to defer all of the tax on the sale of investment property, first make sure that the relinquished and replacement properties are “like kind” and held for productive use in a trade or business or for investment. Second, make sure that the time lines for the exchange are met. Third, make sure that all of the proceeds generated by the sale of the relinquished property are used in the purchase of the replacement property and that the FMV of the replacement property is equal to or greater than sale price of the relinquished property. If any of the first two requirements listed are not met, no exchange is possible. If any of the third requirement is not met, a taxpayer may be able to partially defer their gain but not wholly.
Am I required to have a mortgage on the replacement property?
No. To avoid mortgage boot on the net debt relief, the replacement property financing should include dept equal to or greater than the debt on the relinquished property. If the investor wishes to reduce their overall debt, they may contribute cash out of pocket to the purchase of the replacement property. Cash contributions by the investor serve to offset net debt relief.
I have identified my Replacement Property but have not sold my investment property. Can I still do a 1031 exchange?
Yes. Reverse exchanges are recognized by the IRS and can be accomplished by the intermediary acquiring title to one of the exchange properties. Reverse exchanges are often complex transactions. Please feel free to contact us to discuss the issue in more depth.
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Friday, July 30, 2004
Monday, July 19, 2004
COFI - What is it and how is it calculated.
Arizona Mortgage Broker offering Online Applications!
• What is the 11th District monthly weighted average cost of funds index?
One of the most popular adjustable rate mortgage indexes currently issued nationwide is the 11th District monthly weighted-average cost of funds index, also known as the COFI. Calculated and published by the Federal Home Loan Bank of San Francisco since August 1981. The COFI reflects the actual interest expenses incurred during a given month by all savings institutions headquartered in Arizona, California, and Nevada – the three states that make up the 11th District of the Federal Home Loan Bank System. Each savings institution in the District provides relevant data to the Bank according to an agreed-upon timetable, which enables the Bank to review the data, calculate the index, and publish it on schedule.
• What does "cost of funds" mean?
The Cost of Funds Index is not an interest rate. It reflects the average paid by savings institutions for their various sources of funds over a specified period of time. Deposits in checking and savings accounts – including certificates of deposit account, transaction accounts, and passbook accounts are the primary source of funds for most savings institutions. Other sources of funds include loans obtained through the credit programs of the Federal Home Loan Bank (known as "advances") and money borrowed from other financial institutions.
• Why is the COFI so popular as an adjustable rate mortgage index?
Consumers like the cost of funds index because it does not move up or down as rapidly as market interest rates (such as prime rate, the discount rate, or Treasury bill rates). This is because most savings institutions rely on fixed rate deposits of medium and long-term maturities as a primary source of funds. Because rates on these deposits are not affected by changing market interest rates until the deposit matures, the total interest expense paid by savings institutions in a particular month reflects, to a significant degree, interest rates that were prevalent in previous months or years.
* How is the monthly COFI calculated?
The monthly index is a ratio of monthly interest costs to total funds, expressed as a percentage. Interest costs, the numerator of the cost calculation, include the total amount of interest paid or payable during the month on all checking and savings accounts, all Federal Home Loan Bank advances, and all other borrowings, i.e. C/Ds. Funds, the denominator of the cost calculation, consist of the simple average of the sum of the two most recent month end balances of total deposits, Federal Home Loan Bank advances, and other borrowed money. The resulting quotient is the weighted average cost of funds paid by the 11th District savings institutions for that month. Because the number of days in each month differs, the quotient is multiplied by an adjustment factor that is calculated by dividing an average month (based on a 12-month, 365-day or 366-day year) by the actual number of days in that month. The adjustment factors are 1.086 for February, 1.014 for 30-day months, and 0.981for 31-day months. In leap years, the adjustment factors are 1.052 for February, 1.017 for 30-day months, and 0.984 for 31-day months. The product is annualized by multiplying by 12.
Monthly Weighted Average Cost of Funds Index for 11th District Savings Institutions:
The monthly COFI is computed from data reported by savings institutions that are members of the Federal Home Loan Bank of San Francisco. For July 2000, 50 institutions reported COFI data:
July 2000
(Dollars in Thousands)
Interest Costs on Deposits, Advances, and other Borrowings
(July 2000) $1,420,689.00
Average Funds
(Month end June 2000 plus month end July 2000 divided by 2)
Deposits $162,258,542
Advances $94,468,327
Other Borrowings $50,771,244
Total Funds
$307,498,113
Weighted Average Cost of Funds
(July 2000)
Ratio $1,420,689 / $307,498,113
Expressed as a Percentage x 100 = 0.4620
Monthly Adjustment Factor x 0.984 = 0.4546
Annualized x 12 = 5.4555
Rounded to the third decimal place 5.456%
Comparison to June 2000 Index Value
July 2000 June 2000
Index value (COFI) -> 5.456% 5.357%
Average total funds $307.5 billion $298.7 billion
Average deposits 162.3 billion 161.5 billion
Average advances 94.5 billion 91.6 billion
Average other borrowings 50.8 billion 45.5 billion
Total interest expense * 1398.0 million 1333.2 million
* Adjusted for the number of days in the month. The adjustment factors for 2000 are 1.052 for February, 1.017 for 30-day months, and 0.984 for 31-day months.
The 11th District’s Cost of Funds Index (COFI), comprised of many separate S&Ls in CA, AZ and NV, doesn't dramatically increase when Mr. Alan Greenspan (Fed. Chairman) raises the Prime Rate, nor does it have to increase when the Stock Market increases. The reason it doesn't, is because only about 47% of the estimated $300 billion dollars in total funds deposited is actually borrowed (i.e. Advances & Borrowings) from the 11th District Federal Bank via the Fed. Funds Rate which has a lower interest rate than the Prime Rate. The rest of the money that is borrowed is not really affected, as it has been deposited into Checking and Savings, Money Market accounts and C/Ds. In addition, it takes about 9 months for a Fed. Funds increase or decrease to really affect the over-all economy.
Try to think of this pool of money ($300,000,000,000) as a big bath tub. Turning on the spigot represents (hypothetically) people buying 1, 3 and 5 year C/Ds. Let's assume that on 01/01/2002, folks are receiving 2% Rate-Of-Return (ROR) on their 1 yr. C/Ds, 2.5% on their 3 yr., and 4% on their 5 yr. C/Ds. Because it takes between 1-5 years for the C/D's to come to maturity, and since the C/D's are not an actual cost or expense to the Savings and Loans until the time when they have to be paid back, the average cost of funds doesn't move that rapidly when these Savings and Loans (S&Ls) start to offer higher returns on their new C/Ds.
Let's assume that on 01/01/2003, these S&Ls are in a good mood, and they decide (out the kindness of their heart) to start offering CDs at higher RORs. Let's assume that now the 1yr.C/D has a ROR of 2.5%, the 3yr. has a 3% ROR, and the 5 yr. has a ROR of 4.5%. Back to the "bath tub" analogy: So now we are assuming that when we "turn on the spigot", higher rates of C/Ds are spilling out into our bath tub, or pool of monies borrowed. This of course means that our S&Ls will have to increase their cost of doing business, or cost of funds. But, since the only C/Ds that are coming to maturity (in our example) are the 1 yr., and they are only paying back 2%, and because we are talking about an est. $300,000,000,000 in monies deposited or borrowed, the cost of funds, or the ROR going out of the bath tub drain, doesn't really affect the entire (average) pool of money in our bath tub. Remember that it will take another 12 more months for the 2.5%, 1 yr. C/D to affect the avg. pool of deposits. It take 5 years for the 5 yr. C/D's to affect the avg. pool of deposits.
Now, let's talk about the brother and sister of the COFI, the COSI, or Cost Of Savings Index, and the CODI, or Certificate Of Deposit Index:
COSI:
One of the largest Savings and Loans in the 11th District (CA ,AZ, NV), offers a mortgage program tied to its own "cost of savings." Simply put, this one Lender, borrows money from consumers in the form of deposits, i.e. C/D's, checking and savings accounts, and then lends the money out as home mortgages. The interest rates (ROR) in effect on these deposits are the basis for the COSI. The COSI is not based on actual interest paid on deposit accounts, but rather on a weighted annualized rate of all interest rates in effect on deposit accounts as of the last day of each month.
The main differences between the COSI and COFI are:
1. COSI is derived from One (1) Savings and Loan instead of many S&Ls.
2. COSI has a much smaller pool of monies borrowed or deposited.
3. COSI is derived from Checking, Savings and C/Ds. Borrowings/Advances from the Fed. Funds is not in the equation.
Historically, the COSI has also moved up and down much less rapidly than indexes based on the PRIME Rate, the Federal Reserve discount rate, or Treasury bill rates. This is because COSI is composed primarily of fixed-rate deposits of varying maturities (i.e. C/D's.) Since rates on these deposits are not affected by changes in market interest rates until the deposits mature, the average interest rate on deposits in a particular month reflects, to a significant degree, interest rates that were in effect in previous months. Thus, when market interest rates for deposits move up or down, COSI will lag and generally not move as rapidly or to the same extent. Since the COSI is almost identical to the COFI, as COSI historically, has moved almost step-in-step with the COFI, we whole heatedly also recommend the COSI.
When is the Index Announced? The COSI is computed on the last day of each month calendar month and is announced on or near the last business day prior to the fifteenth day of the following calendar month. For example, when the February COSI is announced on or near the last business day prior to the fifteenth of March. It is in effect until the announcement of the March COSI in April.
• What is the 11th District monthly weighted average cost of funds index?
One of the most popular adjustable rate mortgage indexes currently issued nationwide is the 11th District monthly weighted-average cost of funds index, also known as the COFI. Calculated and published by the Federal Home Loan Bank of San Francisco since August 1981. The COFI reflects the actual interest expenses incurred during a given month by all savings institutions headquartered in Arizona, California, and Nevada – the three states that make up the 11th District of the Federal Home Loan Bank System. Each savings institution in the District provides relevant data to the Bank according to an agreed-upon timetable, which enables the Bank to review the data, calculate the index, and publish it on schedule.
• What does "cost of funds" mean?
The Cost of Funds Index is not an interest rate. It reflects the average paid by savings institutions for their various sources of funds over a specified period of time. Deposits in checking and savings accounts – including certificates of deposit account, transaction accounts, and passbook accounts are the primary source of funds for most savings institutions. Other sources of funds include loans obtained through the credit programs of the Federal Home Loan Bank (known as "advances") and money borrowed from other financial institutions.
• Why is the COFI so popular as an adjustable rate mortgage index?
Consumers like the cost of funds index because it does not move up or down as rapidly as market interest rates (such as prime rate, the discount rate, or Treasury bill rates). This is because most savings institutions rely on fixed rate deposits of medium and long-term maturities as a primary source of funds. Because rates on these deposits are not affected by changing market interest rates until the deposit matures, the total interest expense paid by savings institutions in a particular month reflects, to a significant degree, interest rates that were prevalent in previous months or years.
* How is the monthly COFI calculated?
The monthly index is a ratio of monthly interest costs to total funds, expressed as a percentage. Interest costs, the numerator of the cost calculation, include the total amount of interest paid or payable during the month on all checking and savings accounts, all Federal Home Loan Bank advances, and all other borrowings, i.e. C/Ds. Funds, the denominator of the cost calculation, consist of the simple average of the sum of the two most recent month end balances of total deposits, Federal Home Loan Bank advances, and other borrowed money. The resulting quotient is the weighted average cost of funds paid by the 11th District savings institutions for that month. Because the number of days in each month differs, the quotient is multiplied by an adjustment factor that is calculated by dividing an average month (based on a 12-month, 365-day or 366-day year) by the actual number of days in that month. The adjustment factors are 1.086 for February, 1.014 for 30-day months, and 0.981for 31-day months. In leap years, the adjustment factors are 1.052 for February, 1.017 for 30-day months, and 0.984 for 31-day months. The product is annualized by multiplying by 12.
Monthly Weighted Average Cost of Funds Index for 11th District Savings Institutions:
The monthly COFI is computed from data reported by savings institutions that are members of the Federal Home Loan Bank of San Francisco. For July 2000, 50 institutions reported COFI data:
July 2000
(Dollars in Thousands)
Interest Costs on Deposits, Advances, and other Borrowings
(July 2000) $1,420,689.00
Average Funds
(Month end June 2000 plus month end July 2000 divided by 2)
Deposits $162,258,542
Advances $94,468,327
Other Borrowings $50,771,244
Total Funds
$307,498,113
Weighted Average Cost of Funds
(July 2000)
Ratio $1,420,689 / $307,498,113
Expressed as a Percentage x 100 = 0.4620
Monthly Adjustment Factor x 0.984 = 0.4546
Annualized x 12 = 5.4555
Rounded to the third decimal place 5.456%
Comparison to June 2000 Index Value
July 2000 June 2000
Index value (COFI) -> 5.456% 5.357%
Average total funds $307.5 billion $298.7 billion
Average deposits 162.3 billion 161.5 billion
Average advances 94.5 billion 91.6 billion
Average other borrowings 50.8 billion 45.5 billion
Total interest expense * 1398.0 million 1333.2 million
* Adjusted for the number of days in the month. The adjustment factors for 2000 are 1.052 for February, 1.017 for 30-day months, and 0.984 for 31-day months.
The 11th District’s Cost of Funds Index (COFI), comprised of many separate S&Ls in CA, AZ and NV, doesn't dramatically increase when Mr. Alan Greenspan (Fed. Chairman) raises the Prime Rate, nor does it have to increase when the Stock Market increases. The reason it doesn't, is because only about 47% of the estimated $300 billion dollars in total funds deposited is actually borrowed (i.e. Advances & Borrowings) from the 11th District Federal Bank via the Fed. Funds Rate which has a lower interest rate than the Prime Rate. The rest of the money that is borrowed is not really affected, as it has been deposited into Checking and Savings, Money Market accounts and C/Ds. In addition, it takes about 9 months for a Fed. Funds increase or decrease to really affect the over-all economy.
Try to think of this pool of money ($300,000,000,000) as a big bath tub. Turning on the spigot represents (hypothetically) people buying 1, 3 and 5 year C/Ds. Let's assume that on 01/01/2002, folks are receiving 2% Rate-Of-Return (ROR) on their 1 yr. C/Ds, 2.5% on their 3 yr., and 4% on their 5 yr. C/Ds. Because it takes between 1-5 years for the C/D's to come to maturity, and since the C/D's are not an actual cost or expense to the Savings and Loans until the time when they have to be paid back, the average cost of funds doesn't move that rapidly when these Savings and Loans (S&Ls) start to offer higher returns on their new C/Ds.
Let's assume that on 01/01/2003, these S&Ls are in a good mood, and they decide (out the kindness of their heart) to start offering CDs at higher RORs. Let's assume that now the 1yr.C/D has a ROR of 2.5%, the 3yr. has a 3% ROR, and the 5 yr. has a ROR of 4.5%. Back to the "bath tub" analogy: So now we are assuming that when we "turn on the spigot", higher rates of C/Ds are spilling out into our bath tub, or pool of monies borrowed. This of course means that our S&Ls will have to increase their cost of doing business, or cost of funds. But, since the only C/Ds that are coming to maturity (in our example) are the 1 yr., and they are only paying back 2%, and because we are talking about an est. $300,000,000,000 in monies deposited or borrowed, the cost of funds, or the ROR going out of the bath tub drain, doesn't really affect the entire (average) pool of money in our bath tub. Remember that it will take another 12 more months for the 2.5%, 1 yr. C/D to affect the avg. pool of deposits. It take 5 years for the 5 yr. C/D's to affect the avg. pool of deposits.
Now, let's talk about the brother and sister of the COFI, the COSI, or Cost Of Savings Index, and the CODI, or Certificate Of Deposit Index:
COSI:
One of the largest Savings and Loans in the 11th District (CA ,AZ, NV), offers a mortgage program tied to its own "cost of savings." Simply put, this one Lender, borrows money from consumers in the form of deposits, i.e. C/D's, checking and savings accounts, and then lends the money out as home mortgages. The interest rates (ROR) in effect on these deposits are the basis for the COSI. The COSI is not based on actual interest paid on deposit accounts, but rather on a weighted annualized rate of all interest rates in effect on deposit accounts as of the last day of each month.
The main differences between the COSI and COFI are:
1. COSI is derived from One (1) Savings and Loan instead of many S&Ls.
2. COSI has a much smaller pool of monies borrowed or deposited.
3. COSI is derived from Checking, Savings and C/Ds. Borrowings/Advances from the Fed. Funds is not in the equation.
Historically, the COSI has also moved up and down much less rapidly than indexes based on the PRIME Rate, the Federal Reserve discount rate, or Treasury bill rates. This is because COSI is composed primarily of fixed-rate deposits of varying maturities (i.e. C/D's.) Since rates on these deposits are not affected by changes in market interest rates until the deposits mature, the average interest rate on deposits in a particular month reflects, to a significant degree, interest rates that were in effect in previous months. Thus, when market interest rates for deposits move up or down, COSI will lag and generally not move as rapidly or to the same extent. Since the COSI is almost identical to the COFI, as COSI historically, has moved almost step-in-step with the COFI, we whole heatedly also recommend the COSI.
When is the Index Announced? The COSI is computed on the last day of each month calendar month and is announced on or near the last business day prior to the fifteenth day of the following calendar month. For example, when the February COSI is announced on or near the last business day prior to the fifteenth of March. It is in effect until the announcement of the March COSI in April.
Thursday, July 08, 2004
Mortgage trends heading to ARMs?
In the wake of rising mortgage interest rates, many borrowers are turning to alternative types of loans to either finance the purchase of a home or refinance an existing mortgage. The traditional 30-year, fixed-rate mortgage has long been the loan of choice for most borrowers. But rising interest rates can rapidly change the preferences of consumers. Now, adjustable-rate mortgages (ARMs) are becoming more popular, with initial rates substantially lower than fixed-rate loans. Look for Cash Flow Option ARMs for the lowest interest rates.
In recent weeks, about a third of new mortgage applications have been for ARMs. That reflects an increase of about 14 percent from a year ago. To save even more money spent on mortgage payments, an increasing number of borrowers are opting for an interest-only loan. Many rationalize that this type of mortgage will leave additional funds for strategic investments.
Most interest-only loans are for a specified number of years. It then reverts to an amortized loan for the remainder of its term, requiring interest and principal payments. These loans usually carry a slightly higher interest rate than a conventional amortized mortgage.
Arizona Home Mortgages
Also, keep in mind that while it’s an interest only loan, there is no lowering of the principal balance. The only equity that accrues in your home is from the value appreciation of the property. Many financial professionals believe this type of loan is best suited for affluent borrowers, especially those who have good reason to anticipate higher incomes in the future. They often caution against an interest-only loan for those who simply don’t have the income to support an amortized mortgage.
Hybrid ARMs are also experiencing a growing popularity at this point. These loans offer a fixed-rate for several years – usually 5 to 7 years – then revert to an ARM. The interest rate is significantly lower that a 30-year fixed-rate loan, yet the borrower has assurance that the rate will not change for a period of years. Other mortgages available today include ARMs that can be converted to a fixed-rate loan. There are dozens of varieties of mortgage plans offered to consumers in today’s market. The challenge is to pick the one that meets your personal needs most precisely.
Quick Qualifier
In recent weeks, about a third of new mortgage applications have been for ARMs. That reflects an increase of about 14 percent from a year ago. To save even more money spent on mortgage payments, an increasing number of borrowers are opting for an interest-only loan. Many rationalize that this type of mortgage will leave additional funds for strategic investments.
Most interest-only loans are for a specified number of years. It then reverts to an amortized loan for the remainder of its term, requiring interest and principal payments. These loans usually carry a slightly higher interest rate than a conventional amortized mortgage.
Arizona Home Mortgages
Also, keep in mind that while it’s an interest only loan, there is no lowering of the principal balance. The only equity that accrues in your home is from the value appreciation of the property. Many financial professionals believe this type of loan is best suited for affluent borrowers, especially those who have good reason to anticipate higher incomes in the future. They often caution against an interest-only loan for those who simply don’t have the income to support an amortized mortgage.
Hybrid ARMs are also experiencing a growing popularity at this point. These loans offer a fixed-rate for several years – usually 5 to 7 years – then revert to an ARM. The interest rate is significantly lower that a 30-year fixed-rate loan, yet the borrower has assurance that the rate will not change for a period of years. Other mortgages available today include ARMs that can be converted to a fixed-rate loan. There are dozens of varieties of mortgage plans offered to consumers in today’s market. The challenge is to pick the one that meets your personal needs most precisely.
Quick Qualifier
Wednesday, July 07, 2004
Arizona Home Mortgage Applications online from Sterling Home Mortgage
Look here for your Mortgage Application Online.
Arizona Mortgage Application
Call for a low interest rate on Cash Flow Arms that gives you a choice of payments every month. You will have a choice of a minimum payment, interest only payment, 30 year fixed payment or a 15 year fixed payment. These are great programs for a low interest loan with programs as high as 95% loan to value.
Arizona Mortgage Application
Call for a low interest rate on Cash Flow Arms that gives you a choice of payments every month. You will have a choice of a minimum payment, interest only payment, 30 year fixed payment or a 15 year fixed payment. These are great programs for a low interest loan with programs as high as 95% loan to value.
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