I appreciate the analytical, business-like aspect of the 1031 exchange, and try to do a couple every year just to keep my chops up. I’d love to do more exchanges because sellers of investment properties have to re-invest to avoid capital-gain taxes. But it’s rare that you can find new properties locally that are a good enough buy to make it worth the trade.
But for those who can – here is a good article on the basics of the 1031 tax-deferred exchange, plus three extra points worth noting:
While you will always want professional guidance when doing this kind of swap, there are three things to have in mind from the start:
Be aware of “passive liability.” In other words, if you have a $1 million mortgage, do a swap and acquire a property with a mortgage of $900,000, you have “gained” $100,000 in the eyes of the taxman. If you are buying and selling large investment properties, these gains can add up quickly.
To “exchange” a vacation or second home, that home must be an investment property. If you are planning to swap a vacation home, you need to make the case that it is an active investment. Usually that means being able to show paying tenants for at least a year. To ensure that you do not swap an investment property for a primary residence, a 2008 IRS ruling created a “safe harbor” for dwellings in a 1031 exchange. To meet the safe harbor rule, in each of two years immediately following the exchange, the home must be rented to another person for 14 days or more, and you may not use the home for more than 14 days (or 10 percent of the total number of days the home is rented in a 12-month period).
An exchanged vacation home cannot become a primary residence for purposes of taking advantage of the principle residence exclusion. Property acquired in a 1031 exchange is subject to a five-year-period of exclusion from the principal residence capital gains tax benefit.
The first few house lotteries were shut down due to their gambling nature, but now there are new twists. First it was the flipper who is unloading a 1906 Craftsman-style home to the person who submits $100 and the best dessert-recipe HERE
Now these folks in Phoenix who paid $350,000 for their house want you to submit an essay and $150 to have a chance to win their flip:
PHOENIX — Valley residents with an extra $150 lying around might want to think about investing that in real estate.
That money could actually go a long way as a Phoenix real estate investor says that’s all it takes to have a shot at purchasing one of his properties.
“We purchased the house with the sole intention of making it beautiful and selling it for profit,” said Erin O’Connor.
O’Connor intends to make a profit by selling the nearly 4,000-square-foot, five bedroom home at 6517 W Lucia Dr. through an essay contest that costs $150 to enter.
Any adult can submit an essay up to 250 words, O’Connor will then narrow the essays down to the best 300 and an attorney will pick the final winner.
“If you win the essay contest, then you’re given the exclusive right to purchase the home for $10 and your normal closing fees,” he said.
Those title and escrow fees are estimated to be roughly $3,000, according to O’Connor’s website.
O’Connor said there needs to be a minimum of 4,500 essays submitted for the contest to be valid and only the first 5,500 will be accepted. That ensures at least $675,000 in revenue for the home and at the most, $825,000.
Michael Weinstein of the YourRealEstateWorld.com team at West USA Realty wrote in an email the property has an estimated value of $418,210, so 2,788 entries would be needed to simply break even on the property.
Weinstein called it a fun idea for those that have the resources but was skeptical about the business model for sellers. O’Connor however, said he hopes it is a business model that not only works, but also will catch on.
“I do believe that it could catch on (and) we could make a business out of it,” he said.
A portion of the revenue from the essay entries will go to benefit St. Jude Children’s Hospital, O’Connor said.
It seems the inventory is so picked over that the remaining would-be sellers need to lower their price to get in the game – but Yunnie won’t ever say it outright. At least he didn’t blame it on tight credit this time. From HW:
Lawrence Yun, NAR chief economist, says although pending sales decreased in June, the overall trend in recent months supports a solid pace of home sales this summer.
“Competition for existing houses on the market remained stiff last month, as low inventories in many markets reduced choices and pushed prices above some buyers’ comfort level,” he said. “The demand is there for more sales, but the determining factor will be whether or not some of these buyers decide to hold off even longer until supply improves and price growth slows.”
According to Yun, existing-home sales are up considerably compared to a year ago despite the share of first-time buyers only modestly improving. The reason is that the boost in sales is mostly coming from pent-up sellers realizing their equity gains from recent years.
“Strong price appreciation and an improving economy is finally giving some homeowners the incentive and financial capability to sell and trade up or down,” Yun said. “Unfortunately, because nearly all of these sellers are likely buying another home, there isn’t a net increase in inventory. A combination of homebuilders ramping up construction and even more homeowners listing their properties on the market is needed to tame price growth and give all buyers more options.”
Recently we’ve wondered how many first-timers are participating, but actual data has been scant. D.R. Horton says that 41% of their buyers are first-timers, which is probably similar to the resale market and sounds fairly healthy:
Here are the current market conditions through the eyes of D.R. Horton:
For those wondering if there will ever be any more bank-owned properties for sale, here is the list of 38 houses between La Jolla and Carlsbad that are owned by lenders, or 3rd parties who purchased them at the trustee sale:
A few are listed for sale, and others are still waiting for occupants to vacate or lawsuits to be settled. This Bressi Ranch home was foreclosed in April, 2014, and just hit the open market last week at what most would consider to be pretty close to retail price:
The former owners had worked the system – they had been in default since 2008, and endured four different trustee-sale dates before finally giving up the ship. In the meantime, the lender probably did everything they could to modify the loans?
I don’t think anybody has to worry about getting foreclosed unless they have significant equity.
Today’s inventory is about 4% less than what it was last year at this time. Sales this month look to be on track to match those in July, 2014, but pricing is starting to flatten out. The median sales price is only about 3% higher, and the average cost-per-sf only 1% higher than last July.
Click on the link below for the complete NSDCC active-inventory data:
Shiller calls the real estate market inefficient and irrational in the article below – and I don’t know if we can even call it a market. Entry and exit takes weeks at best and are clumsy. You don’t know who, when, or how much until – and if – luck happens to find you. The entire game is rigged to encourage over-paying, so the conservative buyers have a hard time competing.
Home prices have been climbing. They have risen 27 percent nationally since 2012, even more in places like San Francisco. But why worry? If you accept the efficient markets theory — and believe that real estate is an efficient market — then these prices are based on “new information,” even if you don’t know what that information is.
The problem with this kind of thinking is that the efficient markets theory is at best a half-truth, as a voluminous literature on market anomalies shows. What’s more, even that half-truth is grounded mainly in the stock market, which attracts professional investors who sometimes do make the market behave efficiently.
The housing market is another matter. It is far less rational than even the often irrational stock market, for a couple of important reasons. First, most investors find it difficult to understand how housing supply responds to changes in demand. Only a small minority of people think carefully about such things. Second, it is very hard for the minority of smart-money investors who do understand such matters to bet against bubble-level prices in real estate markets. In housing, the smart money has relatively little voice.
I have two RSF listings that are outside the Covenant.
One seller asked me what the chances are of selling.
I said 20%, to which he said, ‘Yikes’.
But any RSF listing only has a 30% or 40% chance of selling. There were 436 listings, and 127 sales (29%) last year in the 92067.
Here are the detached-home total listings and sold listings from 2014:
Area or City
Listings in the Ranch are the least likely to sell – by far.
What can a listing agent do to help the cause? State your case on value.
It’s always tough to estimate the value of unique or custom homes – but those in the Ranch have so many variables it will make your head spin because every property is so different.
As listing agent, it’s my job to justify the value.
If the purchase is financed, then an appraisal needs to be completed. Even though the sales price will have been given to the appraiser in advance, it’s still the listing agent’s job to make sure they hit the number.
As long as we gathered comps in the beginning to justify our recommended list price, and we have the need to deliver same to appraiser, we might as well include them in the listing to help buyer agents come to the right conclusion.
My case to support the $2,795,000 list price of 7060 Via Del Charro:
We have a lot of clients whose balance sheets are so strong that they don’t intend to adjust much to the short-term pain because the long-term gain will be worth it.
Nice summary @klinger_jbrec https://twitter.com/klinger_jbrec/status/1556751006947590144
The new owner of the Old California Restaurant Row property in San Marcos has applied to develop over 200 housing units and 10,000 square feet of new commercial space on a portion of the site still home to several businesses. @itslaurasplace