Investment Properties –
1031 Exchange is a strategy used by real estate investors to defer capital gains taxes, and is allowed under IRS tax code 1031.
By using a 1031 exchange, an investor can defer paying capital gains taxes on an investment property when it is sold, as long as another “like-kind” property is purchased with the profit gained by the sale of the first property.
Traditionally, a 1031 exchange is
where one property is literally
swapped for another property of like-kind. But finding someone that literally want’s your property and you want their property are pretty slim, so the delayed exchange is more common.
In a delayed exchange, you will need a middle-man who holds the cash for you after you sell your property. they will use that money to buy the replacement property for you. This 3 party exchange is treated as a swap.
When you sell an investment property, even if you weren’t the one who initially purchased, you end up on the hook to pay capital gains tax.
If you’ve made some not so great investments, selling your investment can cost you more than you make. But, if you own a rental property that’s worth significantly more today than what you purchased it for, you can make a come out ahead using this powerful strategy. It’s an important tool for real estate investors, and has become a bulls-eye for tax reform evangelists.
However, the exchange rules require that both the purchase price and the new loan amount be the same or higher on the replacement property.
Example: An investor is selling a $500,000 single family home she’s using as an income property in the LA Area with a $400,000 loan. She wants to buy a multi-family home for income here in the Desert; the replacement property must be valued at $500,000 or more with $400,000 or more leverage, (loan amount).
4 types of Real Estate Exchanges:
1) Simultaneous Exchange – occurs when the replacement property and relinquished property close on the same day. It is important to note that the exchange must occur simultaneously; any delay, even a short delay caused by wiring money to an escrow company, can result in the disqualification of the exchange and the immediate application of full taxes.
Three basic ways a Simultaneous Exchange can occur.
- Swap or complete a two-party trade, whereby the two parties exchange or “swap” deeds.
- Three-party exchange where an “accommodating party” is used to facilitate the transaction in a simultaneous fashion for the exchanger.
- Simultaneous exchange with a qualified intermediary who structures the entire exchange.
2)Delayed Exchange – The most common type of exchange chosen by investors; occurs when the Exchangor relinquishes the original property before acquiring the replacement property. In this scenario, the investor has 45 days to identify the replacement property and 180 days to complete the sale of their new property.
Using this strategy, an investor has a maximum of 45 days to identify the replacement property and 180 days to complete the sale of their property. In addition to the numerous tax benefits, this extended time frame is one of the reasons the delayed exchange is so popular.
3) Reverse Exchange – Also known as a Forward Exchange, occurs when you acquire a replacement property through an exchange accommodation titleholder before you identify the replacement property. Essentially, you buy first and pay later. This type of exchange can be tricky because it requires all cash. Many banks won’t offer loans on reverse exchanges. Taxpayers must also decide which of their investment properties are going to be acquired and which will be “parked.” A failure to close on the relinquished property during the established 180 day period that the acquired property is parked will result in a forfeit of the exchange.
The rules for a Reverse Exchange are similar with a couple of key differences.
- Tax payers have 45 days to ID what property is going to be sold as “The relinquished property”
- After the initial 45 days, taxpayers have 135 day to complete the sale of the identified property and close out the reverse 1031 exchange with the purchase of the replacement property.
4) Construction or Improvement Exchange
The taxpayer can use their tax-deferred dollars to enhance the replacement property while it is placed in the hands of a qualified intermediary for the remainder of the 180 day period.
It’s important to note that the taxpayer must also meet three requirements if they want to defer all of the gain (from the sale of the relinquished property) and instead use it as part of the construction or improvement exchange.
3 key requirements for a Construction or Improvement Exchange
- The entire exchange equity must be spent on completed improvements or as down payment by the 180th day.
- The taxpayer must receive “substantially the same property” that they identified by the 45th day.
- The replacement property must be equal or greater in value when it is deeded back to the taxpayer. The improvements must be in place before the taxpayer can take the title back from the qualified intermediary.
7 Primary 1031 Exchange Rules.
1) Like-kind Property
2) Investment or Business purposes only
3) Greater of equal value
4) Must not receive “Boot”
5) Same Tax Payer
6) 45 Day Identification window
7) 180 Day Purchase Window
We hope your main take-away is; you too can end up with passive income from real estate. But, it’s not easy for even the most seasoned real estate investor. Having the right team working for you will be important to set the stage properly. We have a team of professionals that can help. For more info, give us a call today – we’re happy to help.
The Real Estate Corner Desert Market Update
NUMBER OF SALES
Home sales are up Valley-wide. The total three-month sales are up 2.9%. On a city by city basis, six cities show higher sales, with three; Palm Desert, Desert Hot Springs and Palm Springs showing the largest increase in sales.
The three cities with the largest sales declines are Indio, Indian Wells and Cathedral City.
INVENTORY OF HOMES FOR SALE
While home sales are up, inventories are down. Typically our inventories dip to to their lowest point every year toward the end of September, but this year inventories are even lower.
Low inventory acts as both a positive and negative; it’s positive for sellers and future home sellers as it tends to move home prices higher. But, it’s also a negative in that low inventory puts the brakes on the number of sales. If interest rates continue to increase, that can put a damper on sales as the cost of borrowing money for a mortgage becomes more expensive.
MONTHS SUPPLY OF HOMES FOR SALE BY CITY
The month’s of supply ratio is down valley-wide compared to one year ago in every city. Most have less than 4 month supply except two; La Quinta which currently has a 4.5 month supply and Indian Wells with a 6 month supply of homes to sell.
MONTHS SUPPLY OF HOMES FOR SALE BY PRICE BRACKETS
When we look at the supply of homes by price category, we see the supply is lower across all price brackets compared to one year ago. The biggest change is homes priced above $800,000. Last year the higher price points were taking 7.5 months – 1 year to sell. Now, it’s taking on average 5.3 – 8 months
The tipping point when using this metric is 6 month’s. 6 months is considered a “Balanced Market”, not particularly favoring either Home Buyers or Home Sellers. Less than 6 months, the market is tipped in the Sellers favor, otherwise known as a “Sellers Market”. More than 6 month supply is viewed as a “Buyers Market”.
As home prices or the cost of buying a home, (rising interest rates), increase – sales will start to slow putting downward pressure on pricing. Markets are always in a state of flux, moving from one market to another and rarely stopping at “balanced” for long.
While there is typically a lag period between market shifts, the lag time is shorter as the number of sales are increasing. Home sellers quickly see an improving market and strive to maximize the price they can ask. When prices increase too fast or too far ahead of sales, potential home buyer’s become reluctant to make offers, fearing they could be buying at the peak.
DISCOUNT FROM ASKING PRICE
In 2018, when negotiating a sale price with buyers; home sellers are discounting their listed price an average of 2%. One year ago, sellers needed to discount an average 2.4% off their asking price to close a sale.
For example, this ratio means if a home is listed at $400,000 it’s selling at an average of 98% of their asking price, or $392,000. a discount of $8,000. This metric also shows a strong and improving real estate market here in the Desert.
When we look at the story each of these metrics are showing for the Desert Real Estate Market, we can see an improving but pretty balanced market. In addition, we can see that the market has had and continues to show sustained growth. Making now the right time to be a participant in the market.
The Desert Lifestyle is unlike any other, as we head into our season now is a great time see what the Desert has to offer. Check out these FAB Desert Homes!
Summer Desert Market Report – Median home prices rose for the 8th straight month. Up 9.6% from last year. The hottest cities for sales by volume were Palm Desert (233), Palm Springs (213), La Quinta (156), Indio (131), Rancho Mirage (97). Each city and each community has its own story some communities have seen huge growth, while others are relatively flat. The cities that had the largest price increases, have seen the number of sales flatten, which tells us that prices were getting ahead of the market.
Inventories are down again putting upward pressure on pricing. Overall the desert has seen a decline in the time it’s taking to sell, nicely presented homes in a good location and priced well are selling quickly. Currently there is a 3 month supply of homes for sale in the desert, which puts us in a “Sellers Market” as we head into season.
The Fed has indicated there will likely be two more interest rate increases before the end of the year, which could start to weigh on the market and slow sales until the shock is absorbed.
Southern California and specifically, the Coachella Valley continues to be a sought after destination for a second home get a way.
As we head into our “Season”, we expect to see continued strong home sales and price appreciation valley-wide.
How’s your neighborhood doing? Send me an email, I’ve got the details!
Coachella Valley opens the Kim Nicols Trail, the first new major hiking trail in 10 years.
After a four year effort to create the trail with over $150,000 in funding from the Coachella Valley Mountains Conservancy and help from volunteers with Friends of the Desert Mountains, the new Kim Nicol Trail is now open.
Kim spent 35 years in the Coachella Valley devoted to protecting the area’s endangered species and open spaces, she was passionate about opening access to people so they could learn more about the plants and animals that are unique to the desert. Kim ultimately became Fish and Game Regional Manager and passed away from cancer before she could see her dream come to fruition.
The Kim Nicol Trail is a 5.6-mile loop, located at the intersection of 20th Ave and Corkhill Rd in Desert Edge, just outside Desert Hot Springs. It’s mostly a gentle hike with a steep climb at the beginning with mild elevation gains as you go. A lot of the hike is in a sand dune so the most challenging part is that its hard walk in the sand, you get really tired easily. But the beauty is worth the hike, ringed by mountains on three sides and beautiful Vistas of the Valley in the distance.
More and more, the Coachella Valley has become the destination for nature enthusiasts; younger generations want to enjoy the beauty and nature of our valley and the new Kim Nicols Trail is the newest addition to all that the beauty the Coachella Valley has to offer.
Kitchen and Bath Design Trends…
Each year, all the major Kitchen and Bath suppliers come together for The National Kitchen and Bath Show, the “Design and Construction Week” is the place to be and be seen for Architects, Designers and Contractors to meet and greet new suppliers, spot new Kitchen and Bath Trends and designs for the coming years.
According to KBIS, (Kitchen and Bath Industry Show), and NKBA, (National Kitchen and Bath Association) There are several developing trends you’ll want to take into consideration if you’re beginning a new remodeling project. Here are the biggest Kitchen and Bath Design Trends they see that will carry you into 2018 and beyond.
SAY FAREWELL TO GRANITE COUNTER TOPS!
We’ve seen the transition away from granite for about 2 years now. Quartz is now the number one trend and is here to stay for a while. It’s durable, there are many finish choices and Quartz gives your Kitchen and Bath a fresh new look.
BELIEVE IT OR NOT, BRASS IS BACK!
Yep, it is hard to believe. The trend started about a year ago, we were seeing hints of Blush Blonde accents, (they were trying to ease us 50 something’s into the transition), now bold brass is everywhere you look, from furniture accents to full on Lighting, Plumbing Fixtures and more. Chrome and satin still reign supreme….for now, but if you want to lean into the trend ahead Brass is it!
STONE SINKS STAND THE TEST OF TIME
Carved stone sinks are where the trend is headed. Porcelain is still classic and will withstand the test of time but the new hot trends are stone.
BLEACHED WOOD WITH CONTRASTING FINISH CABINETS
A huge trend showing up for 2018 is bleached woods and two tone cabinets. White has come and is now on its way out.
The biggest trend in Kitchens and Baths right now is color, especially blues. It’s showing up in everything from cabinets to appliances.
COLOR IS EVERYWHERE
Cabinets Faucets, Appliances, and even Sinks.
WHITE SUBWAY TILE IS ON ITS WAY OUT
Finally, boring white subway tile is on its way out, Texture, color, pattern and unique design are the hottest trends for back splashes and more.
Selling a home in the desert has unique opportunities and perhaps some challenges as well. Home Buyer’s may or may not be full time residents, this might be their weekend get away for the family or a winter respite; they may be more willing to try the newest trend as a departure from the style and design of their main home.
The main thing to remember in any remodeling project, they must blend well and look like they belong in your home. While the newest trends are exciting, incorporating them into your existing home can be a challenge so the remodel doesn’t stand out like a sore thumb. The project needs to fit with the overall style of your home. For example, if you have a Spanish Hacienda, remodeling the Kitchen to look like a sleek mid century modern may not be the best choice for re-sale. Likewise, remodeling your Kitchen to state of the art Chef’s Kitchen, while the rest of the house and bathrooms remain 1980’s vintage can thwart your best intentions if you’re looking for top dollar on resale.
Before starting a remodeling project, consult with a designer yes, but also consult with your realtor! Everyday, we see and hear first hand what works and what doesn’t; we hear directly from our Buyers what they’re looking for and where they see value. When you’re thinking about selling your home, often times it’s some of the smallest things that will give you the biggest return.
As one of the leading teams in the desert real estate market and staging professionals, we work with our home sellers to help bring focus to the highest value projects for the best return on investment. We are local Professionals and offer a Full Suite of Services for our clients, as we did for this client at La Casa Feliz in Thunderbird Terrace, Rancho Mirage, who did a major remodel and wanted to sell their home for top dollar.
If you’re thinking about selling your home in the desert, and want to talk about the latest Kitchen and Bath Design Trends for your home, give us a call today; (760) 218 – 5752. We’re here with information to share and happy to help. Get your copy of Desert Living Online, with an ongoing series of home staging articles and desert events. Drop me a line at Cathi@DesertAreaHomeFinder.com and we’ll be happy to keep you in the loop!