In case you haven’t noticed, much of the country is experiencing the most severe and prolonged housing slump in nearly 20 years. Florida, California and New England, as well as the regional markets in Phoenix, Las Vegas and Atlanta are depressed almost beyond belief. In fact, values in some of these locations are down 50 percent from the highs of just three years ago. Bad news? Maybe. But look on the bright side: we’re in the middle of one of the most sensational buyer’s markets of all time.
In a market down 50 percent, you could say there’s a two-for-one sale on real estate. Okay, you say so, what’s the point? The point is, now might be the perfect time to take advantage of some of the great deals out there. And if you play your cards right, you won’t even need cash to do it.
Not all markets are suffering. And that means there are people with substantial paper appreciation in their portfolios. You are one of them? Would you like to trade for better, more lucrative properties like you’re trading last year’s Beamer for a pair of Mercedes? Well, that’s how it’s done.
Many people have heard of the 1031 Exchange, but may not be familiar with the process. Actually, it is quite simple. A 1031 exchange allows the seller to sell a property outright or exchange it for a property of a similar type and defer all capital gains taxes on the proceeds of the sale. The two key points in such a transaction are that you must exchange for a property of the same type, and that the value of the new property must be equal to or greater than the value of the old one.
In a simultaneous exchange, you would exchange your property for one of the same type and value, and the deal would be completed with little more than a deed-for-deed transaction. In a deferred exchange, which is much more common than a simultaneous exchange, you would sell your property outright and have 45 days from the date of sale to locate a target property and 180 days from the date of sale to close on it.
Let’s see an example. He has owned a nice little triplex in his town for the past few years. The value of the building has increased, and you estimate that after paying off the underlying debt, you will earn a profit of $500,000. You sell the property directly using the services of a qualified intermediary, often a title company attorney familiar with 1031 exchanges. The proceeds are deposited into an interest-bearing account. Now all that remains is to find a similar property with the same higher value.
Within the 45 days allowed by the 1031 exchange rules, you locate a seller in Las Vegas who owns two homes that he is now using to rent because there is virtually no market for these homes for residential buyers. At the height of the Las Vegas market, the houses were appraised at $500,000 each. But currently they will price for only half of that. You come to an agreement with this individual. He gets the $500,000 from his broker and you get two nice rentals in Las Vegas.
One of the key points in such an exchange is that you must exchange for a property of the same type. It has a triplex that has been used as an income generating property. Basically, you trade the triplex for rental houses, which are also income-producing properties. Your seller is relieved of the burden of owning property in a declining market and you are looking ahead to the future appreciation cycle with your Las Vegas rentals that has traditionally followed every recession in history.
Is this a far-fetched scenario? Not in many markets across the US today. Will you be able to strike such a deal? You will never know unless you try.
