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You may have heard of a 1031 Exchange. Sometimes it’s called a Starker or a Like Kind Exchange. And, you may also have heard a lot of things about it that aren’t true.
Let me explain what it is as simply as I can. Pretend you purchased an income property in 2000 for $100,000. Even in today’s market, it’s now worth $175,000, and you have a full price offer. After the expenses of selling it and the cost of improving it over the last eight years, you are set to realize a profit of $50,000. If you choose to pocket this money at closing, you will pay capital gains taxes on it.
But wait, there’s more. Remember all of that wonderful depreciation that helped so much on your taxes? If you’re going to cash out, the government would like it back (called depreciation recapture). Unless…instead of pocketing the money, you choose to reinvest. This can help you avoid not only the capital gains tax, but the depreciation recapture as well.
A 1031 Exchange allows you, at closing, to assign the proceeds of the sale to someone called a qualified intermediary. For a small fee, this company or entity holds the money until you pick out a replacement property. When you close on that property, you tell the intermediary to send your $50,000 to the closing as your down payment.
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The Minneapolis Area Association of Realtors (MAAR) released its weekly market activity report yesterday. And, incredibly, there was some good news.
Seven hundred and fourteen (714) purchase agreements were signed the week ending May 17. This figure is 1.7 percent above the number of pending sales during the same period last year.
This is only the first time in the last ten months, and just the second time in the last two years that this has happened.
Of course, there’s always a “but” these days. Of those transactions, 27.5 percent were foreclosures or short sales. And, over the last three months, the total number of pending sales is down 10.3 percent from 2007.
New listings have also dropped 13.9 percent for the same time frame. In fact, there are 700 fewer homes for sale right now than there were at this time last year. This number should increase as more and more sellers wait to put their homes on the market.
Which leads us back to that darned high school economics class: as supply decreases, eventually, prices should go up.
Unfortunately, MAAR doesn’t split multi-family properties out as a separate statistic. However, I can tell you that using my rather mediocre statistical abilities, during the week ending May 17, 38 duplexes went from Active to Pending status. During the same time last year, only 15 properties were pended. That’s a 253.33% increase over last year. Of those properties, a staggering 78.9% were either bank owned or short sales.
Stunned? Yeah, me too. I thought things were picking up. Nice to know I’m not hallucinating…this time anyway.
