Having been in real estate in Durango for so many years, I have witnessed the ups and downs of numerous markets. Back in the 80’s I became familiar with the concept of real estate exchanging. In its simplest form person A has a home worth $300,000 and they want to down size to a condo worth $250,000. Person B has just that type of condo and guess what? Their family is expanding and needs a home worth $300,000. Both parties like each other's property so they exchange their properties, one for the other, and person B gives to person A $50,000 to make up for the difference in values. This straight across, one for one exchange, doesn't happen very often. Instead what we see is person A wants out of their property very badly and really likes person B's property. Person B however has no interest in person A's property. Consequently, we need to add what we often call the third leg to the transaction and that would be a taker for person A's property. You can see how this could get interesting pretty quickly with it not being uncommon to have 3, 4 or even 5 legs to a transaction.
Brokers who do exchanges often get together in groups and present various properties that their sellers have indicated they would be willing to take other property for in exchange for theirs. These meetings are open forums where each presenter gets about five minutes to explain what his client has and what his client would like as well as what his client might be able to add to a transaction in terms of additional properties. I attended just such a meeting yesterday and came away with a proposal for one of my clients. Lots of times, at meetings like this, it isn't just real estate that is offered. When a broker says that their client can add something to the transaction, that “something”could be a boat, a motorhome, an interest in a houseboat, etc. These things are often added in order to balance the equities between the parties. Let's go back to our first example where the one party needed to pay the other party $50,000. It wouldn't be unusual to see an offer made where the one-party would offer you $25,000 in cash and his free and clear ski boat. As you can see these affairs can be very fun and interesting but most importantly they are focused on problem-solving.
There are two ideal candidates in exchanging: the first is what we call a “don't wanter” that is to say, the seller absolutely doesn't want their property anymore. It could be someone who's had a terrible experience in property management; it could be caused by a divorce; it could be someone who has a property that is difficult to sell or so high-priced that it might be better if they had two or three smaller properties which individually would be easier to sell. The second ideal candidate is somebody that owns free and clear property. That makes it very easy for them to go into a transaction because they have a 100% equity position in relation to the value of their property. Bad candidates would be people who are upside down... that is they have no equity in their property... unless they are able to add other properties that have equity.
There are certain tax benefits to doing an exchange but those would only pertain to investment properties. That is, your personal residence is not eligible for a 1031 tax-deferred exchange. That's not to say you couldn't exchange it, it simply means that that you don't have the benefit of the of the 1031 terms. A personal residence, as long as you've lived there for two years, has the $250,000 or $500,000 tax-free gain benefit anyway. I've written some additional information regarding 1031 exchanges that can be found on my main website www.buydurango.com here is a link to that specific page: Durango Real Estate Exchanges .
As you can imagine, these transactions can be complex and you certainly need an experienced real estate broker to guide you through the process. A very good knowledge of the inventory of properties available in the Durango real estate market is certainly important. How to structure an exchange to minimize the tax consequences is important as well. And lastly a broker that can be creative and think out of the box is the kind of broker that you need in order to put together a 3, 4, or even a five legged exchange. If this sounds interesting to you please give us a call, Team Lorenz is here to help.
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