Real Estate Exchanging - an option to pre-foreclosure
Earl L. Huse, JD
April 25, 2008
Simply stated, an exchange of real estate is an exchange or trade of real estate it is the mutual transfer of property for property. Exchanging real estate has become quite popular in recent years. It is a practical way of transacting real property when little or no cash is available.
Under the Internal Revenue Code, no gain or loss is recognized if property held for productive use or investment is exchanged solely for property of like nature. An apartment house owner who might otherwise be assessed a large capital gains tax if he sold in the conventional manner, can accomplish a tax-free transfer by exchanging his building for another of equal value.
The public in the past could not understand the concept so they failed to grasp what they thought to be something new and different, but how do you develop motivation when one does not know what they want and where they are going?
Inflation today is the true estate builder in real estate. There is no particular talent to buy property, hold on to it, do a little fixing up, and then sell the property. It is the American Dream to own a home. After that, the journey down the roads begins; the new furniture, cars, vacation, clothing, whatever it may be.
To have and want of the dream house, cars, vacations, and so forth creates the anxiety of living within your income budget. If you do not live within that budget, what happens? The pressure for future existence prevails until the bills are so great we are forced to sell the home, our American Dream that we worked so hard to achieve. But at last you are out of debt, but you will still need a place to live, so out we go and buy another home, perhaps larger and better than the first, and the race begins all over again.
What happens to the cash each time you sell? Do you realize there are deductions that come out of that transaction?
Sales commissions
Income taxes (due to IRS)
Sellers´ closing costs
Back bills
Any property tax due, etc. (part of sellers´ closing costs)
Possible pre-payment penalty on existing mortgage(s) when the loan is paid off early (many borrowers´ are not aware of this until the loan is in the process of being paid off through refinancing or sale).
Some times you end up further in debt than you started.
Real estate romance is the factor to all this because real estate agents are continuously after commissions; it is their livelihood; as your livelihood is your profession. How may agents ask themselves if the transaction they are handling for their clients really makes sense to all concerned parties? The drive for that commission is so great the public is pushed and shoved to make decisions based on their emotions and fears! Has it ever happened to you?
Gather as much income tax information as possible. This will enable you to see how a sale can be a taxable event, whereby an exchange may not. You may be loosing depreciation by holding onto your property and with the use of exchanging; you may be able to increase your benefits, while continuing to save income taxes for the future.
Refinancing the property can be done sometimes and the increased interest rate alone can offset the income to show a larger loss, and at the same time receive cash for other investments.
Example:
Value of home: $175,000.00
Existing 1st trust deed @ 9% interest: $ 70,000.00
Tappable equity: $105,000.00
Assume you required more tax deductions because at 9% interest tax write-off, you were still paying too much in taxes.
Possible solution:
Value of home: $175,000.00
Refinance to 80% loan-to-value: $140,000.00
Less balance of 1st trust deed: $ 70,000.00
Available cash-out equity: $ 70,000.00
The owner could borrow the $70,000.00, have interest payments on the new $140,000.00 loan that can be used to off-set income taxes, and with the $70,000.00 pay off debts, invest in other real estate, or whatever you wanted to do with it.
When using exchanging, finding property that is free and clear of mortgages is not always possible, and rarely is, but it happens sometimes, and the cash that is needed by the seller can be generated through the seller refinancing his property.
There may be times an exchange is not understood; this is expected. It is a good practice to read a sample exchange agreement when you are presenting a bona-fide transaction. (See sample Exchange Agreement in this chapter).
The desire for new home ownership has, in the past few years, brought new problems into the real estate industry. It has also brought some solutions.
Owing to the great demand for new homes, and because so many new houses are being built today throughout the country, and more so in some areas, it has become increasingly difficult to sell some older homes and get the full value for them when the seller wants the equity cash out so he can purchase a new home.
Almost every parcel of property is a suitable one to be exchanged, providing, however, that the owner of that parcel of property can be shown that a problem is being solved for him by making the exchange in question.
No matter what the trouble is, if you learn to analyze the problem, you will have several possible ideas for solving the problem. Exchanging offers a variety of methods to solve real estate problems. Solving a problem is very desirable, but in solving it, the results should be such that the transaction is profitable and advantageous to all parties connected with it. After it is known what problems exists, and after analysis of the problem, then suggestions of ways of handling the situation may be made.
Exchanging requires the ability of a broker or investor to bring together not only the principals that may be involved in a simple two-way exchange, but also to satisfy other individuals or groups whose interests are involved. After these individuals are brought together, it is necessary that they all have a common understanding of what is going to be finally accomplished. If they have, they all may benefit by mutual action of an exchange after the broker or investor has carefully worked out the plan.
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