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WOODARD: Like-kind exchanges gaining in popularity

There is growing interest in the tax advantages available in like-kind exchanges of properties.

A survey recently released by the National Association of Realtors shows that real estate like-kind exchanges are important in the way that real estate professionals do business. A report found that NAR’s commercial and residential members believe these tax provisions are necessary for gaining and disposing of properties and help fuel the country’s economy and job growth.

Like-kind exchanges, also known as Internal Revenue Code Section 1031, give individuals and businesses a tax deferment on gains after they get rid of one property as long as the proceeds are reinvested in a similar property. These types of exchanges are available to individuals, partnerships, corporations, limited liability companies and trusts.

Real estate investors and commercial property owners agree that like-kind exchanges are highly valued in their business. Forty percent of respondents said that transactions would not have occurred without this tax provision, and 96 percent believe that real estate values would go down if they were repealed.

Realtors participate in like-kind exchanges for many reasons besides deferring capital gains taxes; they use them as equity to buy more properties, as well as in estate planning, diversifying their portfolio and completing development projects, according to the NAR report.

Q: Why is there such volatility in today’s mortgage interest rates?

A: Here is what Sean Becketti, chief economist for Freddie Mac, has to say on that subject:

“Yields on Treasury securities declined this week in response to investor concerns about events in Greece and China. Mortgage rates fell, as well, although not by as much as government bond yields. The rate on 30-year fixed-rate mortgages fell 4 basis points to 4.04 percent.

“Overseas volatility is likely to persist for some time, providing some restraint on potential U.S. rate increases. In addition, the minutes of the June meeting of the Federal Open Market Committee suggest the Federal Reserve will proceed cautiously – monitoring events both overseas and in the U.S. to ascertain the appropriate moment to begin raising short-term interest rates.

“As a result, mortgage rates may remain in the neighborhood of 4 percent for a while.”

Q: Are rents continuing to rise?

A: Yes, and they will probably rise further as the year progresses. Rents in the highest-quality apartments rose 4.4 percent last year, including an 8.0 percent jump in one West Coast portfolio, according to noted real estate consultant John Burns.

With a very high occupancy level (95.8 percent) and job growth exceeding construction levels in almost every major market in the country, landlords will continue to raise rents throughout the remainder of the year.

“While the number of tenants leaving to buy homes remains low – only 14.7 percent of renters moving versus a norm of 17 percent since 2002 – we believe more tenants will choose to become homeowners soon,” Burns said.

Q: Is there an increasing number of mortgage applications?

A: The answer is something of a mixed bag at this point. Mortgage applications decreased 1.9 percent from one week earlier, according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey.

The Market Composite Index, a measure of mortgage loan application volume, decreased 1.9 percent on a seasonally adjusted basis from one week earlier. The Refinance Index increased 4 percent from the previous week.

The seasonally adjusted Purchase Index decreased 8 percent from one week earlier. The unadjusted Purchase Index increased 3 percent compared with the previous week and was 17 percent higher than the same week one year ago.

Comparing volume over the past two weeks, seasonally adjusted purchase applications decreased by 1.4 percent, while the refinance index has increased 6.5 percent, according to the MBA report.

Q: Are mortgage rates rising again?

A: At this point, they are again rising. Freddie Mac recently released the results of its Primary Mortgage Market Survey showing fixed mortgage rates reversing course and moving to their highest level this year amid ongoing volatility in bond markets.

The 30-year fixed-rate mortgage, at this writing, averaged 4.09 percent with an average 0.6 point. That’s up from last week, when it averaged 4.04 percent. A year ago at this time, the 30-year FRM averaged 4.13 percent.

WOODARD has been writing about real estate news and trends since 1971 and is the resident storyteller at the Ronald Reagan Presidential Library in Simi Valley, Calif.


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