RECENT FEDERAL TAX LAW CHANGES TO REAL ESTATE TRANSACTIONS

[This information does not constitute tax advice. Please consult your tax professional for specific tax

advice related to a specific transaction]

 

1. Property involved in a IRC Section 1031 exchange that is subsequently converted to a primary

personal residence needs to be held for at least five years as an additional qualification in order

to get the $250,000 IRC Section 121 exclusion for individuals (or $500,000 for married filing

joint). In other words, owners still need to meet the 2 of 5 rule and other rules, but the total

years of ownership needs to be at least five years.

 

2. Property that is a second home does not qualify as a primary personal residence (the taxpayer

can have only one at a time).

 

3. Property that is a primary personal residence potentially qualifies for the $250,000/$500,000

exclusion.

 

4. Property that is a second home Is a personal asset but does not qualify for the

$250,000/$500,000 exclusion. As a personal asset, a loss on sale is not deductible. As a personal

asset, it does not qualify as property eligible for an IRC Sec 1031 exchange if there is a gain.

 

5. The character of residential real estate can change if the usage changes (from/to Primary

personal residence/second home/investment/business property).

 

6. Taxpayers have converted rental property to a primary personal residence, lived in the property

for at least two years and then sold the property, excluding the resulting gain and using IRC

Section 121 to exclude $250,000/$500,000. Recapture of part or all of the rental depreciation as

ordinary income is still required before calculating the gain to be excluded. This option is still

available, however, a new law requires allocating the gain on the property sale between

qualified and non-qualified use. The gain allocated to the non-qualified use must be reported

while the gain allocated to the qualified gain is potentially excludable under IRC Section 121.

 

7. Taxpayers have acquired property in an IRC Section 1031 exchange, used the property as rental

property and later converted the property to a primary personal residence, lived in the property

for at least two years and then sold the property, excluding the resulting gain and using IRC

Section 121 to exclude $250,000/$500,000. Recapture of part or al/ of the rental depreciation as

ordinary income is still required before calculating the gain to be excluded. This option is still

available, however, a new law requires allocating the gain on the property sale between

qualified and non-qualified use. The gain allocated to the non-qualified use must be reported

while the gain allocated to the qualified gain is potentially excludable under IRC Section 121. In

addition, the property acquired in the IRC Section 1031 exchange and later sold needs to be held

for a total of five years and meet all of the other requirements in order to qualify for the Section

121 exclusion.

 

8. Generally the years used as a primary personal residence count as qualified use, and the years

used as rental property count as non-qualified use. For example, if a property has an $800,000

gain of which $100,000 is depreciation recapture, and the property has two years of qualified us

and five years of non-qualified use, the resulting tax effects would generally be as follows:

$100,000 would be reported as depreciation recapture income, and the remaining gain would be reported as follows. The qualified use of 2/7 X the total remaining gain of $700,000 or

$200,000 would be subject to the IRC Section 121 exclusion and the non-qualified use of 5/7 X

the total remaining gain of $700,000 or $500,000 would be reported as capital gain. A transition

rule provides that non-qualified use prior to January 1, 2009 is not taken into account and is

ignored for the revised IRC Section 121 exclusion calculation.

 

9. As usual, there are qualifiers and exceptions with the new laws, but the rules have generally

been tightened in the last few years making more of the gain on sale of residences taxable.

 

10. Taxpayers need to reassess their real estate holdings in view of the new rules.

• Since longer rental usage generally reduces the amount of gain available for IRC Section

121 exclusion, taxpayers may want to Increase their primary personal usage, cut their

rental use period and sell property while it is eligible for the maximum Section 121 exclusion.

Breckenridge and Summit County Real Estate Statistics YTD 2008

Breckenridge and Summit County Real Estate Statistics YTD 2008

These figures come from the Summit Association of Realtors MLS as of May 1st, 2008, which encompasses over 95% of real estate transactions in the County.

Breckenridge

Single Family Homes sales so far have been 55 compared to 74 for the same period in 2007.  However the average sales price has increased this year by 4.9%, $1,079,167 compared to $1,028,436 in 2007.

Duplex and Townhomes have had 23 sales this year compared to 53 for the same period in 2007 with the average sales price increasing in 2008 to $905,625, a whopping 47.4% increase.

Condominiums and Multifamily so far year to date are at 69 sales compared to 82 last year, with the average sales price increasing this year from $395,027 to $509,896, again a significant 29.1% increase.

Vacant land sales have dropped 55.6% from 72 sales in the same period of 2007 to 32 sales for 2008.  However, the average sales price this year increased 57.8% from $380,173 to $599,814.

 

Summit County

Overall for Summit County YTD, Single Family Homes sales are numbering 100 compared to 138 in 2007, with this years average sales price at $947,600 compared to $909,189, a 4.2% increase.

Duplex and Townhomes had 71 sales YTD compared with 124 in 2007 for the same period, with the average sales price of $560,953 in 2007 increasing to $667,354 in 2008, an 19% increase.

Condominiums and Multifamily so far year to date have 217 sales compared with 277 in 2007 averaging $394,874 this year versus $345,053 last year.  This is a 14.4% increase YTD.

Vacant land sales reduced YTD this year compared to last year from 53 versus 121.  However, the average price increased an astounding 52.7%, average for 2007 was $343,567 compared to this year at $524,770.

 

The total number of listings countywide has increased by 163 listings this year to date, a total of 1,590 compared to 1,427 last year to date.  This is not a significant increase, only 11.4%, considering how markets are elsewhere in the nation.  It seems that pricing here in Breckenridge and Summit County is holding it's own.

 

Question of the Day!

QUESTION

 

I have some concerns about the US real estate market right now and am not sure if this is the right time to buy when the overall market is published at being 8% down.

 

ANSWER

 

First of all you have to remember that Breckenridge and Summit County as a whole is based upon ownership in a mountain valley where nearly all the land is National Forest Land, with a very small portion privately owned that has been and can be developed. The remaining privately held vacant land is predicted to be built out within the next 4-6 years. 

 

The Towns of Breckenridge, Frisco, Dillon and Silverthorne in conjunction with the County Commissioners and ski resort management held a conference a few years back and hired a consulting firm to help them forecast what needs to be done to maintain the quality of life in our County and its appeal. They studied other resort towns that are ahead of us and have or are at that total build out phase, where there is no more land left to build on, it is all used up and the only thing left to do is start knocking down old or existing buildings and re-developing (which is what Vail is currently doing).

 

This group studied traffic ramifications, water rights, schools, hospitals, affordable/employee housing etc. They got to the prediction of Breckenridge and Summit County reaching "build-out" by reviewing how many vacant and developable parcels of land there are left in the County, then taking the average number of building applications on vacant land there have been per year over the last 10 or so years and projecting going forward. That is how the within the next 4 to 6 years came about.

 

They then looked at towns similar to ours that have been through this phase and what happened to them. Examples are, Aspen, Vail, Telluride, Jackson Hole. As the supply gets ever increasingly slimmer, the demand continues to rise. Public opinion gets heavily weighted to prevent more growth, Town leadership and planning leadership positions get filled with staff and members with stricter philosophies about the quality and density of what should be built on the very last remaining parcels of developable land to maintain the quality and attractiveness of the mountain environment. This directly results in big increases in building costs, above and beyond the ever increasing costs of raw materials per year currently being experienced to build a home (review lumber, copper and building material costs that have risen over the last few years as China and other developing nations demand these materials too). This then has a direct affect on the values of existing properties, whereby the values start to go up significantly. Breckenridge and Summit County have not quite reached this stage, hence the huge average price differentiation between us and these other resorts. I am not saying that the pricing in our area will equal Aspen or Vail, but I think the gap will close considerably. As we get more exclusive and quality amenities the pricing of certain properties close by or having those amenities will go up. This in turn will bring the price of other existing properties up too, as the supply is now finite. Remember also, Breckenridge is currently the most visited ski area in the United States with many international visitors, also wanting to own property here.

 

When we had our last recession which was around the year 2000 or 2001, the market had a number of hammerhead blows. We had the dotcom crash, where the stock market took a huge hit. We had 9/11 where many, many people were afraid to fly which affected how many ski visitors would come. We had the Enron scandal, where the public now did not trust anyone with their hard earned money. We had war with Iraq and the uncertainty that would bring. We had a 4 year drought where we did not have much snow for skiing and we had Colorado forest fires.   I stacking all those detrimental market conditions on top of each other over a short period of time was a good test for our real estate market here. What happened to our market in Breckenridge was that we did not depreciate. We just stagnated for about 30 months where our prices did not appreciate, it took longer to sell properties and our skier visits went down and development slowed. It was very resilient.

 

I had been showing investors in the late 1990's properties and they would ask what the annual appreciation would be and I would say about 8% per annum. They would tell me that their mutual funds were getting as high as 30%. Many of them decided not to invest in real estate and keep investing in the stock market. Then in about the middle of that recession I would get some of these people calling me curious about how the real estate market was. I would tell them that it was slow, but the values overall had held. Many of them told me they had lost up to 30% of their investments over this period of time and that they wished they had put some of it in Breckenridge real estate.

 

That episode was great for Breckenridge and Summit County in retrospect, because it showed investors that our market is quite resilient to national downturns and market conditions. We may not have all those glamorous 30% yields and really since the 1970's if you average the property values in 10 year cycles it has been about 8% mean and 10% median per year. We do not have the high risk either.

 

Under current market conditions, where the rest of the nation is down the tubes with regards to property markets and values, Breckenridge, Vail and Steamboat Springs went up in values last year. We were the opposite. Why would that be? Some analysts see the huge development money coming in to complete the few remaining developable parcels left in Breckenridge and Steamboat anyway. In Vail, they are knocking down and re-building as they really do not have much vacant land left. Breckenridge is getting a lot of attention because of all the quality amenities being enhanced or developed, plus compared to nearly all the other ski resort towns in Colorado, we are one of the easiest to get too.

 

Many professional people will still earn significant income even in a recessed market. Drs, surgeons, dentist, lawyers, oil company execs, are still doing great. They are most certainly concerned about if they should put all their money on Wall Street currently. I speak with many clients in this category and they want to invest in something more tangible, like Breckenridge real estate. It may not yield as much as some of their other investments, but I think I can say right now, the ones that have bought here are doing better with their Breckenridge real estate investment than their mutual funds!!! In other words, they are wisely diversifying and not putting all their eggs in one basket. There are or can be significant tax advantages to owning a second home or investment property too. 

 

 

Also as the dollar has currently been weakening in the global currency markets, it has encouraged more foreign investment in our real estate market. This diversifies our micro economy here, where we are not just dependent on buyers or investors from one region. This adds to our resiliency in national US market downturns. 

 

The national real estate market downturn in the United States is in the primary real estate market. Primary real estate is property bought for someone to live in year round. That market was brought down as you well know by poor lending practices to people who could not really afford the home they were purchasing; sub-prime loans. In Breckenridge and Summit County, 70% of the real estate conveyed is investment or second home properties, where it is not possible to originate a sub-prime loan. We have not been directly affected by this.

 

Most of my clients upon reflecting on their ownership of property here are valuing the fun and memories they have with their friends and families more than they are their monetary appreciation potential. As long as they feel safe their money is harbored as securely as anywhere else, they end up just focusing on family, friends and quality time. Their Breckenridge or Summit County property is a catalyst for that!

 

Breckenridge Sunset

We have been having the most amazing sunsets in Breckenridge over the last week or so. Just incredible and really a shepherd's delight! The weather has been extremely mild, the town is very quiet. The lull before winter sets in, a magical time of year for us locals.

Summit High School Freshman Soccer

The Summit High School Freshman soccer team held their own against Denver Academy's mixed Varsity and Junior Varsity team with a 3 - 3 draw.

More fall trees

Well the trees are almost at the end of their fall colors. These were taken at the Blue River Park off Main Street and across the Blue River from the Riverwalk Center.

Here is a slideshow of a few more shots

http://picasaweb.google.com/iggy80424/BreckenridgeFallTrees#slideshow

Summit Football

Play offs at Summit High School

First Snowfall for Breckenridge

First snowfall in Breckenridge last night that settled on the streets for a little while. Winter will soon be upon us!

Summit High School Home Coming Parade -Breckenridge

The Summit High School home coming parade was held today on Breckenridge Main Street. Amid the autumn tree colors the parade did commence.

Here is a link to see a slideshow

http://picasaweb.google.com/iggy80424/SummitHighSchoolHomecomingParadeBreckenridgeCO#slideshow

Town is very quiet in this off season, which makes is a pleasant place to be.

Aspens in full hue

The aspens in fall this year in Breckenridge, Colorado were just fantastic. They peaked later that usual. I am not sure if this was because we had a wet early summer and warm mild late summer, but they were a spectacle to see.

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Welcome to BreckeridgeBlog.com! For all things Breckenridge, Colorado.