How do you do a straight exchange of properties? Owner of property A and owner of property B want to do an equal (or near equal) exchange.
Both properties have mortgages and homeowners’ insurance.
I suppose they could quit claim to each other but what about the mortgages and insurance issues?
I can’t seem to wrap my head around this one.
If they quit claim, the lenders most likely have the right to demand the loans be paid under the due on sale clause in the loan agreements.
The cleanest way I could think of would be for owner A to purchase owner B’s property for the amount of the outstanding loan and owner B would do the same. That way both of the old lenders would be paid off and both owners would have new loans.
Maybe some of the other members here have a better solution.
I would do this a “sub2” deal with each person using a grant deed. Yes, you might have the loaned called but there are some thing that can be done to minimize that possibility (e.g. use land trust)
as for insurance, you could add each other to the existing policy as an “additional insured”
the problem with this approach is the deal is not very clean and you are somewhat entangled with each other financially. The downside of doing two purchase contracts is you have the cost of getting a new loan. Also, you would need to set purchase price so each of you gets 20% of sale price in cash at closing.
Why not do a 1031 exchange? Failing to do a 1031 exchange makes the transaction a taxable event for both parties.
1031 exchange was originally designed exactly for the situation you describe. Party A and party B swap deeds and each assumes the other’s debt on the property received. This is a 1031 exchange scenario
a 1031 also requires that the property be of equal value or higher and all the proceeds of one sale go into the purchase of another.
I recommend you talk with a 1031 expert as the rules for this type of transaction are very concrete and if the rules are not followed, the IRS will disqualify the transfer and each party could have a taxable event.
The 1031 exchange was designed to defer capital gains on investments. A primary residence could not be used in this exchange since it was not an investment. Merely swapping deeds isn’t going to accomplish anything in this regard since the IRS rules concerning the 1031 exchange haven’t been followed. The concept is that you sell the property, take the money and buy another propery of equal of greater value. You keep doing this until you decide that you want to take the money - at which point you are taxed on the gain. If you wait until you retire - and make less money - to sell and take the gain, you will probably pay less tax.
The 1031 exchange was designed to defer capital gains on investments. A primary residence could not be used in this exchange since it was not an investment.
That's what I was thinking. I've done 1031 exchanges before but only with investment properties.
It was not clear to me that the properties in question are not investment properties. If primary residences, then a 1031 exchange is not applicable in this situation.
In this case, each party can still swap deeds and assume the other party’s mortgage debt. You will have a concurrent sale and purchase – could be tax free events for both parties if each party qualifies for the Section 121 capital gains exclusion.
rtruitt and rtruitt,
There are four constructs for exchanges that can be accomplished under the 1031 umbrella – a direct exchange, a delayed exchange, a reverse exchange, and a construction or improvement exchange.
Each of you have cited rules for a delayed exchange, sometimes called a forward exchange. The delayed exchange, reverse exchange, and construction exchanges involve three (or four) parties and require a qualified intermediary
A direct exchange, involves only two parties. Party A and party B swap deeds and each assumes the other’s debt on the respective property. Exchange rules do not prohibit an unequal exchange. An unequal exchange is just not fully tax deferred for the party trading down. In a direct exchange, there is no qualified intermediary required, and no property is sold or purchased – just swapped.
It was not clear to me that the properties in question are not investment properties.
That’s my bad. I wasn’t clear on that point in my original post. Sorry.
Thanks for the info.
I’m still not clear on what the properties are being used for. Are they both primary residences? Are they both investment property?
I'm still not clear on what the properties are being used for. Are they both primary residences? Are they both investment property?
I still haven’t made that clear, have I? :banghead LOL! It’s hell getting old.
They’re both residences.
Hmmm…what if we both did a “Subject To” deal?
Sale and Purchase for each of you. Again, if you each qualify for the Section 121 capital gains exclusion, then the transaction will not be a taxable event for either of you.
Is this a real deal in the works, or, just a hypothetical situation?