Trading houses

4 Replies

I have a free and clear home (owned 5+years) I've agreed to trade straight up for another free and clear home. The other party is an owner occupant and would be owner occupant in my house after closing. The values are roughly the same.

I would like to sell the house I acquire. In fact, I wouldn't mind assigning the contract so I don't even have to close on it. If that doesn't work, my next option is to do a cosmetic rehab (very dated plus deferred maintenance), and then put it on MLS. Option three is to update it and then rent it out.

What are my tax scenarios?  Is this a 1031 Exchange candidate?  If so, how do I establish values since there is no sales price?  If not 1031 X, would my new house be treated as long or short term capital gains if I sold immediately?  Or wholesaled it?  

Another question; how do I write the contract for this transaction?  And make it assignable?

Hi Jon,

If the property that you are relinquishing was held for rental/investment and the property that you are acquiring will be held for rental/investment (as opposed to held for sale), then you can structure the transaction as a concurrent 1031 Exchange. 

However, you must have the intent to hold the replacement property for rental or investment purposes (as opposed to held for another sale/swap), so you would likely not qualify for a concurrent 1031 Exchange and then another subsequent 1031 Exchange because you actually acquired it with the intent to sell or trade unless you can make the argument that the transaction has a legitimate economic/business purpose and that you really did have the intent to hold for rental or investment.  There would be some risk that the auditors would not buy the argument.

If you do 1031 Exchange, the holding periods for the relinquished and replacement properties are added together or "tacked" in order to determine whether you later qualify for long-term capital gain tax rates. 

@Jon Klaus If you are looking for a 1031 Exchange expert @Bill Exeter is the man.

Re the contracts and best practices I am happy to connect with you on our strategies. 

Depending on your jurisdiction contracts can sometimes have to have separate sale contracts for each home that are contingent on each other. We have found its always best to connect and educate the lawyers on both sides.

Joel, I traded the houses mentioned above, sold the one I traded into, and paid my taxes. I did use Bill's company on a 1031x a year ago out of another property into three properties. Went smoothly!

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