Tax free land exchange. (not 1031)

Developer · Clayton, NC · Member since 2020 · 58 posts · 32 votes

I am trying to set up a deal whereby a few vacant lots in a subdivision are exchanged for a house of similar value. Is there a way to set this up without selling each property, but using some sort of direct swap? Preferably we would like to structure this so that reduces or eliminates the tax liability.

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

@Bear Geiger Easily enough done (well easily is relative). It's still a 1031 exchange. But because you are swapping property you technically do not need a qualified intermediary. In the good old day's there'd be daisy chains of several individuals swapping to make it done. Seems like there was always some land in West Texas thrown in the deal somewhere to make values match.

And that is your challenge. You'll still have the same reporting requirements. And the same reinvesting requirements. So the determination and reporting of value as well as handling debt and cash is your challenge when not using a QI and doing the delayed 3rd party exchange.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
5y
@Bear Geiger Easily enough done (well easily is relative). It's still a 1031 exchange. But because you are swapping property you technically do not need a qualified intermediary. In the good old day's there'd be daisy chains of several individuals swapping to make it done. Seems like there was always some land in West Texas thrown in the deal somewhere to make values match.
And that is your challenge. You'll still have the same reporting requirements. And the same reinvesting requirements. So the determination and reporting of value as well as handling debt and cash is your challenge when not using a QI and doing the delayed 3rd party exchange.
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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
5y
Hi @Bear Geiger,
You are referring to the classic two party swap. Some investors just swap properties based on equal equities. This is often referred to as "Equity Exchanging" or "Equity Marketing," but it will not defer the taxes. It would also be structured and reported as a concurrent 1031 Exchange (two party swap) for tax purposes so that you are not only exchanging equal equities but also deferring the income tax consequences.
You do not need a professional Qualified Intermediary with two party swaps. The parties generally enter into an Exchange Agreement (not a 1031 Tax Deferred Exchange Agreement) that addresses how the transaction is going to be structured and consummated. It may also make the concurrent closings a condition or requirement of closing so that both parties can report a tax-deferred exchange.
Each side must make sure they have each met their 1031 Exchange reinvestment values.
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Bear GeigerPro Member
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Developer · Clayton, NC · Member since 2020 · 58 posts · 32 votes
5y
@Dave Foster & @Bill Exeter. Thank you for the comments. I want clarify my objectives in the deal. I have several lots that a builder wants to build on. I wish to trade him these lots and in return have him build me a house on one of these lots. providing we can agree on terms, what does this look like on my side? If I hold the lots more than 12 months can I differ the capital gains since I am "buying" a house? What does the deal look like if I don't hold the lots 12 months?
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Alex Olson
Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes
5y
Originally posted by @Bear Geiger:
I am trying to set up a deal whereby a few vacant lots in a subdivision are exchanged for a house of similar value. Is there a way to set this up without selling each property, but using some sort of direct swap? Preferably we would like to structure this so that reduces or eliminates the tax liability.

As Dave says, this is considered a 1031 exchange as Dave says trading in into and out of land and farm land is fairly common. Hope that helps!
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
5y
@Bear Geiger, That's going to complicate things for you a lot. It would be no problem trading the lots to him for a house from him. But you're wanting to swap for the construction on a lot you already own and may or may not convey to him. Here's at least two issues:

1. You cannot exchange into improvements on property you already own without some very risky manuevers.

2. If you convey all the lots to him and he then returns a house on one as his part of the exchange could call into question his intent to hold the lots. He's acting like a builder/dealer and that could invalidate his part of the exchange.
And honestly, if he's a builder intending to build and divest these lots then there isn't going to be any tax savings for him. He'll be taxed on all of his regular construction activities.

There may be a scenario in there but it would take some massaging. This is actually very much like the Rutherford case of old where payment for the sale of a herd of bred cattle as the unborn offspring. Obviously they couldn't convey at the time of sale.
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