Real-estate trading (also referred to as permanent real-estate swapping), is a type of "I-buy-yours-you-buy-mine" arrangement. It is distinct from vacation-home swapping.
The deteriorating real-estate market (circa 2006) has led many to realize that trading may be an extremely viable approach to selling one's real estate. This approach only works if the seller is also looking to buy another property, such as a move or relocation. But it is possible to move up or down in price, size, etc., or even trade to another city or state entirely.
Real estate trades fall under the 1031 exchange tax loophole. 1031 exchanges are a way to defer capital-gains tax on investment properties. 1031 exchanges do need to involve an actual trade of real estate between two parties.
Online Real Estate Trading
Online trading can take two forms.
The first is simply the inclusion of a text box alongside a real-estate listing, stating the seller will consider a trade and possibility a description of what the seller is looking to trade for. Craigslist is a popular example of this. While not specifically geared towards permanent trades, it is often used for such purposes. There are also several web sites, mostly set up by realtors, that use this approach.
The second, more sophisticated, approach uses a model similar to a dating service. Such a web site matches sellers with other sellers based on what each seller has and what each is looking to trade for. There are a small number of web sites that make use of this approach. Onlinehousetrading.com, Craigslist.org,Domuswap and GoswapHow to sell your house
How it works
While there are multiple ways to accomplish a house trade, the simplest is the simultaneous-sale approach. In this scenario, you purchase a property from another seller, and he buys your property, all in the same transaction. As in a separate sale, you must have sufficient funds coming in from the sale to pay off your existing mortgage. You also need the necessary funds to purchase the new property, or the necessary down payment to procure a new mortgage.
Since both parties are buying new properties, both will need the ability to purchase the other property, either through sufficient equity in their existing house or additional available cash or borrowing potential. So it is difficult to accomplish a trade with another owner who has little or even negative equity.
In a simultaneous-sale approach, the two transactions must happen simultaneously. In other words, both must close or neither closes. By structuring the closing in such a way, proceeds from the sale of one property can be figured into the amount applied towards the purchase of the other. In this way, you are able to apply a portion of your existing equity towards the new property.
Swapping houses falls under section 1031 in the Tax code, also referred to as a 1031 exchange. The rule allows investors to sell off a property without paying the capital gains tax if they purchase another property, or properties, within 180 days of the original sale. However, if there is a mortgage on the property it is called a "mortgage boot," and taxes have to be paid to alleviate the debt. Also, any remaining amount of capital that is not subsequently invested in a like asset will be taxed as capital gains.
Can it work for me
A simple test to determine if you are a candidate for a house swap is the following: "If you sold your property today, would you be able to go out and purchase that other property tomorrow? If the answer is no, you either need to look at a less expensive property to swap with, or you're not a candidate" .
Since this type of house swapping is in actuality a simultaneous buy and sell, you will need to walk away from the sale part with enough funds to complete the buy portion. The stumbling block here is often the necessary down payment (20% is standard). You therefore need to have at least 20% equity, minus closing costs, to purchase the other property.
References
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