House swapping becoming popular in a down market

 

REAL ESTATE: Swapping houses under the right circumstances can make sense, but the right circumstances may be hard to find.

 
By Tim Hilger, CPA, Spidell Publishing, Inc.
 
“HHI SC and-or BEAUFORT SC available to swap for CALIFORNIA”
 
Are you ready to retire in Hilton Head, South Carolina? Then you might want to go to www.domuswap.com and get in touch with the folks running this ad. If you own a home in California and they like it, they just might make it an even trade.
 
House swapping has moved beyond vacation home swapping to what is often called “permanent swapping,” that is, homeowners are now trading their principal residences. There are now several websites where, for at most, a small fee, a home trader can post their ad and get in touch with potential swappers. (See www.domuswap.com, www.tradeahome.com, www.pad4pad.com, www.goswap.com, www.onlinehousetrading.com. In addition, the powerhouse trading site Craigslist also has a house swapping section.)
 
Note: Since a swap of a home is not a §1031 exchange and is treated the same as the sale of a home, §121 will apply and gain will be the difference between the fair market value of the acquired home plus cash or other consideration received minus cash paid or other consideration given and the basis of the old one.
 
The benefits
 
In a down economy, people don’t want to — and often can’t — buy a new house before they sell the old. They are dependent on the sales proceeds from the old house to make the down payment on the new one and they don’t want to — or can’t — be saddled with two mortgages simultaneously.
 
By finding a trading partner, they can unload the old house at the exact time they buy the new one. In addition, by finding each other, they can avoid the commission costs of having two realtors involved.
Moreover, the cost of finding a trading partner can be very low. For example, www.onlinehousetrading.com — a site that claims to have over 60,000 listings — charges a one-time fee of $29.95 to run an ad for an unlimited period of time, while www.domuswap.com is free.
 
Other reasons for swapping
 
• Sellers are often finding that buyers want to buy a foreclosure and get a “great deal.” In other words, they’re not buying.
• Real estate commissions are high, especially when paid on both properties. Although prices are down, the commission on sales of two $400,000 houses is typically about $48,000 (6% × $400,000 × 2).
• Family members may swap so the children live in the parent’s large family home and parents move to the children’s smaller home, condominium, or vacation home.
 
Does it work?
 
Finding the right swap can be difficult, of course. It’s hard enough to do a purchase or sale, but with a swap you not only have to find a seller who has the home you want, but that same individual must want the home you have.
 
On the other hand, under the “you never know principle,” it’s worth a try. It costs little to nothing to run an ad and it doesn’t take much time to review the ads posted by others.
 
Also, keep in mind the old adage, “beggars can’t be choosers.” Swapping is not like cruising through a neighborhood and saying, “I want that one.” With swapping, you might have to settle for the best available approximation of your dream home and dream location but the approximation might turn out to be the dream, after all.
 
EXAMPLE: Lisa and Brian purchased their condo in Fullerton for $200,000 and have lived in it as their principal residence for eight years. Today, it’s worth $325,000 and has a mortgage balance of $125,000. Lisa is expecting their first child so they want to sell their condo and buy a bigger house.
 
Jon and Lynn own a five-bedroom house in Fullerton worth $700,000. Their children have grown and they want a smaller place. They have a basis of $100,000 in the house, it’s fully paid off, and they meet the requirements for §121. The two parties agree to swap houses.
 
Lisa and Brian swap their condo with John and Lynn’s house, and take out a loan of $500,000; $375,000 is disbursed to John and Lynn and $125,000 is disbursed to their old lender. Their gain is $125,000 ($700,000 house received minus $375,000 cash paid minus basis of $200,000). They may exclude the gain under §121.
 
John and Lynn have gain of $600,000 (FMV of home received of $325,000 plus cash of $375,000 less basis of $100,000). They may exclude $500,000 of the gain under §121. They have taxable income of $100,000.
 
Real-life story
 
When George and Martha retired, they moved to Arizona. After a few years of living there, they wanted to move back to their old home town in Georgia where their grown children still lived. The closest swap they could find was about 70 miles away. At first, they felt like they had settled on something less than perfect. After living there awhile, they began to feel like they got something better than perfect. They’re close enough to the kids that they’re easy to reach; they can even get together for dinner. But they’re far enough away that the kids can’t just dump the grandkids on them on a whim — thinking that they since they’re retired, they have nothing better to do.
 
What to look for
 
If you find a suitable swap, there are several things to watch out for.
 
• Take the same steps you would take in any other sale and purchase of a residence. Visit the home, have inspections done, contact the county recorder’s office to check for liens, get proper title insurance, etc.
• Hire a real estate professional to handle the transaction. This individual can help with proper documentation and shuttling the whole transaction through to completion. Using a single professional will greatly cut transaction costs compared to having two professionals, as is usually the case when there are two purchases.
• Don’t get involved with trading partners who have little or no equity in their homes. They will have a tough time getting financing in a tight lending market.

 

 

 

About the author:
Tim Hilger, CPA, is with Spidell Publishing, publisher of The Elder Client Planner, a monthly publication covering tax, legal, and financial issues facing retired and retiring clients. Each month readers get analysis of issues that directly relate to aging clients, citations to keep abreast of changes in tax law, Social Security laws and procedures, and new good, bad, and ugly investment opportunities that affect your clients.

 

 


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