My neighbor wants to TRADE houses (with some 'boot')

behaviorkeltonMarch 5, 2011

So my neighbor wants to trade one of his houses for my house.

His house is nicer than mine in a variety of ways. He plans to rent my house.

I would give him my house and maybe $40,000.

We are wondering how this works when it comes to tax time... and/or how this type of deal can be made at all! Neither he nor I have ever done this sort of thing.

We're wondering if there are any advantages or disadvantages to this type of deal as opposed to just selling each of our houses and then buying the usual way.

No financing would be involved.

Any ideas?



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Would not anything without talking to a lawyer and tax person. I don't think you can just "give" him that amount of money, that is where you need legal advice.
Also you need to know market values on both house. How close are they--would you still be neighbors? Lots and lots of questions to ask.

    Bookmark   March 5, 2011 at 4:00PM
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Of course, this would require a lawyer and /or accountant.

My house is worth what someone will pay as is his. Pricing homes is getting very difficult. For the sake of this thread, we will have to assume that his home is legitimately worth $40,000 more than mine. I do know my neighborhood, though. His selling home is much bigger, better quality, and on a much nicer street. It was built in the late 20's, is move in ready (although could use some work), but it would be way out of my range if it was "all fixed up".

He just moved out of that house and moved into a single story home nearer to me due to health.

We would still be neighbors, but I would end up moving four or five blocks further away. My current home (which he would get) would be only a few houses away from his home.


    Bookmark   March 5, 2011 at 4:09PM
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This all depends on how the deal is structured as well as your personal tax situation. No one here can even begin to give any answer that would be useful.

    Bookmark   March 5, 2011 at 5:10PM
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Tax situation? What factors would be important?

Neither of us are going to make any money, really. So "profit" is not a consideration.

It would be odd to find that it would be easier to just buy his house while he buys my house. But it might be true.

    Bookmark   March 5, 2011 at 5:16PM
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I would start with getting both houses appraised then take it from there. You may find one house isn't worth what you think it is; could be more/less or equal. You should also have a home inspection on both properties so that you both know what you're dealing with. This could be the easiest way to kill a friendship if you don't do it the right way.

Good luck to both of you.

    Bookmark   March 5, 2011 at 7:45PM
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"Tax situation? What factors would be important"

That is what a RE attorney and/or a tax pro can tell you.
That said, roselvr's advice is excellent.

    Bookmark   March 5, 2011 at 11:20PM
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We did something similar in 1990. It was structured as two separate transactions: we bought her family home, she bought our condo. It was a buyers market at the time, so we both got pretty good deals (as buyers, not sellers) on the properties. But we had to bring money to the table both for our old condo and our new house. Ouch! There was one big closing at a title company, and they took care of putting the papers in front of us to sign. It was really pretty simple.

    Bookmark   March 5, 2011 at 11:41PM
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Do you have a mortgage on your home? If so, I don't think that you could simply "trade" homes, as your mortgage most likely has a due on sale clause. You would probably need to take our a new mortgage to buy the neighbor's house and sell him yours.

    Bookmark   March 6, 2011 at 10:32AM
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We both own our houses with no mortgage. I would think that this would make things simpler, but perhaps I'm wrong.

As to the comments about inspections and appraisals, that is the sort of advice that goes for any home purchase.

I do know my neighborhood pretty well in terms of values of things.

Both of our homes have their share of funky features. I expect some money-pit aspects to his house and he expects the same of mine.

His lot his amazing (3 acres and very nice homes of at the edges), great views through the trees, the entire home is almost un-touched in terms of "upgrades" ... so it still has the toilets, sinks, tubs etc. from the 20's. I far prefer this compared to those "upgraded" homes that look like I walked into the early 1990's at a home depot!

For it to be affordable, it pretty much has to have some flaws. This house, on that amazing street, on that huge lot would be way out of my price range if it were anywhere near perfect.

    Bookmark   March 6, 2011 at 12:10PM
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If tax ramifications are an issue, then appraisals might be required as documentation of $ values, much the same as appraisals are necessary when probating properties. I know house trades are done all the time and I think it's a super tool when used properly and can be win/win situations.

I also recommend you and your prospective trader make an appointment at a real estate attorney's office. One is going to be involved sooner or later anyway. They can lead you through the whole process and cover your tushes as they are at it. He/she may even not find it necessary to represnt one or the other of you in the transaction since it doesn't have the overtones of an adversarial you both seem to be satisfied with the structures 'as is'.

Best of luck, I'd be excited about it too.

    Bookmark   March 6, 2011 at 1:18PM
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It's called a 1031 exchange under IRS rules. Find a realtor who knows how to do it and negotiate to maybe pay them a flat fee for their expertise or use a lawyer.

    Bookmark   March 6, 2011 at 3:02PM
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I believe that 1031 exchanges only apply to investment properties. Since both parties own the homes free and clear, I think that a real estate attorney could probably handle the details, once both parties agree upon price. Both parties should definitely get title insurance.

    Bookmark   March 6, 2011 at 6:49PM
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Correct. 1031 exchanges are for investment properties only, the owners would not be able to occupy the homes.

    Bookmark   March 7, 2011 at 10:05AM
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