How to paper a real estate trade

     A property swap or trade can be simply defined as the trade or exchange of one tract of real property for another.    This trade can be even – property for property – or uneven, where one party pays additional cash or other compensation (e.g., a mortgage note) to even out the trade.   This additional cash or compensation is called “boot.”

How is it accomplished ? 

     1.         Let’s say Charles Kramer and Karl Hunter wish to trade homes.  Charles owns 202 Carlton and Karl owns 303 Stefani. 

     2.         We draft two (2) TREC Resale Contracts (this is for residential property in Texas -- your contract may vary for commercial or other jurisdictions), one for each home to be traded.  Charles selling 202 Carlton to Karl and Karl selling 303 Stefani to Charles. 

     3.         Price / para 3:   In each contract simply insert “See para. 11” or “See Addendum A” (if more room needed)

     4.         202 Carlton, para 11 or Addendum A:

“Buyer is purchasing the Property in consideration of Seller’s simultaneous purchase of Buyer’s property located at 303 Stefani, [city state and zip] (“Buyer’s Property”), as part of a simultaneous swap or exchange, between Seller and Buyer, of the Property and Buyer’s Property.   All of the terms and conditions of the sale / trade / exchange of Buyer’s Property to Seller, which are contained in another contract of even date herewith and attached hereto, are also incorporated herein by reference, and both contracts shall be deemed to be part of a single agreement.”

Add, if applicable:   “As part of the purchase price, Buyer is also paying the additional sum of $______________ as additional consideration to Seller, in addition to the sale and conveyance of Buyer’s Property.”

Add, if applicable:  “Such additional consideration shall be paid as set forth in para 4.”

 

     5.         303 Stefani, para 11 or Addendum A:   [same thing, just reversed]

“Buyer is purchasing the Property in consideration of Seller’s simultaneous purchase of Buyer’s property located at 202 Carlton, [city state and zip] (“Buyer’s Property”), as part of a simultaneous swap or exchange, between Seller and Buyer, of the Property and Buyer’s Property.   All of the terms and conditions of the sale / trade / exchange of Buyer’s Property to Seller, which are contained in another contract of even date herewith and attached hereto, are also incorporated herein by reference, and both contracts shall be deemed to be part of a single agreement.”

Add, if applicable:   “As part of the purchase price, Buyer is also paying the additional sum of $______________ as additional consideration to Seller, in addition to the sale and conveyance of Buyer’s Property.”

Add, if applicable:  “Such additional consideration shall be paid as set forth in para 4.”

 

     6.         Closing date, option period, and any and all other contingency deadlines should match EXACTLY.  In a trade, the fewer contingencies, the better.   If there are option and financing contingencies, consider adding the following in para. 11 or addendum A:

“If Buyer terminates this contract pursuant to any valid and unexpired right of termination hereunder, such termination shall also operate to terminate the other attached contract for the sale / trade / exchange of Buyer’s Property to Seller, and all earnest money, if any, shall be returned to each buyer under each such contract.”

 

     7.         Mortgages:    Each property should be delivered and conveyed free and clear of any mortgage of each seller / owner.  If there is boot coming in to the transaction and escrow, that may be enough to pay off the mortgage of the larger residence. 

             NOTE:  if the incoming boot is insufficient to payoff the mortgage, or it is an even exchange (no boot), then the seller of each property will and should be obligated to pay off their mortgage at closing with their own funds.  If they cannot, the swap cannot work (unless some sort of rare, dual mortgage assumption is to be arranged). 

 

     8.         Closing costs / title policy:   Each property should be title insured and probably the best allocation of these costs is to have each buyer pay all closing costs (including the title policy) required for their own, respective acquisition.   Some additional suggested language:

“Notwithstanding anything herein to the contrary, Buyer shall pay for all closing costs (except prorations, as set forth below) herein, including the owner’s policy of title insurance.”

 

     9.         Prorations:    this is typically a debit against the seller’s proceeds and a charge against Buyer’s closing costs – but in a swap, there may not be any “funds” going to Seller that can be deducted for prorations.  This may result in closing costs for such prorations being, literally, paid by Seller and disbursed to Buyer, at closing—all as shown on the closing statement. 

     10.       Tax issues

                  A.        The tax basis in 202 Carlton becomes the basis in 303 Stefani, and vice-versa (they are likewise swapped).  

                  B.        Boot is taxable, and is taxed to the extent capital gains are triggered on the boot portion (under current law, if boot received, minus basis, is >$250K if single, >$500K for family)

                  C.        If no boot (e.g., an even exchange), this is a simultaneous exchange and may not be considered a sale or taxable event at that time.

                  D.        1031 process is not required – that is for a time-deferred transfer and not one where the exchange is simultaneous.

                  E.        This is a very complex area – tax counsel is STRONGLY recommended !