Is your home a candidate for a HOUSE SWAP?
Earl L. Huse, JD
June 25, 2009
House swapping consists of listing list your house as available on a house swapping website or through a realtor. When real estate markets leave people wanting to sell their homes but can't, house swapping becomes more popular. House swapping can include temporary swaps for vacation purposes, but serious and permanent house swapping involves two parties seeking to exchange homes, or swap. Generally, people resort to house swapping when they've had no luck in selling their homes in the traditional way.
There are never easy solutions to real estate problems, there seems to always be the scrupulous individuals attempting to take advantage of the volatile marketplace, just remember to always approach a house swap with caution. I would consider hiring a realtor to accompany you to visit a property to make sure what has been represented to you is in fact, what it is, and, always consult an attorney to draw up any legal contracts that may be required.
Once you have signed up on a house-swapping site and have found someone who wants to swap with you, both home owners need to arrange to exchange homes on the same date via a simultaneous closing. Both of you must pay off any existing loans and obtain new financing on the homes you are buying
If you are considering a house swap as an alternative, do your self a favor and avoid potential headaches down the road and hire an attorney with experience in real estate transactions to review all the paperwork before you sign anything. The attorney will advise you on any parts of the contract that you do not understand thoroughly and parts of the contract that might work against you. Remember that a permanent house swap is a legal transaction, and it is important that an expert be on hand to look out for your best interests.
Although you have the right to select any title company you desire to handle the transaction, not all title companies and their agents are familiar with house swapping, therefore, ensure that the same title company is processing both your transaction and the other party´s transaction. This way, they can be closed at exactly the same time rather than leave one party responsible for two mortgages.
There are certain responsibilities you need to insure are completed by yourself, "DO NOT" allow a third party do these for you, they are, but are not limited to the following:
1. Inspect the home personally. "Do not allow a third part do it for you".
2. Ask the owners to provide information on major appliances, neighborhood details, recent repairs and other important homeowner questions.
3. Ask for any recent inspection records or arrange for inspections to be done on the property. (I would recommend a termite inspection, appraisal, and if there is a water well, a well certificate. Although these essential reports are not necessarily relevant to you now, they will be in the future, but it is up to you should you elect to have up-front additional costs in the transaction).
4. Use a house-swapping realtor who has had experience in house swapping. If you plan on using a house-swapping website, make sure to verify their experience before utilizing their services. Be safe now, so you won´t be sorry later. There are lots of home swapping companies out there to choose from. A good site will ask a lot of questions and screen the members when they join which should save you some of the hassle. If you are still unsure, contact the site administrator to inquire about their screening guidelines and process.
5. Contact the prospective candidates you have chosen and send them some questions or additional information or questions you may have. Get a feel for them through email, and then move to phone conversations. Consider a background check if you can afford it.
6. Contact their references and speak with them in depth. If you know someone in the area, contact him or her for information as well. Contact their local police department to inquire about the people; if there have been incidents of any kind, they will know.
How is a house swap related to 1031 property exchange?
A 1031 like-kind property exchange is the tax deferment tool that allows investors to sell properties and apply proceeds from the sale to a like kind (similar in investment use) property and defer any capital gains tax due. 1031 exchange rules are very specific.
An exchange or trade of real estate is the mutual transfer of property for property. Exchanging real estate has become quite popular in recent years. It is a practical way of transacting real property when little or no cash is available.
Under the Internal Revenue Code, no gin or loss is recognized if property held for productive use or investment is exchanged solely for property of like nature. An apartment house owner who might otherwise be assessed a large capital gains tax if he sold in the conventional manner, can accomplish a tax-free transfer by exchanging his building for another of equal value. You can read more at www.IRS.gov.
What are some Advantages of House Swapping?
One of the biggest advantages house swapping has "Big time" is the reduction of the transaction costs!
Same scenario applies to swapping real estate where the middleman is a realtor. Realtors' fees in the US range from 4% to 10% of the property value. There is no middleman when you are exchanging properties through GoSwap.org, so parties on both sides eliminate these transaction costs. As you can see, swappers' savings can be substantial.
The new "Buy and Bail" law makes new home purchase financing difficult, house swapping is at rescue. (SEE UNDERWRITING GUIDELINE INFORMATION BELOW IN REFERENCE TO THE BUY AND BAIL LAW)
With the passing of the "buy and bail" law taking affect October 1, 2008, any homeowners with unsold homes now have to qualify for any new FHA financing with both mortgages. It used to be that the homeowners had an option of renting their unsold residence and uses the large portion of the rent income derived against their total liabilities--not anymore. House swapping now makes even more sense because it eliminates the need to rent the unsold home in the first place, since homeowner is swapping their primary residence for another and the original mortgage on the primary residence is paid off during the simultaneous closing.
Remembering that there are never free benefits or profits without some consequences, bartering or exchange of property will not avoid capital gains tax obligation in the US. Make sure to contact your real estate attorney or accountant to determine the best situation for your personal circumstances. But to simplify the capital gains obligation question for you, the answer is yes for most owner occupied homes if occupied by the owner for two out of any last five years. Capital gains tax cannot be avoided when selling investment properties, however. When swapping an investment property both parties can defer paying the tax through a 1031 exchange. Keep in mind deferring the tax only makes sense when one can anticipate property value appreciation. Sellers are generally better off paying the taxes during the tax year of the sale when property values are declining.
Both parties in a swap transaction can reasonably lower their exchange property values in order to diminish profit subject to capital gains tax. As most investors are probably aware, there is no set price for any house. Even ordering several appraiser reports would most likely yield several different appraised values. These values will fluctuate even more in cases with abnormal properties, i.e. historical value property, a one of a kind odd shaped structure, etc. Ordering several appraisal reports and taking the lowest value as basis for your exchange basis would especially make sense in questionable value scenarios. The bottom line is that on top of all other advantages bartering property offers flexibility in lowering your tax obligation
September 19, 2008
MORTGAGEE LETTER 2008-25
TO: ALL APPROVED MORTGAGEES
SUBJECT: Converting Existing Homes to Rentals—Underwriting Instructions
Through this Mortgagee Letter, the Federal Housing Administration (FHA) takes steps to immediately respond to an unscrupulous practice arising in the housing mortgage market that poses a risk to FHA, FHA-approved lenders, and consequently to FHA´s ability to help new homeowners.
Recently, FHA and others in the mortgage industry have observed an increasing number of homeowners who have chosen to vacate their existing principal residence and purchase a new residence. This has been occurring as some homeowners, given the rising price of fuel, are relocating to homes nearer their employment, or are taking advantage of other home buying opportunities arising in the marketplace.
Due to FHA´s concern that some homebuyers in these transactions may attempt to provide misleading information regarding the rental income of the property being vacated to qualify for the new mortgage, FHA is instituting underwriting guidance designed to assure that the homebuyer can make payments on the full debt service of both mortgages. Consequently, beginning with case number assignments on or after the date of this Mortgagee Letter and until further notice, the underwriting analysis may not consider any rental income from the property being vacated except under circumstances described in this Mortgagee Letter. The exclusion of rental income from property being vacated is being instituted on a temporary basis while FHA further analyzes this situation to determine whether permanent measures may need to be taken. This will assure that a homeowner either has sufficient income to make both mortgage payments without any rental income or has an equity position not likely to result in defaulting on the mortgage on the property being vacated. In either case, this guidance is directed to preventing the practice known as "buy and bail" where the homebuyer purchases, for example, a more affordable dwelling with the intention to cease making payments on the previous mortgage. Although the property being vacated will not have a mortgage insured by FHA, surrounding properties may and, thus, FHA may be indirectly negatively affected should that property result in a foreclosure.
Exceptions:
Rental income on the property being vacated, reduced by the appropriate vacancy factor as determined by the jurisdictional FHA Homeownership Center (see http://www.hud.gov/offices/hsg/sfh/ref/sfh2-21u.cfm) may be considered in the underwriting analysis under the following circumstances:
Relocations: The homebuyer is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance. A properly executed lease agreement (i.e., a lease signed by the homebuyer and the lessee) of at least one year´s duration after the loan is closed is required. FHA recommends that underwriters also obtain evidence of the security deposit and/or evidence the first month´s rent was paid to the homeowner.
Sufficient Equity in Vacated Property: The homebuyer has a loan-to-value ratio of 75 percent or less, as determined by either a current (no more than six months old) residential appraisal or by comparing the unpaid principal balance to the original sales price of the property. The appraisal, in addition to using forms Fannie Mae1004/Freddie Mac 70, may be an exterior-only appraisal using form Fannie Mae/Freddie Mac 2055, and for condominium units, form Fannie Mae1075/Freddie Mac 466.
The guidance in this Mortgagee Letter applies solely to a principal residence being vacated in favor of another principal residence. This Mortgagee Letter is not applicable to existing rental properties disclosed on the loan application and confirmed by tax returns (Schedule E of form IRS 1040).
It is important to note that if the property being vacated had a mortgage insured by FHA, eligibility for a second FHA insured mortgage can only occur under the exemptions described in handbook HUD-4155.1 REV-5, paragraph 1-2.
If you have any questions regarding this Mortgagee Letter, call 1-800-CALLFHA.