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 a 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.
Read more about this topic: Real Estate Trading
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