How
To
Barter
For
Real
Estate
By James Harvey Stout (deceased). This material
is now in the public domain. The complete collection of Mr. Stout's writing
is at
http://stout.mybravenet.com/public_html/h/
.
Jump to the following topics:
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We
will find some excellent tax breaks and other benefits when we
barter.
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Real-estate exchanges are
complex.
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We can barter for
various aspects of the deal.
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In
some cases, the deferral might not be beneficial to us.
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We can create multiple
trades.
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We can get real
estate through a barter club.
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We can upgrade our property
by bartering.
We
will find some excellent tax breaks and other benefits when we barter.
Our taxes might be deferred. In the United States, we still have to pay taxes
on the trade, but we don't do it at the time of the exchange; instead, we
pay later, when we sell the property for cash, or when we die. That can be
a significant benefit for us if, at the time we cash in, we can better afford
to pay taxes on the gain; for example, perhaps we will be in a lower tax
bracket at that time. Those benefits will occur whether we are a real estate
broker, or an investor, or a businessperson who wants to trade some property,
or a private individual who wants to acquire a residence or investment property.
Real-estate exchanges are
complex. They have more technical details than we would find in a simple
sale -- so we will need the help of a real estate salesperson who has previously
overseen exchanges. (Some salespeople don't want to deal with exchanges because
of those extra details, but others are happy to do so because they will earn
a commission from both parties.) There are real-estate brokers who specialize
in exchanges; they might mention this specialization in their advertisements.
We might also find brokers who are members of a barter club; at one club,
there were 12 real-estate brokers.
We can barter for
various aspects of the deal.
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The down payment. Nearly anything that's valuable can be used as a down payment.
For example, one real estate trader has arranged deals in which some or all
of the down was paid with stocks, bonds, treasury bills, gems, jewelry, gold,
works of art, boats, and other types of personal property.
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The commission. The commission might not have to be paid in cash; instead,
the broker might accept our goods or services. As noted previously, some
real-estate brokers are members of barter clubs, so their commission could
probably be paid with barter-club units.
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The "boot." The boot is something extra which we add to a deal to make it
more enticing. Instead of cash, the boot can be another piece of property,
or some of our goods or services: a car from our showroom, barter-club units,
our landscaping services (to be used at the person's other properties), or
any other valuable item. (The boot is considered in the tax basis of the
property.)
In some
cases, the deferral might not be beneficial to us. (Note: Tax
laws change constantly, so you will need to confirm that this tax information
is still true when you conduct the transaction.)
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Tax-deferrals are allowed only for property which is used for business or
investment. They are not permitted for a trade of personal property,
i.e., the property on which we have our own residence.
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We might be in a higher tax bracket when we sell.
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New tax laws might eliminate our advantages.
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We cannot claim as much depreciation. The basis of the property which we
accept in a tax-free exchange is determined by the basis of the property
which we trade away. So if we bought a $10,000 property, and it's now worth
$100,000, we can trade it for another $100,000 property, but the basis will
still be only $10,000. If, however, we sell the original property for $100,000
and then we pay cash for the second piece, we have a $100,000 basis -- and
much greater room for depreciation. Some people keep a rental property only
as long as they can continue to report the depreciation. When the depreciation
is used up, they trade the property for another property, and they start
again.
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We cannot claim a loss in a trade. For example, our $100,000 property might
now be worth only $50,000. If we exchange this $50,000 for another $50,000
property, the loss is not recognized, so it is not deductible. (However,
instead of trading this $50,000 property, we could sell it
for $50,000 cash, and claim our deduction; then we could buy the other $50,000
property.)
We can create multiple trades.
It can be difficult to find a someone has exactly what we want, and who wants
exactly what we have. So brokers often use trades which involve three or
more property-owners; for example, we give our property to person #1, who
gives some property to person #2, who gives some property to us. Multiple
exchanges can be complex, but they are common.
We can get real estate
through a barter club. In some of the following deals, we might not be
able to pay with barter-club units alone; some of the price might have to
be paid in cash.
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We can spend units instead of dollars. A real-estate purchase is particularly
attractive to us if we have accumulated a large number of units (because
our goods or services are popular with the other members), and we want to
spend our excess units in one big purchase.
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The broker might be a member of the barter club. If so, we can probably pay
for the commission with units.
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The barter club can offer a loan. Some barter clubs extend credit -- enough
to purchase real estate. We would pay back the loan with units.
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The club's management might sell real estate. For example, in the 1960's,
Business Exchange bought nearly 300 acres of land in Antelope Valley, with
the idea of reselling the property in smaller parcels to the club's members.
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We can convert our units to cash. For example, one barter-club member was
unable to sell his property for cash, so he decided to sell it to another
member for $1,000,000 worth of barter-club units; then he spent those units
on cars, gems, and other goods which he could sell for cash.
We can upgrade our property
by bartering. We can make the property more valuable by bartering for
the services of a landscaper, a carpenter, a house-painter, etc. We might
pay for those services with a one-to-one deal (i.e., swapping our goods or
services for theirs), or with barter-club units, or with a portion of the
land which we are acquiring, or with the materials which are on the property
(as in the case of a person who is willing to tear down an old building in
exchange for the lumber), or with a portion of whatever we build there (if,
for example, we are building a condominium on the property, and we willing
to give one of the condos to the architect).