Any way to trade land without paying taxes or exchanging funds?

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Clark & Addison
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Any way to trade land without paying taxes or exchanging funds?

Post by Clark & Addison » Fri Dec 07, 2018 10:56 pm

Is it possible for two people to trade properties without buying the properties from each other and not paying any taxes on the exchange? We have a family member that is wanting a part of a property that we own to build a house on. He has property that is very close to us, just not exactly where he'd like to build. He asked about buying part of our land and I'd rather trade if we can make it work. Both of the properties that would be traded are farm ground with no structures that were gifted and if sold would result in significant capital gains taxes.

Once our property is divided to be the same size (and value) as the property that we want to trade for, can we trade deeds without exchanging money? I've been reading about 1031 exchanges, but everything I'm finding is when one property owner sells, then buys another property. What we want is to trade one property for the other straight up. I plan to talk to a real estate attorney and an accountant, but any advice here would be greatly appreciated.

JGoneRiding
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by JGoneRiding » Fri Dec 07, 2018 11:07 pm

You should be able to. Deeds are actually recorded generally that have seen "for $1" in our area you would just need to consult a title company to put the work through with the county though technically you could do this yourself.

My first step would be the building dept though. I have been in there a lot this year and one time was listening to some one else issue. The wanted to buy about 1.3 aceres to make their property square for irrigation growth purposes from their neighbor but the county wouldn't let them just re title it as part of their property bec then the neighbor had less than 20 acres and that was no longer allowed for that property type and it didn't mater that so many other neighbors had less cause this zoning was now being inforced. So any way check with building first yo make sure your subdivided property is buildable

riverguy
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by riverguy » Fri Dec 07, 2018 11:19 pm

Just consider it a gift and report it to the IRS. Likely well within your lifetime maximum gift allowance.

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Watty
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by Watty » Fri Dec 07, 2018 11:54 pm

If you have a mortage or home equity loan then your lender will likely not allow you to do this.

It would be best to get any building permits needed before you do the swap. You could get halfway through the deal only to find out that you cannot get something like a permit to put in a septic system.

Some things to ask your account;

1) How would this affect your homeowners capital gains exemption?

2) How would it affect your property taxes? Some areas have a limitation that the property taxes can only go up a certain percentage a year, a transaction like this could trigger a new assessment at the current market value.

Iridium
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by Iridium » Sat Dec 08, 2018 1:37 am

Investment real estate has an option called a '1031 exchange' which essentially allows one to sell a property and buy a new one within a certain period of time and not pay capital gains (the basis of the old property would carry over).

It may not be workable in your case, either because the property would not be considered an investment (not sure of rules), or because the fee to the escrow company takes to big a chunk out of the tax savings. However, it is something probably worth exploring. Might be one of the few times, ever, that an exchange is used to actually exchange property between the two parties.

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Clark & Addison
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by Clark & Addison » Sat Dec 08, 2018 9:07 am

Fortunately/unfortunately depending on how you view it, our county doesn't have zoning or a building department. In our county, all that is needed to build a new home is to contact the assessor's office (for taxes) and the health department (for septic). The property that we are going to trade is over 10 acres, so I don't believe a soil test is needed first for that size property (I'll check though).

We do have a mortgage on our home, but the remaining balance is less than 10% the value of the home/land and the land we would be trading is also less than 10% of that value. I talked to the mortgage lender yesterday and he said that with those values that they would just write that part off the mortgage once new surveys were brought in (and a $350 fee paid).

The main thing I don't understand is if the 1031 exchange would be useful in this situation. I know 1031 exchanges can't be used for personal homes, but I'm not sure if we could or not since this lot we want to divide has our home on part of it. The traded portion would just be land. From what I've been reading, it looks like if each of us want to buy the property from each other, we should be able to with a 1031 without paying taxes, but I haven't found examples of it being done for a straight up land exchange without transferring funds.

We hadn't considered gifting, but I guess that would be an option too.

Watty, thanks for the questions to ask the accountant. We are wanting to be accommodating to the family member wishing to build, but not to the extent that we'll be paying extra to do so.

Gill
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by Gill » Sat Dec 08, 2018 9:16 am

riverguy wrote:
Fri Dec 07, 2018 11:19 pm
Just consider it a gift and report it to the IRS. Likely well within your lifetime maximum gift allowance.
How can you consider it a gift when it is in exchange for valuable consideration?
Gill

Nate79
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by Nate79 » Sat Dec 08, 2018 9:18 am

Our state/county has a transfer tax on the transfer of real estate from one party to another. The tax is on the assessed value. I believe any form of transfer would incur the tax (excluding 1031), otherwise people would be setting up sham "gifts/trades" to get around paying the tax.

staythecourse
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by staythecourse » Sat Dec 08, 2018 9:23 am

Gill wrote:
Sat Dec 08, 2018 9:16 am
riverguy wrote:
Fri Dec 07, 2018 11:19 pm
Just consider it a gift and report it to the IRS. Likely well within your lifetime maximum gift allowance.
How can you consider it a gift when it is in exchange for valuable consideration?
Gill
Correct. A GIFT by definition by IRS standards means you are giving something of monetary value and NOT receiving or expecting to receive something of value in return. Getting another property is of value so I would think NO to the gifting idea.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

Gill
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by Gill » Sat Dec 08, 2018 9:29 am

staythecourse wrote:
Sat Dec 08, 2018 9:23 am
Gill wrote:
Sat Dec 08, 2018 9:16 am
riverguy wrote:
Fri Dec 07, 2018 11:19 pm
Just consider it a gift and report it to the IRS. Likely well within your lifetime maximum gift allowance.
How can you consider it a gift when it is in exchange for valuable consideration?
Gill
Correct. A GIFT by definition by IRS standards means you are giving something of monetary value and NOT receiving or expecting to receive something of value in return. Getting another property is of value so I would think NO to the gifting idea.

Good luck.
Plain and simple - tax fraud being recommended.
Gill

riverguy
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by riverguy » Sat Dec 08, 2018 9:43 am

Gill wrote:
Sat Dec 08, 2018 9:29 am
staythecourse wrote:
Sat Dec 08, 2018 9:23 am
Gill wrote:
Sat Dec 08, 2018 9:16 am
riverguy wrote:
Fri Dec 07, 2018 11:19 pm
Just consider it a gift and report it to the IRS. Likely well within your lifetime maximum gift allowance.
How can you consider it a gift when it is in exchange for valuable consideration?
Gill
Correct. A GIFT by definition by IRS standards means you are giving something of monetary value and NOT receiving or expecting to receive something of value in return. Getting another property is of value so I would think NO to the gifting idea.

Good luck.
Plain and simple - tax fraud being recommended.
Gill
Get real. It's a swap of properties between family members. Sell it for under market value and consider the difference between the sales price and FMV a gift if that makes you feel better.

Spirit Rider
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by Spirit Rider » Sat Dec 08, 2018 9:47 am

More illegal advice.

In my state, 1031 exchanges and any other real estate for real estate swaps are specifically included as subject to the transfer tax.

Transfers between related parties by blood or marriage are taxed at the full market value, except no tax is due on transfers incident to divorce or death.

"For transactions between related parties in which the consideration stated is unsupported, the tax will be assessed on the fair market value of the property."

You should check your state's laws on such transfers. There can be differences, but I wouldn't be surprised if you are on the hook for two transfer taxes at FMV no matter how you try to finangle it.

The states/counties are wise to all of the end runs. I worked on an IT project with the local county > 30 years ago to flag all transfer tax stamps for < the assessed value

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Clark & Addison
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by Clark & Addison » Sat Dec 08, 2018 10:03 am

Thanks for all the responses. Looks like this is going to be more complex than I was hoping for. I'll be calling the accountant and attorney on Monday. We're not interested in anything illegal, just hoping to find a legal way to trade properties without paying taxes on it. Maybe that's not possible.

Gill
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by Gill » Sat Dec 08, 2018 10:05 am

riverguy wrote:
Sat Dec 08, 2018 9:43 am


Get real. It's a swap of properties between family members. Sell it for under market value and consider the difference between the sales price and FMV a gift if that makes you feel better.
The OP said nothing about wanting to make a gift or to sell it under FMV. It's irrelevant that it's between family members. If two parties exchange properties which they consider to have equal value a taxable sale has taken place. Appreciate your not telling me to "get real". I'm only relating what the tax law says.
Gill

staythecourse
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by staythecourse » Sat Dec 08, 2018 11:08 am

Gill wrote:
Sat Dec 08, 2018 9:29 am
staythecourse wrote:
Sat Dec 08, 2018 9:23 am
Gill wrote:
Sat Dec 08, 2018 9:16 am
riverguy wrote:
Fri Dec 07, 2018 11:19 pm
Just consider it a gift and report it to the IRS. Likely well within your lifetime maximum gift allowance.
How can you consider it a gift when it is in exchange for valuable consideration?
Gill
Correct. A GIFT by definition by IRS standards means you are giving something of monetary value and NOT receiving or expecting to receive something of value in return. Getting another property is of value so I would think NO to the gifting idea.

Good luck.
Plain and simple - tax fraud being recommended.
Gill
Thanks for the clarification.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

FindingFIRE
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by FindingFIRE » Sat Dec 08, 2018 3:58 pm

Clark & Addison wrote:
Sat Dec 08, 2018 9:07 am
The main thing I don't understand is if the 1031 exchange would be useful in this situation. I know 1031 exchanges can't be used for personal homes, but I'm not sure if we could or not since this lot we want to divide has our home on part of it. The traded portion would just be land. From what I've been reading, it looks like if each of us want to buy the property from each other, we should be able to with a 1031 without paying taxes, but I haven't found examples of it being done for a straight up land exchange without transferring funds.
You can absolutely do a 1031 like you want - it would be a case of simple 2 party simultaneous exchange, where you swap properties without any cash being exchanged. However has to be investment property, and like other posters said, likely subject to transfer tax (but that's dependent on your state/county).

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Clark & Addison
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by Clark & Addison » Sat Dec 08, 2018 5:11 pm

FindingFIRE wrote:
Sat Dec 08, 2018 3:58 pm
You can absolutely do a 1031 like you want - it would be a case of simple 2 party simultaneous exchange, where you swap properties without any cash being exchanged. However has to be investment property, and like other posters said, likely subject to transfer tax (but that's dependent on your state/county).
It looks like Indiana doesn't charge a property transfer tax (hopefully accountant will confirm this). The property that we want to trade away is part of the property our home is on. Once it's split, the new property (over 10 acres of farmland, no structures) will have rental income. Would this allow it to be considered an investment property?

FindingFIRE
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by FindingFIRE » Sat Dec 08, 2018 5:26 pm

Clark & Addison wrote:
Sat Dec 08, 2018 5:11 pm
It looks like Indiana doesn't charge a property transfer tax (hopefully accountant will confirm this). The property that we want to trade away is part of the property our home is on. Once it's split, the new property (over 10 acres of farmland, no structures) will have rental income. Would this allow it to be considered an investment property?
The land you own now need to have been used in business or held for investment. Has it been producing rental income or have you been holding it for appreciation? Your accountant should be able to help figure out if you qualify for 1031.

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Clark & Addison
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by Clark & Addison » Sat Dec 08, 2018 5:52 pm

FindingFIRE wrote:
Sat Dec 08, 2018 5:26 pm
The land you own now need to have been used in business or held for investment. Has it been producing rental income or have you been holding it for appreciation? Your accountant should be able to help figure out if you qualify for 1031.
The land does produce income and has since before we built on it a few years ago, hopefully this will qualify it as an investment property.

JGoneRiding
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Re: Any way to trade land without paying taxes or exchanging funds?

Post by JGoneRiding » Sat Dec 08, 2018 10:58 pm

Clark & Addison wrote:
Sat Dec 08, 2018 10:03 am
Thanks for all the responses. Looks like this is going to be more complex than I was hoping for. I'll be calling the accountant and attorney on Monday. We're not interested in anything illegal, just hoping to find a legal way to trade properties without paying taxes on it. Maybe that's not possible.
It might totally be too. These things are extremely local! You could probably do it in my county if the zoning was right. You need a local land attorney or local title company and ASK THEM. We have no idea where you live

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