Land Trading Tax Implications

[street]

I have a question regarding when people trade land for no dollars in exchange. It happens here in the west more often than one realizes. A neighbor just traded land for land just this year.

So, what are the tax or legalities of such a transaction?

After some research it does look like a legal event with no tax payment. I believe you file 1031 Exchange for this type of action.

What am I missing? Can you trade anything of equal value for land or does it have to be real-estate only?

 

[pb4uski]

I think it has to be "like-kind" properties... land for land.

 

[luckydude]

I have a question regarding when people trade land for no dollars in exchange. It happens here in the west more often than one realizes. A neighbor just traded land for land just this year.

So, what are the tax or legalities of such a transaction?

After some research it does look like a legal event with no tax payment. I believe you file 1031 Exchange for this type of action.

What am I missing? Can you trade anything of equal value for land or does it have to be real-estate only?

Interesting question. I have never come across this personally. I don't know how exactly that would work.

1031 exchange is applicable if a seller has sold a property with cap gains and wants to defer cap gains taxes by rolling the proceeds into a new property. I suppose in this case the two parties involved would "sell" each other their respective properties and roll their proceeds into their respective new properties. But if there are no cap gains involved, 1031 would not work.

Maybe you could ask your neighbor to see how they have done it.

 

[street]

Thanks.
My understanding is what pb4uski said. Has to be real estate for real estate.

​

 

[CaptTom]

I did that once to re-draw the property boundaries to go around a building the neighbor had encroaching on my property. Traded a chunk of his land for a chunk of mine. All properly registered with the town and county. Nobody charged either of us any tax.

 

[street]

I did that once to re-draw the property boundaries to go around a building the neighbor had encroaching on my property. Traded a chunk of his land for a chunk of mine. All properly registered with the town and county. Nobody charged either of us any tax.

Yep, that sounds about how people do it here. There is a procedure that needs to be followed but my understanding and no tax.

 

[Ronstar]

I did that once to re-draw the property boundaries to go around a building the neighbor had encroaching on my property. Traded a chunk of his land for a chunk of mine. All properly registered with the town and county. Nobody charged either of us any tax.

Back in my surveying days, we did a lot of surveys where adjacent owners swapped pieces of their properties. I think we also did one where the owners were across the street from each other. This one was a little complicated in that one of the owners moved his building across the street.

To my knowledge, there was no exchange of dollars in these deals. Just a couple of deeds. The only government entity that received notice was the recorder of deeds who recorded the deeds.

Since no money exchanged hands, the value of the properties were the same after the transaction as they were before. And there really wasn't any change in value that would affect the basis of the property.

I'm no expert in tax law, but I can't imagine how a 1031 exchange would be needed if no money exchange was involved.

 

[Doribe]

Interesting question. I have never come across this personally. I don't know how exactly that would work.

1031 exchange is applicable if a seller has sold a property with cap gains and wants to defer cap gains taxes by rolling the proceeds into a new property. I suppose in this case the two parties involved would "sell" each other their respective properties and roll their proceeds into their respective new properties. But if there are no cap gains involved, 1031 would not work.

Maybe you could ask your neighbor to see how they have done it.

I've done 1031 Exchanges twice. Both times were with rental property. It was not exactly a trade the way we think of it. I put the proceeds of one property into to a 1031 escrow account and I had a specific time limit to close on a new property. I think it was 180 days to make the tax free exchange. It is also called a Starker Exchange. The properties had to be in the U.S.

Not only did I avoid capital gains, but I avoided adding back in all of the depreciation that I had taken over the years. The end game is to leave it to heirs at the stepped up basis.

 

[street]

Back in my surveying days, we did a lot of surveys where adjacent owners swapped pieces of their properties. I think we also did one where the owners were across the street from each other. This one was a little complicated in that one of the owners moved his building across the street.

To my knowledge, there was no exchange of dollars in these deals. Just a couple of deeds. The only government entity that received notice was the recorder of deeds who recorded the deeds.

Since no money exchanged hands, the value of the properties were the same after the transaction as they were before. And there really wasn't any change in value that would affect the basis of the property.

I'm no expert in tax law, but I can't imagine how a 1031 exchange would be needed if no money exchange was involved.

Ronstar, that is interesting. These two guys traded because each live in the same county but live many miles apart from each other. They each own land where the other person lives. So they traded land so each would be closer to their home base.

 

[Ronstar]

Ronstar, that is interesting. These two guys traded because each live in the same county but live many miles apart from each other. They each own land where the other person lives. So they traded land so each would be closer to their home base.

Makes sense. Should have been a simple transaction with no money involved. Just a couple of deeds. And each guy gets a piece closer to home. Good for both parties.

 

[street]

Makes sense. Should have been a simple transaction with no money involved. Just a couple of deeds. And each guy gets a piece closer to home. Good for both parties.

Yep, that is right.

 

[Koolau]

I'd be tempted to run the process past a qualified attorney. "Rules" might well be state or even county specific, so better safe than sorry but YMMV.

 

[skyking1]

My understanding of the 1031 exchange process:
It is an "arms length" deal where the transactions are done by a third party.
You can choose to add cash to the deal and purchase something more expensive.

I hope to do that with our beach lot. It is not a whole lot of Cap gains, but I hope to get a recreational property closer to our new place that way.

 

[SecondCor521]

I hope to do that with our beach lot. It is not a whole lot of Cap gains, but I hope to get a recreational property closer to our new place that way.

My understanding is that 1031 exchanges are only for business property.

 

[RetiredAndLovingIt]

My understanding is that 1031 exchanges are only for business property.

My son has used a 1031 exchange every time he sells a rental property so at least 2 or 3 times. He has so many days to find and purchase a new property and defer capital gains. Not sure if it would apply to the OP's situation.

 

[SecondCor521]

My son has used a 1031 exchange every time he sells a rental property so at least 2 or 3 times. He has so many days to find and purchase a new property and defer capital gains. Not sure if it would apply to the OP's situation.

Right. A rental property is a form of business property.

My point was that 1031 exchanges, AFAIK, do not apply to personal property, such as a primary home. I have a hard time seeing how a "beach lot" would qualify as business property, but perhaps it could.

I also wonder about the examples the OP refers to where it's just land exchanges. I suppose it's possible if both properties were farm or rental properties.

From the IRS:

"Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment."

-- https://www.irs.gov/pub/irs-news/fs-08-18.pdf

"Generally, if you exchange business or investment real property solely for business or investment real property of a like kind, section1031 provides that no gain or loss is recognized."

-- https://www.irs.gov/pub/irs-pdf/i8824.pdf

ETA: I'm not any sort of 1031 exchange expert, so will defer if others have actual direct experience or better knowledge. The first quote above is from 2008, and the second one does use the word "generally", so maybe there are exceptions.

 

[street]

Found out a little more about how it works here. If you read Ronstar, post #7 and #10 it sums it up how they do it here. An attorney is used so the procedure is followed and things get recorded but pretty easy and no capital gains just a swap.

 

[skyking1]

Right. A rental property is a form of business property.

My point was that 1031 exchanges, AFAIK, do not apply to personal property, such as a primary home. I have a hard time seeing how a "beach lot" would qualify as business property, but perhaps it could.

I also wonder about the examples the OP refers to where it's just land exchanges. I suppose it's possible if both properties were farm or rental properties.

From the IRS:

"Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment."

-- https://www.irs.gov/pub/irs-news/fs-08-18.pdf

"Generally, if you exchange business or investment real property solely for business or investment real property of a like kind, section1031 provides that no gain or loss is recognized."

-- https://www.irs.gov/pub/irs-pdf/i8824.pdf

ETA: I'm not any sort of 1031 exchange expert, so will defer if others have actual direct experience or better knowledge. The first quote above is from 2008, and the second one does use the word "generally", so maybe there are exceptions.

it is for business or investment property, which a vacation lot or raw land does qualify for.

 

[SecondCor521]

it is for business or investment property, which a vacation lot or raw land does qualify for.

Gotcha, makes sense.