Well, it’s one way to transfer property deeds between people! Yet trading homes with someone else isn’t your typical deed transaction.
In a prolonged tight market, deed exchanges are drawing growing numbers of curious and creative homeowners. Here’s a bit more about the concept.
A Quirky Kind of Deed Conveyance—But It’s Done.
This kind of transaction can happen if both sides of the bargain have unusual circumstances — which happen to mesh. Say at least one of the homes has a mortgage. That’s an issue. If the parties transfer their deeds, language in their mortgage agreements will cause their balances to come due all at once. To get around that, they couldn’t simply swap the loans along with their homes. They would have to pay off their existing mortgages.
It typically takes applying for a new mortgage to get out of an existing one. Maybe both sides of a deal have assumable loans, and both sides’ lenders have agreed to the unusual arrangement…
But that would be a rare situation.
So, what are the odds of two owners finding each other, each one wanting the other’s home, and both homes being free and clear of mortgages and other significant liens?
If homes are conveyed between the parties for less than fair-market value, the IRS counts the price discount as a gift of real estate. The IRS allows for a substantial lifetime gift tax exclusion, though — shielding most gifts of real estate from gift tax.
Some people do find ways to make it happen — with relatives, or even with strangers. It’s possible to find listings with language like:
“Will consider trades!”
“Sellers are empty-nesters ready to downsize. Do you need to trade up?”
“Sellers want larger home; could it be yours?”
“Need someone to pay the remainder of my mortgage. In return for my $200K in equity, I seek a condo on the Delmarva Peninsula.”
There are also home swap pages and groups active on social media. These are mainly announcements for vacation homes, but some home trades are for keeps. The “real estate trade” and “permanent real estate exchange” discussion forum is a thing. And some local bank managers are willing to work with clients on special transactions like deed swaps.
Is The Deed Swap Becoming a Trend?
The Great Recession of 2007-2011 forced many owners out of their homes. Some owners couldn’t move, stuck in place when their home equity fell below their mortgage balances. Some lost their homes to a wave of foreclosures. And some managed to deal with the crisis through home swaps.
Deed swapping gained traction again after Covid struck and the market became ultra-competitive. It’s not hard to understand why. You likely know a household who sold their small home to get more space for a growing family, but then couldn’t buy anything more spacious because nothing was within financial reach.
The 2022-33 interest rate hikes made transactions somewhat harder, too. And so now, as in the recession, creative people may think about how to help each other get the housing everybody needs.
Nitty Gritty: Working With Deeds and Mortgages
When two people swap deeds, they are simply carrying out two distinct home purchases at one time. As with other real estate sales, each home’s deed must be recorded in its new owner’s name.
If the homes are of roughly equal value, could each party simply quitclaim a home to the other without any money changing hands? If there’s no mortgage on either home, then, in theory, no money has to change hands (except for deed recording, transfer taxes, and loan costs). But it would be quite a fluke if two parties with equivalent home values decided to swap. Realistically, the owner of the less expensive home will need to pay money for the difference in value on closing day.
And, as we noted earlier, the two households almost certainly may not just assume each other’s mortgages. New loans and closings are necessary. The parties need their own appraisers and home inspectors. Each must adhere to the state’s real estate laws. Each needs a real estate attorney or title company to handle the title searches and title insurance.
Is one of the parties nearing retirement age and looking to age in place? People who transfer their deeds need to know how to protect their medical benefits, if applicable.
Closing Two Transactions? Tap Local Experts
A purchase agreement states the parties agreed-upon terms. Here, the parties’ agreement might designate a specific day dedicated to closing both transactions.
Each of the homes needs its own purchase contract. (It’s needed even where one party is paying no money; that person has offered their property as the consideration.) Each party’s contract can be contingent on the other one. And the parties should agree in writing about what items are included in their exchange.
Parties can ask mortgage companies about their fees, escrow requirements for insurance and taxes, and so forth. Each person in the deal may need to liquidate some of their current home equity to cover these and other home buyer’s expenses.
Anyone entering into a deed swap should tap the advice of a local real estate lawyer. Sellers, check in with your accountants as well. The IRS scrutinizes real estate transfers for any taxable capital gains. (State law impacts these deals, too. For example, in California, since February 2021, those who receive their parents’ homes are dealing with new property tax basis rules.)
Nice Deal, If You Can Swing It…
What’s the nicest thing about a deed exchange? For one thing, it can spare the parties from the typical process of shopping for and marketing their homes. And as both parties are committed to closing the deal, the agreement can be focused and efficient.
Best results happen when no one has to feel rushed. Granted, some situations need urgent resolutions. But that’s when it’s especially important to commit to due diligence.
It’s all about treating your title with care. Your home’s future owners — buyers or heirs — will appreciate it.
Please note: This article is intended as general information. Deeds.com cannot provide legal or financial advice.
Supporting References
U.S. Government Accountability Office Blog via GAO.gov: Homeownership During a Recession (Jul. 06, 2020; citing the Bureau of Labor Statistics / Consumer Price Index). Also via GAO.gov: The Affordable Housing Crisis Grows While Efforts to Increase Supply Fall Short (Oct. 12, 2023).
Kacie Goff for Bankrate, LLC., a Red Ventures company, via Bankrate.com: Can You Swap Houses With Someone — Permanently? (Jan. 30, 2023).
Jacob Passy for MarketWatch, Inc. / Dow Jones Network via MarketWatch.com: The Big Move – “We Live 5 Minutes From Our In-Laws Who Have a Larger Home: Is It a Good Idea to Swap Houses? Will I End Up With a Surprise Tax Bill?” (last updated Feb. 22, 2022).
Gary M. Singer for the South Florida Sun Sentinel and The Salem News via SalemNews.com: Can I Swap Homes With a Relative in Another Town? (Mar. 4, 2022).
And as linked.
More on topics: Assumable mortgages, Closing on a home fast
Icon and photo credits: Arthur Shlain via The Noun Project (CC BY-SA 3.0); and Lukas, via Pexels/Canva.