An investment property exchange involves the selling of one property and in turn, acquiring another. This can include one of many types of property exchanges, some with tax benefits and others that are treated as a typical property sale. The choice to partake in an exchange instead of a traditional sales situation is dependent upon several factors.
Simply put, an investment property exchange is the buying and selling of two properties within the same transaction. In other words, someone who is selling a home buys a new property and in turn, sells his property to the same person. This way both transactions can be done at one time, saving time and money for both parties. In the case of an investment property, the exchange could involve rental properties or houses that each party intends to flip and resell.
Two houses do not have to be equal in value in order to have an investment property exchange. Money is still transferred between the buyers and all other aspects of the transaction are the same as a traditional sale. There are some situations, however, where no money is exchanged: only property. This situation is rare, but can save each seller the time it would take secure a loan for the purchase.
Another type of investment property exchange is called a 1031 exchange. This exchange works very much the same as a typical property trade, but each property must meet certain government requirements. The transaction must be made within a certain length of time. In this type of exchange, the money made from the property sales are not taxed as they normally would be. This prevents the sellers from having to pay money to the government for any gains made during the sale.
The benefits of doing an investment property exchange vary with each situation. Time is a major factor in the process, as instead of waiting for two closing dates to roll around, everything is taken care of at the same time. In some cases, it may also save money for one or both parties by allowing them to swap homes as part of the payment.
Disadvantages of an investment property exchange include the time it takes to find someone who wants to swap houses. In many cases, finding a buyer may be faster and easier than finding someone to make a trade. Also, if one party backs out of the agreement, neither party closes the deal. This differs from a traditional buyer/seller situation where one may complete the purchase of a home before the current home has been sold.