Bartering your real estate for someone else's, rather than selling it outright, is rapidly becoming one of the most popular tax-saving techniques among property owners and investors around the country.
With the help of computers and networks of "exchangors" in every state, thousands of pieces of real estate, - farmland, rental town houses, coffee shops, orchards, warehouses, theaters and apartment buildings - are now changing hands annually, without a penny of capital gains taxation on their owners' ostensible profits.
Ranch owners in southwest states are swapping their holdings for hotels in eastern seaboard resorts; apartment owners in Illinois are trading away their property for interests in shopping centers outside Phoenix; New Jersey farmers are bartering their acreage for office buildings in nearby cities.
These swaps, known as tax-deferred exchanges, are permitted under Section 1031 of the Internal Revenue Code. The law allows owners of properties held for investment or business use to exchange their equities in them, tax free, for properties of "like kind" and equivalent equity values.
The capital gains taxation that normally would be imposed on a seller's profits from, say, a piece of farmland that had grown in value tremendously since acquisition, are deferred under the code. Only when the owner actually cashes in his inflated real estate equity - perhaps many years down the road - will Uncle Sam demand tax payment on the gain following sale. The farmer at that point may not be a farmer at all, but a successful shopping center owner or a retired marina operator on the Gulf of Mexico.
The advantages of this deferral of taxes are substantial in an inflationary economy. Take, for instance, the situation of a small-scale land owner, whose 30 acres of marginal corn and wheat in northern Maryland has quintupled in value in the 15 years since he bought it.
He paid $600 an acre for it in cash originally, and now it's worth a minimum of $3,000 an acre. If he sells it outright, he'll make a dandy profit of $2,400 an acre, or $72,000. But he'll also get hit with a substantial capital gains tax that could take away $14,400 of his profits.
Rather than losing anything to the Treasury, the owner can barter his land for property of equivalent equity value. He may, for example, seek out the owner of an income-producing, depreciable piece of urban commercial property - a small office building or a well-located apartment building. This will provide him added benefits via a tax shelter on the new property that he never enjoyed with his farmland.
The owner of the second property may be interested in something relatively carefree and potentially profitable like land, and he will to make a direct, tax-deferred swap. Or, more likely, he may be willing to sell his property to a third party who will make a cashless swap with the owner of the 30 acres.
Author and antiques expert Constance Stapleton is one owner in this area who believes in making good use of the tax code provision. She owns a 14-room brick manor house, circa 1790, on South Mountain outside Frederick, Md. She is a barterer and exchanger of goods and services of many years standing, and wrote a book (with Phyllis Richman) called Barter, published by Scribner's in 1976.
Stapleton's property includes 20 acres of leased farmland, two income-producing apartment structures, and seven acres around the house. The manor house has commerical zoning - because of its former use as a nursing home - and a local historic designation for its role as the head-quarters of Gen. McLellan during the Civil War battle of South Mountain.
Stapleton plans to exchange her entire property, or any of the integral pieces of it, for investment and residential property elsewhere in the area. The total package is going for close to $400,000. But the individual swaps, if any, will be smaller.
For example, she is looking at the possibility of bartering away her apartments and land, and retaining the historic manor house, or vice versa. Or she can sell the house, barter the apartments and continue to rent out the land.
"One of the great advantages of exchanging, once you understand the technique, is the flexibility you can obtain in getting the maximum benefit from your property," she said. "Selling and buying is only one way to go; trading is often the most sensible approach in an economy like today's." CAPTION: Picture, Constance Stapleton hopes to exchange this manor house hear Frederick, Md.