CHICAGO Oct 5 Ed Zwirner and his wife, Alison Loeppert, recently bought an historic house in the Chicago suburbs without brokers' fees, tight moving deadlines, undetected defects or other stresses that accompany one of life's biggest purchases. At the same time, Loeppert's parents made a similar move.
The secret? The two couples exchanged homes: the teachers and their two young sons gained more square footage and a big yard on a residential street. The empty-nesters traded unneeded extra space for the easy maintenance of condominium living within short walking distance of an attractive downtown and lakefront.
"It was the perfect solution for them and us," said Loeppert's mother, Alice Loeppert. "Our intention was always to have that house available to our own children."
According to the National Association of Realtors, there are no firm numbers on how many homeowners are swapping homes with older or younger relatives, but experts say it's a trend that could take off as the baby boomer generation moves progressively into smaller homes as they retire.
"It's (age) 65-plus where you really see downsizing occur," said Walter Molony, an NAR spokesman, citing statistics from a 2011 study. One of four sellers, he said, is seeking a smaller property.
A swap can benefit both parties, saving hefty realtors' commissions and other fees, and assuring both sides the comfort of familiar turf. Still, it could quickly become a minefield without careful financial planning and consideration of the impact on other family members.
Realizing they needed more space but dreading wasted weekends at open houses, Zwirner and Loeppert last fall proposed buying the roomy stucco bungalow that Loeppert's parents had lived in for more than 20 years. In many ways, it was the ideal solution and holds promise for other families looking to make a similar move. Here's how they did it.
In one day, they sold their vintage, three-bedroom, two-bath condo for $300,000 and purchased the house for $419,000. The deal hinged on two individual sales, with the younger couple financing the difference with a mortgage. That allowed Loeppert's father, who was entering retirement, to take as much money away from the transaction as possible.
"(The condo) had lost so much money that it was in the price range of condos my in-laws were looking for," Zwirner said. "They were able to cash out of the house the way they needed. And the loss for us was cushioned on the way out."
Though they avoided brokers' fees, they still paid for appraisals and attorneys' costs at closing. And Zwirner conceded there was more paperwork than he and his wife had ever imagined.
The Internal Revenue Service tends to scrutinize inter-family real estate transactions extra closely because of the potential for fraud, making it essential to carefully document everything and get fair market appraisals of each property prior to the sale, said Michael Eisenberg, a Los Angeles-based certified public accountant and personal financial specialist. That's especially important if either side plans to offer the other a break on price, a common occurrence in these types of deals.
"Verify that if you are going to sell at a slight discount that the discount is reasonable in the eyes of the IRS," he said. "Make sure you deal with your professionals - your CPA, your financial adviser, your attorney."
Under federal law, each party will still be able to take profit tax free from the sale of their primary residence up to $250,000 for an individual and $500,000 for a married couple, said Barbara Weltman, a Millwood, New York-based tax attorney.
"It doesn't seem there is any downside," she said.
But she stipulated that tax considerations vary widely from state to state and recommended that interested families confer with local tax experts to plot the best course of action.
Even so, adjustments to these arrangements aren't always easy. Besides the financial changes that come with a different size home, such as landscaping costs for upsizing families and condo fees for some who trade down, these transactions can have long-lasting emotional ramifications, said Eisenberg.
For instance, how will each side handle seeing their décor abandoned to suit different tastes? Will other siblings harbor jealousy over the sale of the family home to a brother or sister?
"This assumes you get along with the people you're swapping with," said Bryan Gillette, a human resources consultant in Pleasanton, California, who did a home exchange deal with his parents in 2008.
He and his wife traded their 1,700 square-foot house for a much larger one his father had custom built with the help of Gillette's older brother.
They bypassed selling the properties, instead opting for a method known as parent-to-child transfer. Despite the name, the transfer applies as a child-to-parent transfer as well.
The younger couple paid the difference on the value of the larger home, roughly $250,000, with cash and a mortgage. Because of California tax provisions, this route allowed them to maintain a low tax base on the properties. Homeowners in other states wishing to use a parent-to-child transfer should check with their tax advisers on whether their state allows the deal, and possible tax consequences.
"There were no regrets at all," said Gillette, adding that early access to the bigger house allowed his family to move in stages as well as begin painting and making other modifications.
For Alison Loeppert, the emotional benefits of such a transaction are priceless. She regularly views a makeshift chart on the molding in the dining room of her former condo. That's where she and her husband marked their sons' progress in height.
"I don't think my parents would ever paint over this," she said.