Whether it's for tax purposes or a way to plan for the future, Realtors are helping clients find creative ways to purchase property through "like kind" exchanges that allow the deferment of federal income taxes and some state taxes on the transaction.

The properties involved in the transaction must be similar or "like kind" properties held as an investment or used in a trade or business. The transaction involves an independent party or qualified intermediary, sometimes referred to as accommodators or exchange facilitators. The qualified intermediary is often referred to as a "safe harbor" since it holds the sales proceeds from the original property until needed to purchase the replacement property.

While Realtor Stefan Walker of Alain Pinel Realtors in Los Gatos is often hired to help with exchanges by investors looking to "buy up," he also helps homeowners who have owned their properties for many years.

"We're often working for homeowners who have so much built-up gain that they opt to buy investment property with a portion of their proceeds when they downsize to avoid paying prohibitive capital gains taxes," said Walker, who finds no two exchanges are ever alike.

A recent example involved a couple with a new baby who purchased a Victorian in Santa Clara seven years ago, but were unexpectedly transferred overseas, forcing them to rent the property.

"They know they will be coming back to the area sometime in the next few years. However, the family of three has now turned into a family of five, so they decided to sell the Santa Clara property and buy a larger rental property in a better school district, all while they live and work in Europe," Walker said.

With Walker's help, the couple found a more suitable house for their family in Saratoga and will rent it out until they move back to the area in the next few years. The transaction was handled primarily through email and fax, with Walker coordinating all aspects of the deal.

"Most important was the setting of the strategy, the positioning of the Santa Clara property, timing for everything to meet the statutory deadlines of the exchange and positioning of my clients as buyers to ensure that we beat out the competition on the Saratoga house without overpaying," said Walker, who described the successful transaction as very long and complicated.

Realtor Dennis Byron of Byron & Associates in Los Gatos can attest to the fact that exchanges can be complex, but he also thinks they are a creative way to dispose of property while deferring taxes. Byron, who has taught classes on investment and exchanges for the California Association of Realtors, handled one exchange that involved 19 brokers and 149 properties with 63 separate transactions.

"The exchange market today has been simplified to the point that it is a simple tool for the average person to use to defer their taxes. I must emphasize 'defer.' Some people think they will eliminate their taxes and this is not true. The IRS will always get theirs. The exchange is a tool to transfer your tax base to a new property and avoid paying the tax now," Byron said.

For active investors the exchange is a means to acquire property such as shopping centers or office buildings. For the average homeowner the exchange can be a creative way to plan for retirement.

"Let's say you want to trade your house in Oakland for a house in Saratoga that you want to move into when you retire. You could exchange these properties tax deferred and then move in after you have made the exchange and convert it to a personal residence," Byron said. "It's not as difficult as you may imagine. See your real estate professional, consult your tax adviser and contact an exchange facilitator to work it out for you."

Mortgage planner Judy Hamilton of Bankers Network also views the exchange process as a retirement tool. She has a lot of experience with 1031 exchanges, both with her clients and on a personal note.

"Due to what is happening with the lack of security in the job market and the constant changes towards benefits, less than 25 percent of our population can afford to retire at the age of 62. I have found that by using your equity in a responsible manner you can still achieve your financial goals," Hamilton said.

When she sits down with clients to talk about the best loan program for them, Hamilton asks a series of questions about their financial status. When she discovers they have a great deal of equity in their home, she suggests they think about buying investment property.

"This way they have two separate assets that would help pay off or turn into income down the road. I have educated my clients and helped direct them to both responsible 1031 exchange companies and real estate agents in other states to help make the bottom line of cost versus rent make sense," Hamilton said.