Dealing with seller-back financing involving a promissory note in a 1031 exchange can be tricky. One potential solution is to have the taxpayer/seller instruct the buyer to make the promissory note in favor of the qualified intermediary. This allows the qualified intermediary to receive all of the proceeds (including the seller-back note). Before the closing of the Replacement Property, the taxpayer can arrange for a third party to purchase the note from the qualified intermediary for the note’s face value so that the qualified intermediary has sufficient cash in the exchange account to pay over to the seller of the Replacement Property and transfer all of the taxpayer’s equity into the Replacement Property.
It should be noted that this strategy will not work the same way with a contract for deed, executory land contract, or installment land contract because if the taxpayer/seller is listed in the contract as the vendor, then the seller may be deemed to be in privity of contract with the buyer and to have actually received non-cash proceeds (boot) from the buyer by virtue of the rights and benefits accorded the vendor under the contract. It may be necessary in the case of a land contract to have the taxpayer/seller deed the Relinquished Property to the qualified intermediary (or a wholly owned special purpose entity of the QI) so that the seller is fully insulated from receiving any proceeds and the qualified intermediary is formally listed as the vendor under the land contract.
Post relinquished property closing, the qualified intermediary may sell off the vendor’s interest to get all cash into the exchange account, that way the qualified intermediary can contribute the cash exchange funds for the purchase of the new replacement property.
How a Qualified Intermediary Can Facilitate Your 1031 Exchange
Learn more about how a qualified intermediary can facilitate your 1031 exchange of investment real estate by contacting CPEC1031, LLC. Our team has over two decades of experience helping taxpayers of large and small defer capital gains taxes on the sale of qualifying real estate. A 1031 exchange can help you save a lot of money in deferred taxes when selling real property. Let us handle the details of your like-kind exchange and ensure you defer 100% of your gain. Reach out to set up a time to chat at our downtown Minneapolis offices today!
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
© 2024 Copyright Jeffrey R. Peterson All Rights Reserved