If you're doing a 1031 exchange, you want to be able to take all of your equity (or net proceeds) in the relinquished property and reinvest those proceeds into the replacement property.
If your buyer of the relinquished property asks you to finance a portion of their purchase, you may want to do that just to get the deal done. But if you're taking a portion of your proceeds from the sale and loaning it back to the buyer, that's going to hamper your ability to move all of your equity and redeploy into the replacement property.
An Easy Workaround
One easy workaround is to loan the money to the buyer out of your own pocket rather than out of the proceeds of the sale.
The old expression is: “cash is king.” So if you've got the cash to loan to your buyer – great! That's a good workaround. If you don't have the cash and you want to maximize the tax efficiencies of your exchange, tell the buyer that you want cash on the barrelhead - that you don't want to be their banker, you just want to sell them the property.
If you can get the buyer to pay you cash and finance the property with a traditional loan or from other sources, so much the better. Keep your exchange simple and make it as easy for you to redeploy all of your equity into that bigger and better like-kind replacement property, and do so in in a way that allows you to compound and build your wealth without the drag of unnecessary recognition of taxes.
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.
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