Tips for Buying Replacement Property on a Contract for Deed

Some taxpayers considering a 1031 exchange wonder whether or not they can buy replacement property on a contract for deed. That's our topic for this article.

Factors to Examine

The quick answer is yes. If the contract for deed gives you equitable title such that you've received enough of the benefits and burdens of ownership that for federal tax purposes you’re deemed the owner of the property.

Some factors to look at are:

• Did the vendee receive exclusive possession of the property?

• Does the vendee bear the risk of loss if the property is destroyed?

• Does the vendee have the obligation to pay the property taxes and insurance?

The more these benefits and burdens rest on the vendee’s shoulders the more likely the IRS will concur that you are the owner of the property.

Push & Pull

If you’re doing a 1031 exchange bear in mind that you need to reinvest all of your equity, all of your net proceeds from the sale of your relinquished property into your replacement property.

That may mean that your downstroke or down payment on your contract for deed may be more substantial than the vendor wants to take. This is because the vendor is often entering into the contract for deed with the idea that they're wanting to delay the receipt of proceeds and take that money in small increments over a long period to take it in more efficiently.

So there is a little bit of push and pull between you and the seller as to how much down payment the seller is willing to accept in a contract for deed.

• Start Your Exchange: If you have questions about contract for deeds in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Direct Deeding in a 1031 Exchange

In this 1031 FAQ video, Jeff Peterson talks about direct deeding in a 1031 exchange. Watch more 1031 educational videos here.

• Start Your 1031 Exchange: If you have questions about direct deeding in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

What is Direct Deeding in a 1031 Exchange?

Many people are asking “what is direct deeding?” In the olden days before the 1991 regulations, when you did a 1031 exchange you would physically deed the property to your intermediary and then the intermediary would sell the relinquished property to a third-party buyer. So the intermediary came into the chain of title.

Then the intermediary would acquire the replacement property and deed it to you to complete your exchange. Again the intermediary would come into chain of title on the replacement property. Well those extra deeds that had to run through the intermediary created extra expenses, paperwork, and complications.

1991 Regulations

In the 1991 regulations it was adopted that the intermediary could merely be assigned the benefits or rights in the contract between you and the buyer of your relinquished property, and between you and the seller of the replacement property. So the intermediary, rather than taking a direct deed in the properties, would instead merely be assigned the rights in these purchase agreements or sales contracts with the other parties.

And by doing that we now allow the taxpayer to deed relinquished property directly to their buyer, and to receive the replacement property by deed directly from their seller. There's one caveat - the assignment of the purchase agreements under Old English common law and under the regulations adopted by the IRS; those assignments were not considered effective unless everyone to the original contract was given a written notice of that assignment.

Written Notice

So in order for the assignment to the intermediary to be considered valid we must give written notice to all of the other parties to the purchase agreements which generally means you want the buyer of the relinquished property to sign an acknowledgment that says "yes I received notice that the seller has assigned their interest in the purchase agreement to the intermediary." And the seller of the replacement properties says "yes I acknowledge I was given written notice of the assignment by the buyer to their qualified intermediary." These acknowledgements of notice don’t adversely affect the other parties in the least but they serve as substantiation to prove you gave the written notices that are required.

It’s a prudent practice to put a cooperation clause in your purchase and sale agreements requiring the other parties (including any assignees) to cooperate in providing these written acknowledgments at or prior to closing.  That way you will have the proof (in writing) that you complied with the regulations for direct deeding

• Start Your Exchange: If you have questions about direct deeding, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved