Issues to Be Aware of with 1031 Exchanges & Seller Financing

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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

Front Leg Reverse 1031 Exchange Options - Switching It Up

Sometimes in a 1031 exchange, it is not advantageous to park your new replacement property. Here are a few potential reasons.

How Do We Structure the Deal So You Can Get Into the New Property as Soon as Possible?

To get you into your new property as soon as possible, we structure the transaction as a front leg reverse exchange (this is also sometimes called an exchange first reverse exchange). That means, we have the exchange accommodation titleholder (the LLC) take title to your old relinquished property. That gets the property out of your name and frees you up. Now you are no longer tied to that (old) property and this allows you to immediately acquire the new replacement property.

After that, you still need to find a (real) buyer for the old relinquished property. The 1031 intermediary holding title through this LLC can only hold on to the property for 180 days (per Rev. Proc. 2000-37).

Rush to Sell Your old 1031 Exchange Property within 180 Days

You will need to market the relinquished property and hopefully a third party purchaser will acquire the property from the intermediary. The Intermediary doesn’t have any money of its own, so it would have borrowed that money from you or from a bank with your guarantee. So, it behooves you to get the intermediary out of title and get the new purchaser in so you or your lender can get paid off and you can be free of the guarantee.

Reverse Exchange Advantages

In a tight market you can’t wait around. You need to seize opportunities when they arise. A reverse exchange is another tool to get the deal done tax deferred. It allows you to purchase a property by having your exchange accommodation titleholder acquire either the new property or alternatively, take title to your old relinquished property, thus freeing you up to immediately acquire this new replacement property. Reverse exchanges are excellent and powerful tools, but they are sophisticated creatures. You need to have your CPA, your tax attorney and all your other advisors on board to get these deals done correctly.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved