In a 1031 exchange, you generally want to move all of your equity into the new replacement property, which means you don’t want to inappropriately siphon proceeds out of the sale of the relinquished property. Sometimes a situation arises where you owe money from the relinquished property but it’s not evidenced by a mortgage or deed of trust. There may be an informal loan tied to the property but there isn’t any lien in the real estate record or perhaps any contractual nexus between the loan and the sale of the property. Many investors want to pay off those loans when they sell the relinquished property but the problem is how to connect the debt to the closing statement. One way to accomplish that is to do an amended and restated note between the lender and the borrower that specifically says if the property is ever sold the debt has to be discharged or satisfied. Another way to create a contractual nexus is to add an addendum to the purchase agreement between the buyer and seller that says the seller has an obligation to the lender and as a material and substantial condition of the sale contract, the seller will be obligated to satisfy and release that obligation as part of the closing. So there are ways to create a contractual nexus between the unsecured debt that is more mentally tied to the property than it is legally tied to the property. That is a way to potentially use those sales proceeds to discharge that loan obligation as part of the sales transaction. This is complicated stuff. This is where you want to bring in your accountant and perhaps even a tax attorney to help you solidify the contractual nexus between the sale of the property and the discharge of this loan.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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