This article discusses a specific 1031 exchange situation we recently dealt with involving seller-backed financing. Our client came to us with the following question:
Can a 1031 exchangor complete their like-kind exchange by purchasing property with seller-backed financing on a land-contract, or contract for deed?
The short answer is yes. Generally speaking, in a 1031 exchange a taxpayer can purchase property on a land contract or contract for deed as the vendee.
Exchange Funds
Typically, all of the exchange funds are used to pay the down payment, and the remainder of the purchase price is financed by the seller.
For tax purposes, the vendee is deemed to be the equitable owner of the replacement property; and the seller is treated as a creditor holding bear legal title as an enforcement mechanism to ensure payment of the debt.
The Devil is in the Details
Contracts can be written in many different ways, and the devil is in the details…so before proceeding with a 1031 exchange in this situation, you will need to answer the following questions:
Does the vendee have exclusive possession of the property?
Is the vendee responsible for the property taxes and insurance?
Does the vendee bear the risk of loss in the event the property is damaged or destroyed?
Is the vendee effectively the owner of the property for all practical purposes except for financing?
These are all essential questions you’ll need to answer with the help of your qualified intermediary in order to ensure a successful 1031 exchange.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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