2 Alternatives to a 1031 Exchange

2 alternatives to a 1031 exchange

In certain situations, you may not be able to do a 1031 exchange (for example, when selling a partnership interest). Thankfully, there are some alternatives to 1031 exchanges that are available when you can’t do a 1031.

Outright Installment Sale

One possibility is to do an outright installment sale. You could sell your property on a contract for deed and take your money over time. But the risk of doing an installment sale or contract for deed (also sometimes called an executory contract or installment land sales contracts) is that your buyer might flake out and you may have to cancel the contract and take back your property. In which case you’re going to get the property back in rough shape and go through the process of refurbishing and reselling.

Another risk is that if better financing becomes available your purchaser might hit you with a tsunami of money if they can refinance at a lower rate and you might end up getting all that tax in one year anyway.

Deferred Sales Trust

Another option that doesn't carry these risks is a deferred sales trust. That’s where you take the asset that you want to sell and you convey it to a trustee of an institutional trust company. In return you get an installment note that’s tailored to transfer the proceeds to you over time and in a fashion that’s most tax efficient. Let’s say that you’re a doctor and you’re still going to be working for the next three years. Your installment note might provide that you’re not to receive any payments for the next three years and then for the last 7 years of the 10 year note, you’re to receive payment. You want to tailor the note to meet your financial needs.

The biggest benefit is that rather than having you be the seller, the trustee becomes the seller of the property. They sell the property to a 3rd party for cash and all of that cash that would have gone to you and hit your tax return like a tsunami in one year instead goes into the trust which invests that money (maybe in stocks and bonds, maybe annuities). But that money pre-tax is compounding inside of the trust and is then available to payout to the taxpayer over a period of time. If the money that’s inside of the trust is in an annuity that pays out incrementally, you’ve got a sure thing. You know your money will be coming in like clockwork.

  • 1031 Hotline: If you have questions about alternatives to 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

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