Can I Purchase my 1031 Exchange Replacement Property on a Contract for Deed?

1031 replacement property contract

 

A lot of people wonder: "Can I purchase my replacement property on a Contract for Deed?" As financing gets more and more challenging, seller arranged financing looks more appealing. So, if we can find a seller that will convey their property to us on a Contract for Deed, will that property work as a 1031 replacement property?

How Can This Work for a 1031 Exchange if I do not have Full Legal Title?

This question might be lingering in the back of your mind. What happens when you are the vendee, but the vendor still holds legal title? Considering the fact that, as a purchaser under a Contract for Deed, you don’t receive the actual deed until you are done making all payments, does this qualify as a 1031 Exchange?

The Question: Who is the Owner for Federal Tax Purposes?

The answer is probably because a Contract for Deed vendee receives the benefits and burdens of ownership. And, you want to make sure that your Contract for Deed is drafted so that it gives you the benefits and burdens of ownership:

  1. you bear the risk of loss of the property if destroyed;
  2. you bear the obligation to pay the property taxes;
  3. you have exclusive right of possession of the property.

All of these factors really weigh on the side of you being the equitable owner of the property and the equivalent of the owner of a fee interest in real estate for federal tax purposes.

Put the Exchange Funds Down as the Down-Stoke If You are the Owner

So, you can purchase your replacement property on a Contract for Deed. In theory, you would take all of your 1031 exchange funds (all of your net proceeds from your relinquished property) and plunk that down as your down-payment. Once your 1031 exchange is complete, you will continue making incremental installment payments going forward until the Contract for Deed is satisfied, at which time you would receive the deed for the property. However, in the interim, you are the equitable owner of the property, and that should be sufficient to complete your 1031 Exchange.

  • 1031 Hotline: If you have questions about contract for deed issues relating to 1031 exchanges in Minneapolis, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

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