Some taxpayers considering a 1031 exchange wonder whether or not they can buy replacement property on a contract for deed. That's our topic for this article.
Factors to Examine
The quick answer is yes. If the contract for deed gives you equitable title such that you've received enough of the benefits and burdens of ownership that for federal tax purposes you’re deemed the owner of the property.
Some factors to look at are:
- Did the vendee receive exclusive possession of the property?
- Does the vendee bear the risk of loss if the property is destroyed?
- Does the vendee have the obligation to pay the property taxes and insurance?
The more these benefits and burdens rest on the vendee’s shoulders the more likely the IRS will concur that you are the owner of the property.
Push & Pull
If you’re doing a 1031 exchange bear in mind that you need to reinvest all of your equity, all of your net proceeds from the sale of your relinquished property into your replacement property.
That may mean that your downstroke or down payment on your contract for deed may be more substantial than the vendor wants to take. This is because the vendor is often entering into the contract for deed with the idea that they're wanting to delay the receipt of proceeds and take that money in small increments over a long period to take it in more efficiently.
So there is a little bit of push and pull between you and the seller as to how much down payment the seller is willing to accept in a contract for deed.
- 1031 Hotline: If you have questions about contract for deeds in a 1031 exchange, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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