Recently, a client came to us with a unique 1031 exchange question. The client signed a contract for deed 6 years ago that was scheduled to last 20 years. Their borrower is electing to pay off early and the client is interested in a 1031 exchange. Does the clock for identification and closing start when the contract for deed was signed or when possession changes hands when the note is paid off?
Typically, the clock starts running when the contract for deed was signed.
For federal tax purposes, the vendee on the contract for deed generally is the owner, and the vendor is merely holding bare legal title as an enforcement mechanism to compel payments and full performance of the vendee. Contracts can differ depending on terms – but this is generally the case.
The vendee has exclusive possession and use of the property, bears the risk of loss for destruction, pays the real estate property taxes, takes the deprecation and tax deductions related to business expenses of the property = Vendee is the Owner.
Vendor is really a creditor now holding a security interest (his legal title under the CD is an enforceable claim or lien which gives the vendor the potential right to cancel the CD and repossess all or part of a property as collateral for the instalment loan) which will not qualify for 1031.
Under the pre-2017 version of 1031 exchanges, it more explicitly excluded “notes, other securities or evidence of indebtedness” from 1031.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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