1031 Exchanges Involving Seller-Backed Financing

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.

Defer the tax. Maximize your gain.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

How to Mix 1250 & 1245 Property in a 1031 Exchange

In a real estate transaction you may have 1250 property (the traditional real estate and buildings), and then you may have other components that are personal property that are characterized as 1245 property for depreciation.

1250 & 1245 Property

What’s the impact of having a mixed bag of 1250 and 1245 components in a like-kind exchange? The answer is that in order to maximize the benefit of your 1031 exchange you’re going to want to receive replacement property that has both 1245 and 1250 components so that we can match up the proceeds from the sale of your 1245 with new 1245 property, and the proceeds from the old 1250 property to new 1250 property.

Getting the Maximum Benefit

In order to get the maximum benefit you really need to know what your depreciation has been on the prior relinquished property and then target replacement properties that meet your needs to maximize the tax deferral.

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

Defer the tax. Maximize your gain.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

The Importance of Maintaining Section 1031 of the IRC

In this article, we are going to talk a little bit about the history of the 1031 exchange and why it’s important to preserve this important part of the internal revenue code.

Section 1031 Has Been Around for Nearly 100 Years

Getting back to the idea that simplification requires the elimination of 1031, it’s important to note that section 1031 and its predecessors have been in the tax code since 1921. It’s almost a hundred years old. There’s a reason that it survived as long as it has in the code because it fulfills an important function.

It says that as long as you have a continuation of investment into another like-kind property, the government is not going to punish you by making you recognize gains because you’re continuing your investment into another like-kind property. We want investors to be able to move their cash to where it’s needed in the economy because it benefits them, but more importantly it benefits the whole economy by creating jobs and increasing property values.

Preserving The 1031 Exchange

If we eliminate 1031 exchanges, deals will stop happening. That will cause property values to decrease. When property values decrease, then you can’t even refinance out your equity and you’re locked into the property and unable to sell. Eliminating 1031 is not a good idea. We need to preserve 1031 even through the most comprehensive of tax reforms because it is a vital key to keeping property values up, stimulating the economy, and creating jobs.

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

Defer the tax. Maximize your gain.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Rental Pool Property Rules

Here’s a common 1031 exchange question we get from time to time – how much personal use can you take on a replacement property put into a rental pool? In other words, if a taxpayer sells a Minnesota rental property in Minnesota and buys a rental condo in Florida, how much can they live in that Florida “investment” property without violating tax laws?

Rental Pool Property Rules

If the taxpayer puts the Florida property in a rental pool, they can have some limited mixed personal use: up to 14 days a year, or up to 10% of the time it is actually rented in a year. The IRS can test each of the two separate years after the exchange under the safe harbor.

Contact a Qualified Intermediary

It’s always a good idea to contact a skilled qualified intermediary if you have questions about any details surrounding your 1031 exchange. Contact the intermediaries at CPEC1031, LLC today to discuss your exchange!

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

Defer the tax. Maximize your gain.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

2 Tips for 1031 Exchanging a Home with Reduced Debt

When you sell a home that had the debt reduced due to a loan forgiveness program such as the Mortgage Forgiveness Debt Relief Act of 2007, you may have a lower basis in your property (than what you paid for it). In this situation, there are some additional precautions that you have to take in order to ensure the success of your 1031 exchange.

IRS Regulations

IRC Section 121 gives a $250K exclusion of income ($500K for married couples filing jointly) on the sale of a principal residence. This may cover all of your gains, but you need to check with your own CPA or tax accountant to be sure.

IRC Section 108 {Part H} is an exclusion of income from “discharge of indebtedness”. The debt forgiveness could have triggered an offsetting reduction in you basis. Gain is determined by subtracting your current basis from your net-sale price (after subtracting selling expenses like commissions and title/closing fees and recording charges). The amount of debt relief that is excluded generally reduces the owner’s cost basis in the property.

Work with Your CPA

As always, you need to work with your own CPA or tax accountant to see what your current basis is (after any subtraction for the debt relief) to see if you GAIN or profit for tax purposes is more than the exclusion amount under 121.

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

Defer the tax. Maximize your gain.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Defer the tax. MAXIMIZE your gain.

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