Tag: 1031 Exchange Qualified Intermediary

Seller Financing in the Context of a 1031 Exchange
It is not unusual for a taxpayer to finance the buyer in whole or in part.  Such transactions may or may not involve the seller’s intent to complete a 1031 exchange.  The structure of the seller’s financing can take the form of a note and mortgage/deed of trust from the buyer or under Articles of Agreement for Deed.  The specific form should not impact the seller’s options in structuring an exchange as part of the transaction. 
Under an installment sale using a note and mortgage/deed of trust, the question frequently arises whether a taxpayer can structure an exchange when the balloon payment becomes due, rather than at the time the parties enter into the installment sale.  Similar questions are raised with Articles of Agreement for Deed – can the exchange be done at the time of the balloon payment when the buyer is receiving the deed? It cannot, since, for tax and legal purposes, the point of transfer of ownership occurs when the parties enter into the note and mortgage or an Articles of Agreement for Deed rather than when the balloon payment is made or when the deed is issued.
Taxpayer Receiving Cash and a Note
It’s very common for the taxpayer/seller to receive money down from the buyer and to carry a note for the additional sum due.  At times, this arrangement is entered into because the parties wish to close, but the buyer’s conventional financing is taking more time than expected.  In this instance, the note should be made payable to the qualified intermediary (the exchange company).  To the extent that the buyer can procure the financing from the institutional lender before the taxpayer closes on the replacement property, the note may simply be substituted for cash from the buyer’s loan. 
It is more likely that the taxpayer’s 180 day exchange period will fall prior to the receipt of funds into the exchange account.  In this case, a solution is for the seller to “buy” his own note from his exchange account with fresh cash.  Essentially, the taxpayer advances personal funds into the replacement property while not receiving the equivalent amount of cash from the buyer at that time. These funds can be cash that the taxpayer already has available, or it can be from a loan that the taxpayer takes out to buy the note.  The benefit to the note buyout is that the future principal payments received by the taxpayer over time will be fully tax deferred. 
In the example above, care should be taken as to when the note (or installment agreement) should be turned over to the taxpayer. There is a natural tendency to pass the cash and note simultaneously. After all, the client is putting into the exchange account the exact same value that he is taking out.  However, because the regulations prohibit the taxpayer from the “right to receive money or other property pursuant to the security or guaranty arrangement,” it is probably better to receive the cash into the account sometime prior to the purchase of the replacement property, while assigning the note to the seller after all the replacement property has been acquired.  Some qualified intermediaries will have a form that they will sign acknowledging the substitution of cash for the note with a promise to distribute the note upon the closing of the exchange account.
Conclusion
There are various scenarios in which an installment sale can impact tax deferral.  In some cases deferral can be attained by the taxpayer’s substitution of cash into an exchange account for an installment note or a sale under articles of agreement for deed. In our next post, we examine more complex instances involving installment sales and 1031 exchanges.

These TIC purchases often require commercial bank lending. For a 100% tax deferred exchange, the exchanger needs to make sure that all of the net proceeds from the sale of their old property are utilized for the TIC purchase. Additionally, any mortgage debt paid off from the sale of their old property must be replaced. Many of the commercial lenders for these TIC purchases require the bank lending be made to a Delaware LLC entity. This creates the requirement for the 1031 exchanger to have a single member LLC for each party of the exchange.
 

Check out the following lending issues prior to your 1031 exchange transaction:
1. Clean up the old property title by transferring it to your individual name. Mortgage portfolio lenders will not lend to living trusts, revocable trusts, partnerships, or limited liability companies. Remember that the IRS considers a single owner trust, a single member limited liability company or a husband and wife owned partnership as a disregarded entity. This means that you can transfer ownership back and forth with no federal tax effects and still obtain the mortgage lending. Be sure to check that you do not trigger a “due on sale clause” in your mortgage note when transferring such ownership back and forth.
2. Mortgage lenders understand the purpose of a 1031 exchange – investment property purchase. Do not try to obtain 2nd home mortgage financing for a 1031 replacement property. The underwriters will not fund a loan if you misrepresent the use of the property.
3. If proceeds from a mortgage loan cause an exchanger to receive cash at closing of the replacement property, the exchanger will incur a tax liability. Instead request to have your earnest money refunded or apply the excess as a principal reduction payment on the settlement statement to avoid capital gains tax.
4. When participating in a reverse exchange do not utilize a residential mortgage lender who sells their loans to other investors. Only commercial banks will lend to a Limited Liability Company (LLC) which acts as the parking entity for a qualified intermediary.
7. Be careful when you refinance to take money out of your old investment property. An exchanger should not obtain cash out refinance on their old property immediately before their 1031 exchange transaction. The IRS will not allow the

These TIC purchases often require commercial bank lending. For a 100% tax deferred exchange, the exchanger needs to make sure that all of the net proceeds from the sale of their old property are utilized for the TIC purchase. Additionally, any mortgage debt paid off from the sale of their old property must be replaced. Many of the commercial lenders for these TIC purchases require the bank lending be made to a Delaware LLC entity. This creates the requirement for the 1031 exchanger to have a single member LLC for each party of the exchange.
 

Check out the following lending issues prior to your 1031 exchange transaction:
1. Clean up the old property title by transferring it to your individual name. Mortgage portfolio lenders will not lend to living trusts, revocable trusts, partnerships, or limited liability companies. Remember that the IRS considers a single owner trust, a single member limited liability company or a husband and wife owned partnership as a disregarded entity. This means that you can transfer ownership back and forth with no federal tax effects and still obtain the mortgage lending. Be sure to check that you do not trigger a “due on sale clause” in your mortgage note when transferring such ownership back and forth.
2. Mortgage lenders understand the purpose of a 1031 exchange – investment property purchase. Do not try to obtain 2nd home mortgage financing for a 1031 replacement property. The underwriters will not fund a loan if you misrepresent the use of the property.
3. If proceeds from a mortgage loan cause an exchanger to receive cash at closing of the replacement property, the exchanger will incur a tax liability. Instead request to have your earnest money refunded or apply the excess as a principal reduction payment on the settlement statement to avoid capital gains tax.
4. When participating in a reverse exchange do not utilize a residential mortgage lender who sells their loans to other investors. Only commercial banks will lend to a Limited Liability Company (LLC) which acts as the parking entity for a qualified intermediary.
7. Be careful when you refinance to take money out of your old investment property. An exchanger should not obtain cash out refinance on their old property immediately before their 1031 exchange transaction. The IRS will not allow the

These TIC purchases often require commercial bank lending. For a 100% tax deferred exchange, the exchanger needs to make sure that all of the net proceeds from the sale of their old property are utilized for the TIC purchase. Additionally, any mortgage debt paid off from the sale of their old property must be replaced. Many of the commercial lenders for these TIC purchases require the bank lending be made to a Delaware LLC entity. This creates the requirement for the 1031 exchanger to have a single member LLC for each party of the exchange.
 

Check out the following lending issues prior to your 1031 exchange transaction:
1. Clean up the old property title by transferring it to your individual name. Mortgage portfolio lenders will not lend to living trusts, revocable trusts, partnerships, or limited liability companies. Remember that the IRS considers a single owner trust, a single member limited liability company or a husband and wife owned partnership as a disregarded entity. This means that you can transfer ownership back and forth with no federal tax effects and still obtain the mortgage lending. Be sure to check that you do not trigger a “due on sale clause” in your mortgage note when transferring such ownership back and forth.
2. Mortgage lenders understand the purpose of a 1031 exchange – investment property purchase. Do not try to obtain 2nd home mortgage financing for a 1031 replacement property. The underwriters will not fund a loan if you misrepresent the use of the property.
3. If proceeds from a mortgage loan cause an exchanger to receive cash at closing of the replacement property, the exchanger will incur a tax liability. Instead request to have your earnest money refunded or apply the excess as a principal reduction payment on the settlement statement to avoid capital gains tax.
4. When participating in a reverse exchange do not utilize a residential mortgage lender who sells their loans to other investors. Only commercial banks will lend to a Limited Liability Company (LLC) which acts as the parking entity for a qualified intermediary.
7. Be careful when you refinance to take money out of your old investment property. An exchanger should not obtain cash out refinance on their old property immediately before their 1031 exchange transaction. The IRS will not allow the