How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Ray Your Own Question
Ray
Ray, Lawyer
Category: Real Estate Law
Satisfied Customers: 41646
Experience:  Texas Attorney for 30 years dealing in real estate
8534270
Type Your Real Estate Law Question Here...
Ray is online now
A new question is answered every 9 seconds

We have a closing scheduled TUESDAY July 19th. We are the

Customer Question

Hi We have a closing scheduled for this TUESDAY July 19th. We are the exchangor. The buyer now wants us to take back financing in order to make the deal work. We are willing to do this but we want to do a 1031 Exchange to defer all tax liability. The deal looks as follows:$800,000 Contract sales price
$200,000 Buyer's cash down payment
$382,500 Buyer obtaining bank 1st trust
$217,500 Buyer wants us to take back this 2nd trustThe adjusted basis in the relinquished property is approximately $359,000.QUESTION 1: Is there a creative way to accomplish this deal to satisfy all parties?QUESTION 2: Can the $217,500 2nd trust be lent to the buyer by a third party and then we buy the loan from that third party?Thank you
Submitted: 1 year ago.
Category: Real Estate Law
Expert:  Ray replied 1 year ago.

Hi and welcome to JA. Ray here to help you again.

QUESTION 1: Is there a creative way to accomplish this deal to satisfy all parties?Yes you would need to find a property to exchange here to account for the equity from the sale, $359,000 as you state.

QUESTION 2: Can the $217,500 2nd trust be lent to the buyer by a third party and then we buy the loan from that third party?You could buy the note here from the third party.

You will need a realtor that can help you do such a deal and closing.You would need to have another property if you want to do an exchange and avoid the tax bite.

Expert:  Ray replied 1 year ago.
Expert:  Ray replied 1 year ago.

1031 Exchanges now enable one to sell their property to someone totally unrelated to the person from whom they are purchasing their replacement property. Although there are guidelines to follow, the only difference between a 1031 Exchange and a typical sale and purchase transaction is the deferral of federal capital gains.

BASIC REQUIREMENTS OF EXCHANGES

  1. BOTH PROPERTIES MUST BE “LIKE-KIND”.
    • Like-kind simply means real property.
    • Like-kind refers to the nature or character, not its grade or quality.
    • Like-kind is a very broad and liberal category where just about any type of investment or business use property would qualify.
    • Properties can be located anywhere within the United States with exchanges taking place in one or more states.
    • Examples of like-kind: rental properties (single family homes, duplexs, triplexes, apartment buildings and complexes, etc.), raw land, office buildings, shopping centers, businesses, marinas, golf courses, a lease of at least 30 years including options, parking lots, farms, factories, trailer parks, storage facilities, retail stores, interest in a co-tenancy.
    • Examples of non like-kind: stocks, bonds, notes, interest in a partnership, personal property, certificates of trust, choses in action.
    • Investors can “mix and match” their properties. For example, an investor can sell a duplex and acquire raw land or sell a parking garage and acquire a multi-unit apartment building and a warehouse.
  2. BOTH PROPERTIES MUST BE HELD FOR INVESTMENT OR BUSINESS USE.
    • Your use of both the relinquished property and replacement property must be investment or business use; each for a minimum of one to two years.
    • Properties must not be used for personal use for more than 14 days per year or 10% of the actual number of days the property has been rented in a given year.
    • Replacement property cannot be purchased with the intent to sell immediately.
  3. EXCHANGER MUST USE A QUALIFIED INTERMEDIARY OR FACILITATOR.
    • One of the safe harbors of the regulations is the use of a qualified Intermediary to facilitate the Exchange.
    • The sale of the relinquished property and the acquisition of the replacement property must “flow” through the Intermediary. This is done through direct deeding to avoid duplicate transfer taxes.
    • The qualified Intermediary may not be the taxpayer or an agent of the taxpayer (realtor, attorney, tax advisor, banker, accountant, employee, etc.) or lineal descendant of the Exchanger.
  4. EXCHANGER MUST USE A QUALIFIED ESCROW AGENT AND HAVE NO ACTUAL OR CONSTRUCTIVE RIGHTS TO THE SALE PROCEEDS OF THE RELINQUISHED PROPERTY.
    • The Qualified Escrow Agent may not be the taxpayer or an agent of the taxpayer (Realtor, attorney, tax advisor, banker, accountant, employee, etc.) or a lineal descendant of the Exchanger.
    • The Exchanger must not have access to the sale proceeds of the relinquished property.
    • The Exchanger is entitled to all earnings on the escrow funds. These taxable funds must also be restricted in the same manner as the principle.
    • The Exchanger choses the Escrow Agent.
    • The Exchanger is entitled to obtain security for his funds.
  5. THE PROPER DOCUMENTATION MUST BE USED IN ORDER TO COMPLY WITH 1031 REGULATIONS.
  6. EXCHANGER MUST ADHERE TO TIME LIMITATIONS.
    • The 45-Day Identification Period* begins at the closing of the relinquished property and requires the identification of like-kind replacement property.
    • During this 45-Day Identification Period, you may revoke an identification and make a new one.
    • If a like-kind replacement property has not been properly identified to the Intermediary by midnight of the 45th day, the exchange will not work and the taxpayer will be unable to defer capital gains.
    • The 180-Day Exchange Period* runs concurrently with the 45-Day Identification Period and requires the acquisition of at least one of the identified replacement properties.
    • If the settlement of the relinquished property occurs between October 16 and December 31 of the current year, the 180-day Exchange Period for an individual will be shortened to the income tax deadline of April 15 of the next calendar year unless a timely and proper IRS extension is filed for their return. For a corporation, this filing date is March 15 of the next calendar year unless an IRS extension is filed.
  7. The specialist can help you pull this off I hope you will consider them to structure the exchange.

Related Real Estate Law Questions