Skip to content

§1031 Exchanges Combined with Seller Carryback Notes

CEO leadership; §1031 EXCHANGES COMBINED WITH SELLER CARRYBACK NOTES

§1031 Exchanges Combined with Seller Carryback Notes

By Steve Chacon

Occasionally sellers are approached with the request they carry back an installment note to finance the purchase. Not a bad idea from a “big picture” perspective, as seller financing has been effective in environments where credit is a concern and interest rates are rising. But is it possible to include a carryback financing note in §1031 exchange installment sale, and how will it impact the process?

§1031 Exchanges Combined with Seller Carryback Notes

§1031 EXCHANGES COMBINED WITH SELLER CARRYBACK NOTES

While it is possible to include the seller carry back note in the exchange, careful consideration must be made.

Upon settlement of the relinquished property, both the cash proceeds and the promissory note must go into the exchange account. This is a two-step process; first, the cash portion is wired directly to the qualified intermediary’s bank to be placed in a separate account on behalf of the exchanger.

Second is the note.

While the terms will be negotiated between the exchanger and the buyer, the actual language will name the qualified intermediary as the “obligee/beneficiary” and the buyer as the “obligor”. All related security documents should be drafted in the same manner. Payments on the note should be delivered directly to the qualified intermediary and deposited with the rest of the sale proceeds in the exchange account. All three items — the initial cash proceeds, the promissory note, and the payments received — will remain with the qualified intermediary until the exchanger is ready to purchase a properly identified replacement property(ies).

Importantly, if after settlement, the promissory note incorrectly names the exchanger as the beneficiary, it cannot be corrected. The IRS will treat the note as taxable “boot” and look for installment sale treatment with recognition of depreciation recapture.

When the exchanger is ready to purchase properly identified replacement property(ies), the qualified intermediary wires the necessary amount from the exchange account to settlement.

Additionally, in an exchange that includes seller financing, the exchanger must take an active role before closing by doing one of the following:

Deliver funds equal to the payoff balance of the note to the qualified intermediary. The intermediary will then endorse the note and related security documents tot he exchanger. The initial proceeds and new note proceeds will then be wired as consideration to purchase the replacement property(ies). The IRS will require the note received be treated as taxable “boot received” by the exchanger, but the cash paid for the note may be used to offset that amount as “boot paid,” thereby eliminating any tax due.

1031 may require negotiation

Negotiate the sale of the note to a third party buyer and convert it into cash. The note then moves from the qualified intermediary to the third party buyer and the sale proceeds are delivered directly to the exchange account. The entire cash amount, both initial proceeds and note proceeds, will be wired as consideration to purchase the replacement property(ies).
Instruct the qualified intermediary to endorse the note and related security documents to the seller of the replacement property(ies). The exchanger will need to negotiate with the seller to include the note as consideration for the purchase of the replacement property(ies).

The decision to include seller financing in a §1031 exchange with installment note can be difficult. If you are considering seller financing, be sure to select an experienced qualified intermediary who understands the process and has been through it before. And always seek advice from your tax advisor and financial planner to ensure the transaction is complete smoothly, successfully and that it dovetails with your larger financial picture.

Steve Chacon is Chief Operating Office of Malbur Exchange Group and Associates, LLC (MEGA 1031) and can be reached at 866-881-1031.

We hope you found this article about “§1031 Exchanges Combined with Seller Carryback Notes” helpful.  If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page  or our website at www.GROCO.com.  Unfortunately, we no longer give advice to other tax professionals gratis.

To receive our free newsletter, contact us here.

Subscribe our YouTube Channel for more updates.

Alan Olsen, CPA

Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com.  GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.

Alan L. Olsen, CPA, Wikipedia Bio

 

 

GROCO.com is a proud sponsor of The American Dreams Show.

 

American-Dreams-Show-Accounting-firm-in-ca-cpa-tax-advisors-groco-alan-olsen

The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.

Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.

The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.

They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..

American Dreams discusses many topics from some of the world’s most successful individuals about their secrets to life’s success. Topics from guest have included:

Creating purpose in life / Building a foundation for their life / Solving problems / Finding fulfillment through philanthropy and service / Becoming self-reliant / Enhancing effective leadership / Balancing family and work…

Untitled_Artwork copy 4

MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness.  It’s mission statement:

In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.

Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.

Posted in

Hello? Is This Really the IRS, or Just a Scam?

No one enjoys getting a call from the IRS, but getting a call from someone who claims to be from the IRS, but who is really just a scammer, is even worse. However, according to the country’s top tax agency, that is exactly the kind of sophisticated and elaborate scam that has been going on…

United States and Singapore Buddy Up on Tax Evasion

For those who are still not convinced that the United States is serious about tracking down tax dodgers who are trying to hide money in offshore accounts, here’s one more piece of evidence that might change your mind. In a deal announced last week, the country of Singapore says it has come to terms with…

IRS Overpaid by $6 Billion in Child Tax Credits in 2013

Although no one will probably ever shed a tear to hear that the IRS paid taxpayers too much money, this latest report does nothing to breed confidence in how things are run in the nation’s tax collecting agency. According to reports, the IRS paid about $6 billion in child tax credits last year to people…

Small Business Stock Gain Exclusion Receives 2014 Extension

It’s not like the government to bring everyone some well-needed Christmas cheer, but the new tax bill that lawmakers were finally able to pass brought some good news for many investors before the year ends. It’s unfortunate that it took the entire year to get it done, but at least the tax provisions that did…