Re: 1031 Exchange Question - Posted by JPiper
Posted by JPiper on January 16, 2001 at 22:23:11:
First, allow me to say that if I were you I’d fire my CPA, those tax attorneys, AND your qualified intermediary/exchange company. This question is a rather straightforward question.
Taking back a second does not disqualify your deal from it’s deferred status under 1031. There are several options though which will determine just exactly what happens.
One option is that YOU can take the second…in which case you will pay tax on this on an installment sale basis, basically paying tax as the principal is received in proportion to your profit, and paying tax on the interest. Again, nothing in this causes you to lose the tax-deferred status of the rest of the transaction.
Another option is that you could include the note in your exchange. That is, you would name your qualified intermediary as the beneficiary of the note (I’d get a new one since this one could tell you nothing).
If you take this latter option you then have several possibilities. One would be to use the note as part of the purchase of your new up-leg property. The qualified intermediary would then assign the note to the seller of the up-leg property at closing.
Another possibility is that you could buy this note from the qualified intermediary with your own cash (from outside the sale of your property). Your cash is then used in the acquisition of the new up-leg property.
You could also sell this note to a notebuyer. The qualified intermediary would then assign this note at closing to the new notebuyer, who would deposit cash, which would then be used in your new acquisition. The problem here is that if it’s a high LTV note, then the note buyer’s are probably going to be non-existent.
If you were unable to implement any of these alternatives, then the qualified intermediary would assign you the note at closing, and you would pay tax on an installment sale basis.
Since this is a relatively small note, and you’re coming into your new deal with plenty of cash, if I were you I would try to offer it right along with your cash as part of your downpayment…thereby deferring the tax on the note as well.
But either way, worst case scenario is that you tax on an installment basis on the note. Best case is that you can include it in your exchange. And nothing in the acceptance of a note harms the 1031 process.
By the way, I’m neither a tax professional nor a CPA…and therefore normally I would suggest that you run all this by your CPA…LOL. In your case, well, I better leave that to you to decide.