Seller Carry Back Notes and 1031 Exchanges
An Investor may occasionally be asked to carry back an installment note or promissory note by real estate buyers looking for assistance with financing when purchasing the Investor’s property; this can be a very effective and persuasive action when setting up real estate transactions, as well as an effective income tax planning and/or estate tax planning strategy for the Investor if they are not looking to exchange properties as part of a 1031 Exchange.
The installment note and deed of trust or mortgage will be drafted differently depending on if the seller carry-back note will be deferred under installment sale rules or will deferred by means of a 1031 Exchange; the two are regularly combined within the same deal. Once the sale is completed, the choice of these two options the Investor has made cannot be undone.
At the close of the transaction the Investor’s Qualified Intermediary will receive all of the Investor’s net cash proceeds as well as the seller carry-back installment note; as a result, the Investor’s entire relinquished property sale transaction will be assigned to the Investor’s Qualified Intermediary. Any deed or mortgage acquired under this deal would be tax-deferred under the 1031 Exchange rules and capital gain and depreciation recapture income tax liabilities indefinitely deferred, provided exchanges continue. A reverse 1031 Exchange can also utilize seller carry-back notes as well. Net proceeds from the sale would be sent to the Investor’s Qualified Intermediary at the close of the sale and the installment note would not be part of the 1031 Exchange, but owned by the Investor, and would be taxable by the IRS in the year of the sale and the Investor’s capital gain income tax liability is only deferred over the term of the installment note.
Including the seller carry back note inside a Structured Sale excludes the seller financing from a 1031 Exchange; any proceeds from the sale would be sent to the Investor’s Qualified Intermediary at the close of the sale, and the Investor’s Qualified Intermediary would only be assigned into the part of the property sale that is apart from the seller carry-back note portion of the sale; the Structured Sale would be taxable by the IRS. Depreciation recapture income tax liabilities will possibly be taxed in the year that the property sale transaction completes. Including a seller carry-back note inside of the Investor’s 1031 Exchange transaction allows capital gain and depreciation recapture income tax liabilities to be indefinitely deferred.
Disclaimer: 1031 exchange made simple does not guarantee the performance of the QI's in our referral network and we can not be held liable for any misrepresentations or mistakes in regards to a 1031 exchange by one of the QI's that we refer to you. 1031 Exchange made simple does not provide tax advice nor can we make representations regarding the tax consequences of an exchange transaction. 1031 Exchange made simple is a 1031 QI Referral Network. 1031 made simple is not responsible (in any way) for the performance, creditability, and financial condition of any QI in our network. In this new economic environment it is imperative that all potential 1031 exchange customers do their own due diligence and research on any QI that they may use, on a 1031 exchange. Please verify and check the validity of the Bonding and Insurance of your QI. It may be wise to have your 1031 exchange accounts set up as separate, individual customer accounts. Our web site is to be used as a information based web site only. All parties doing a 1031 exchange must consult their tax advisors or attorney for this information.
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