Options for
Seller (Exchangor) Carryback
Financing
IMPORTANT - If the
Exchangor agreed to provide
financing for the buyer or
Relinquished Property these
decisions must be made prior
to closing!
If the
Seller plans to complete a
§1031 Tax Deferred Exchange
and intends to offer
financing to the Buyer of
his existing property he is
combining an exchange with
an installment sale
(§453). Both have very
different tax ramifications
and he should consult
with his tax advisor before
the sale closes. The
following information is
provided as a general
guideline for the Exchangor
and Tax Advisor to take into
consideration.
The terms
of a normal exchange
agreement call for the
Qualified Intermediary to
step into the seller’s (Exchangor’s)
position prior to closing.
If the Purchase Contract
calls for seller financing,
the Qualified Intermediary
should then become the
beneficiary of that
financing. However, If the
Exchangor wants to have the
proceeds taxed when the
principal is paid, then he
must instruct the settlement
agent and the Qualified
Intermediary that only the
portion of the sales price
that is not financed will
apply to the exchange. The
Qualified Intermediary will
then prepare the exchange
documents accordingly and
the financing documents will
name the Exchangor as
beneficiary at closing
(i.e. $100,000 sale, $20,000
financed, Q.I. assigned in
to 80% of sale).
If the
Exchangor intends to defer
the gain on the entire sale,
including the financing,
the Qualified
Intermediary MUST be named
as the Beneficiary in the
financing documents PRIOR to
closing and the Exchangor
then has the following
options to consider:
Assignment to Seller of
Replacement Property
If the
Seller of the Replacement
Property agrees to accept
financing secured by the
Exchangor’s Relinquished
Property as part of the
purchase price, Qualified
Intermediary will assign the
financing documents to the
Seller and deliver them to
the Replacement Property
settlement agent for
recordation at closing. In
this event, the financed
portion of the sale proceeds
are deferred and the Seller
of the Replacement Property
will receive all payments
and principal on the amount
financed.
Sold to
Third Party
If, prior
to the acquisition of the
Replacement Property, the
Exchangor can arrange to
have the financing documents
purchased from the Qualified
Intermediary by an unrelated
third party at face value or
discounted, the gain is
deferred. (The buyer and
the purchase price is
determined by the Exchangor.)
Funds are deposited into the
exchange and the documents
are assigned to the third
party. The funds are
combined with the
Exchangor’s other proceeds
and used to acquire
Replacement Property.
Subsequent Purchase by
Exchangor
The
Exchangor may subsequently
wish to purchase the
financing documents from the
third party. The third party
would then assign the
financing documents to the
Exchangor. (This subsequent
purchase could be subject to
step-transaction doctrine if
the Exchangor advances cash
to the third party and then
cancels the indebtedness in
exchange for the original
financing documents. Please
consult your tax advisor.)
Paid
in full prior to acquisition
of Replacement Property
If the
financing is paid off within
180 days of the Exchangor’s
sale, prior to closing on
the Replacement Property,
funds can be deposited with
Qualified Intermediary and
used to acquire the new
property.
If none
of the above options are
done prior to the completion
of the Exchange, Qualified
Intermediary assigns the
financing documents to the
Exchangor and that portion
of the exchange reverts back
to installment sale status. |
