![]() The five (5) options for structuring a seller carry-back note with a 1031 Exchange are discussed below. Excluding the seller carry-back note from the 1031 Exchange will recognize some or all the seller’s taxable gain because part of the net proceeds (e.g., the seller carry-back note) is not being reinvested in replacement property. Including the seller carry-back note in the 1031 Exchange will defer all the seller’s taxable gain as part of the 1031 Exchange transaction because all the net proceeds are being reinvested in replacement property. Seller carry-back notes can be included in (tax deferred) or excluded from (taxable) the seller’s 1031 Exchange transaction. Seller Carry-back Notes – Inside or Outside the 1031 Exchange This means the seller carry-back note must be used toward the purchase of replacement property if the seller is to defer all his or her taxable gain. The “net proceeds” includes the cash and the seller carry-back note. The combination of a seller carry-back note and a 1031 Exchange is more difficult because all the “net proceeds” from the sale of real property held for rental, investment, or business use (Relinquished Property) must be used (reinvested) toward the purchase of real property also held for rental, investment, or business use (replacement property). Sellers should therefore always discuss these transactions with their own legal, tax and financial advisors in conjunction with Exeter 1031 Exchange Services, LLC before entering into any Purchase and Sale Agreement. Seller financing is extremely beneficial to the buyer while the seller assumes all of the risks. However, using them together is considerably more complex and requires careful planning to ensure a smooth and successful 1031 Exchange transaction. Sellers can structure a 1031 Exchange with a seller carry-back note. The widespread belief is that seller financing and 1031 Exchanges cannot be used together. Complications With Seller Financing and 1031 Exchanges Seller financing can also serve as a valuable income tax planning and/or estate planning strategy as an alternative to the 1031 Exchange when sellers do not want to reinvest in Seller financing can be a highly effective tool when negotiating and structuring the sale and purchase of investment real estate during difficult times. ![]() Seller financing is commonly referred to as a “seller carry-back note,” “seller carry-back financing,” or just “seller financing.” Seller financing can be in the form of a promissory note secured by either a deed of trust or a mortgage, or it can be in the form of a contract for deed or land contract. In these situations, sellers may want to consider offering seller financing (installment note) to the buyer (or the buyer may request the seller to consider seller financing) to help the buyer finance the purchase of the investment real estate. Consequently, buyers (borrowers) may no longer qualify for financing and therefore not be able to purchase investment real property. Lenders frequently impose stricter borrowing requirements during these times. Register Now Seller Carry-back Notes and 1031 ExchangesĬlosing investment real estate transactions can be particularly challenging during a rising interest rate environment, an economic downturn, a tight credit market, or other distressed real estate market conditions. Get the edge you deserve when it comes to understanding the power of wealth building tax-deferral and tax-exclusion strategies.
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