Need Help ASAP - 1031 Exchange, Owner Offering Financing
OK here it goes. Working through a broker on a multi unit property. Seller has to sell for at least 450K (asking 450K, worth 600K) to avoid capital gains tax. I can't obtain satifactory financing due to limited credit. Owner said she would be willing to refinance property to pull out 100K equity (difference between current balance and sells price), then sell to me at 90% - 100% financing on a land contract with a balloon in 12 months to allow me to get seasoning. I would then refinance out of her name into mines.
I need to know how to structure this deal on paper. I have to submit offer asap because I was just told by owner that broker called her to tell her that there was another offer being made on the property tomorrow.
How does a 1031 exchange fit into the picture?
Owner has to sell for 450K, anything less and the owner will be taxed as gain. Owner has balance of 350K and is going to do a 1031 exchange for property closer to her residence.
Then, your question is really "How to I finance this deal?" rather than an income tax question.
Because you are asking the question, does this men the seller's terms (100% financing with a 12 month balloon) are not acceptable to you?
What better terms are you looking for?
I do commercial finance. I can possibly point you in the right direction, but I simply need more information.
Do you have any money to put down on this?
What is your credit score?
How many units?
What issues have you had, when you say that you have not been able to acquire financing?
Respectfully,
Phil
Phillip Herrejon
President of the Chicago Real Estate Investment Club
312.375.7132
Seller is willing to owner finance possibly 100%. Since the owner purchased this property under the like kind 1031 tax shelter, the seller is going to sell this property and purchase another closer to her home under the same shelter. FYI - seller has been doing this since inheriting a property about 10 years ago and has been doing the 1031 exchange to avoid paying taxes on gain realized from sell of inherited property. Sell will refinance to pull out the equity she would normally be getting if I were to bring in a new first mortgage. She will refi and sell to me under any terms that will prevent her from having to pay taxes and will allow her to continue the 1031 exchange.
I am not asking for financing I know that I cannot get favorable financing until April, 04 when my final credit woes will fall off my credit report. (thank you 7 year gods).
Anyone familiar with the 1031 exchange, where owner is offering financing, have any idea on how to structure the offer to acheive these ends.
Seller is willing to owner finance possibly 100%. Since the owner purchased this property under the like kind 1031 tax shelter, the seller is going to sell this property and purchase another closer to her home under the same shelter. FYI - seller has been doing this since inheriting a property about 10 years ago and has been doing the 1031 exchange to avoid paying taxes on gain realized from sell of inherited property. Sell will refinance to pull out the equity she would normally be getting if I were to bring in a new first mortgage. She will refi and sell to me under any terms that will prevent her from having to pay taxes and will allow her to continue the 1031 exchange.
I am not asking for financing I know that I cannot get favorable financing until April, 04 when my final credit woes will fall off my credit report. (thank you 7 year gods).
Anyone familiar with the 1031 exchange, where owner is offering financing, have any idea on how to structure the offer to acheive these ends.
I see NO way to structure a seller financed deal that would allow the seller to hold the note and to defer all the capital gains via 1031 exchange.
Once the deal is structured, perhaps the seller can work with a professional accomodator to hold the note, resell the note in the secondary market, then use the proceeds of the note sale to purchase the replacement property under the exchange umbrella. This is all outside the structure of your contract with the seller. I only suggest this as an avenue for the seller to explore, but this may not turn out to be a viable option.
If you bring your own cash and third party financing to the table, then the seller's 1031 exchange opportunities are still preserved. The seller's tax issues may dictate against seller financing the deal. Your problem is how to finance the deal without seller participation. Once you have your financing lined up, then the structure of the deal falls into place.[ Edited by DaveT on Date 10/29/2003 ]
Per seller's accountant, as long as a title change does not occur at the courthouse the seller can still use the 1031 exchange. If she refinances, she would simply be cashing out the equity that she would normally have realized during a straight sale. Then draw up an unrecorded land contract or other simple agreement to spell out the terms of the purchase. I take over the property management and in twelve months use the land contract and cancelled checks to refinance into my name thereby consumating or properly reliquishing her of the property and thus starting her 180 day clock to find another like kind property.
I suppose it is not your place to give tax advice to the seller in this transaction. Perhaps, it is best if you just make your offer for the property on the terms that are best for you and let the seller worry about the potential tax ramifications. The seller's tax treatment is not your problem to solve.
According to the IRS, a land contract sale is treated as an installment sale. It does not matter that title has not changed hands, a land contract sale is still a taxable sale on the date the buyer and seller enter the contract. An IRS audit of the facts and circumstances of this transaction would disqualify any subsequent 1031 exchange where this property is the relinquished property.
The accountant is correct on one point, the seller may do a cash out refinance without creating a taxable event.
Change the scenario slightly. Make your agreement with the seller a lease option agreement instead of a land contract sale and the exchange treatment may still work when you exercise your purchase option.