Today I received a call from one of my long time customer relating to their current 1031 Exchange. They wanted to know if they could use seller financing to purchase their Replacement Property. It appears that the Replacement Property they would like to purchase exceeds the amount they currently have in their exchange. The property they sold as part of this exchange was debt free. My customer is not sure if they will be able to obtain a loan from a Lender. You see, they are Realtors and they are having a hard time obtaining a loan due to current market conditions. Their credit score is in the 800's but they are still unable to get the loan they need. In this case they may want to look to the Seller of their anticipated Replacement Property to carry back a note on the property. My investor has over 50% cash as a down payment, so this may be attractive to the Seller of the Replacement Property.
The next question asked by my customer was - Can I then sell another investment property and use the proceeds to payoff this Replacement Properties loan? If my customer is hoping to defer the taxes on the "second" investment property being sold, the answer is no. The IRS requires that in a 1031 Exchange all proceeds be used to purchase Replacement Property not to pay loans down on existing investment property owned by the taxpayer. I suggested to my customer that they try to sell the other investment property (since the current 1031 Exchange deadline isn't until February of 2011) and include the proceeds within the same exchange. Then they could use the existing exchange funds and the "new exchange" funds (from the second investment property) to purchase the contemplated Replacement Property and receive the dual deferment they are looking for.
In today's market our customers are looking for solutions and ideas. What are your thoughts?
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