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1031 Exchanges

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Ron Thomas
  • Real Estate Investor
  • Wyandotte, MI
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Splitting proceeds from a sale in a 1031 exchange?

Ron Thomas
  • Real Estate Investor
  • Wyandotte, MI
Posted Dec 26 2014, 05:21

Hello all,

So here's a quick run down of the situation I am asking about.  Myself and another investor in the suburbs of Detroit are looking at a 140 unit apartment complex being sold by a larger investor who wants to recycle his resources into a larger deal.  Its on the market for about 4m.  We walked it with the broker's assistant (the broker was out of town for the holidays), looked over the pro-formas, and decided everything looked good enough to write a letter of intent.  A few hundred K in capital investment is needed fairly quickly, and in order to make sure were not short on cash during the reposition, we need a seller carry back of about 10%.  We called the brokers assistant to ask if this was possible, he called someone on the seller's side and returned a response of 'the seller will entertain a 10% carry back'.  'Great!' we thought.  Then, a couple hours later, the actual broker direct emailed my partner and said 'A carry back is not an option here, the seller is doing a 1031 exchange with the sale proceeds'.

So here is what I am looking for advice concerning.  A) Can the seller simply split the 1031 proceeds and maintain his tax advantages on at least the 90% he recycles if not also the 10% he leaves in the property via-us?  B) We have enough funds to close this property on our own but need this extra portion for cap ex after we buy.  Could how we structure his 10% carry back effect his 1031 eligibility?  In other words, instead of him leaving 10% in the property, could we buy it and pay him then, through a PPM or some other legal doc, have him reinvest the cash equivalent of 10% of the sale price back to us to leave his desired tax deferment intact?

This is a deal I would like to close but am not willing to risk being underfunded for.  I think the broker may be viewing the entire transaction as a little to linear.  My partner gets the impression the broker thinks of him as 'amatuer-ish' because were both relatively young and this would be our biggest investment to date.  There is some merit to that notion, were not large investors yet, but why not just walk away with a sale and nice commission check then watch us fall on our face from a distance if this is how the broker feels?  Who knows, maybe we'll succeed and bring a repositioned deal back to him.  We havent replied to the broker with what we plan to do yet.  I would like a sound plan that achieves our funding goal while maintaining the tax benefits of the seller before we reply.  That way, even if were 'ameture-ish', how we conduct ourselves will be 'pro-ish'.  I appreciate any advice.  

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