1031 w/ assumption of financing?

Question

Doing my best to put together a win-win-win...

I have a client who would like to sell his triplex and 1031 funds into a larger apartment building. He has the triplex financed on a 30 year fixed @ 3.75% with a balance of 390,000. Asking price is 550,000 which is fair market value and building has the rents to support this. He will be purchasing the new property on a CD, likely 5-10 year term.

Question:

If we find him a buyer who can assume the mortgage and pay him the 160,000 difference in cash at closing, and he takes the cash and puts it down on the CD purchase - can he avoid paying capital gains through a 1031 exchange?

Yes we are contacting our CPA, I just thought I might get a more creative answer crowd sourcing this unique situation.

Dave Foster · Answer

@Bill Brandt, Thanks for the shout out.  @Adam Tafel, The two requirements in a 1031 are to purchase at least as much as your net sale and to use all of the net cash in the new purchase.  The note assumption (a very attractive proposal) is simply a transfer of debt that would not affect the 1031.

Your client will need to purchase $550K ish in new real estate using $160K ish of cash.

It's a very solid plan as long as that financing is assumable.

Bill B. · Answer

Ask @Dave Foster for the definitive answer but my GUESS would be it sounds good because the seller is reinvesting all the equity (because you’re putting up so much cash.) as long as they qualify for another loan.

The possible no comes from is the property considered sold when they still hold the loan, probably? But, what if the bank calls the loan due and your buyer can’t pay it off? This could unravel the seller’s entire deal.