Couple of 1031 questions

2 Replies

Hi all,

I have a couple of questions on 1031 exchanges, both may be stupid, but this is what happens when I sit and daydream about real estate transactions:

1. Is there a way for a person to get a loan to buy, in my case, a six-plex and the seller who is selling the six-plex to sell the building and acquire the note using the 1031 to avoid paying tax on the sale and then essentially finance my purchase/ hold the note of the building? Does a building to note transaction qualify for a 1031?

2. Would a four, tri, or du-plex sale and 6-plex purchase qualify for a 1031. Or does it have to be a tri for tri or 6 for 6 type transaction? I'm guessing it would be ok to have a different number of units but I want confirmation.

Thanks!

1. No. Exchanging real estate for a note does not satisfy the like-kind property rule if the seller is trying to do a 1031 exchange.

There is a way to use a seller financed sale in a 1031 exchange. The QI who handles the transaction has to accept the note then sell the note on the secondary market which converts the note to cash. Then the seller has all of the proceeds of the sale available to invest in the replacement property.

2. Any real estate can be exchanged for any other real estate as long as the properties in question meet the qualified use requirement of the 1031 exchange. The exchange does not have to be one-property for one-property either. Any number of relinquished properties can be exchanged for any number of replacement properties (1 for 2, 2 for 3, 3 for 1, 1 for 6, 7 for 3, etc.).

Hi Tim,

No, the like-kind requirement means that you must sell a real estate interest and you must acquire a real estate interest.  Promissory notes are not considered to be real property, so they would not satisfy the like-kind requirement.

However, the like-kind requirement would be satisfied by any type of real estate as long as it is held for rental, investment or use in a business.

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